<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
September 14, 2000
Storage Computer Corporation
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(Exact Name of Registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
DELAWARE 1-13616 02-045093
------------------------------- ----------------------- ---------------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
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<TABLE>
<CAPTION>
<S> <C>
11 Riverside Street, Nashua, NH 03062-1373
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (603) 880-3005
Not Applicable
--------------------------
(Registrant's Name of Former Address, if Change Since Last Report)
The undersigned Registrant hereby amends paragraphs (a), (b) and (c) of
Item 7 of its Current Report on Form 8-K dated September 29, 2000, to read in
their entireties as follows. This amendment includes the Financial Statements of
the Business Acquired, the Pro Forma Financial Information and the Consent of
the Independent Auditors.
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 14, 2000, Storage Computer Corporation (the "Registrant")
acquired CyberStorage Systems Corporation, a Delaware corporation
("CyberStorage"), by way of the merger (the "Merger") of Cyber Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of the
Registrant ("Cyber Acquisition Corp."), with and into CyberStorage. The Merger
was consummated pursuant to the terms and conditions of an Agreement and Plan of
Reorganization dated as of August 22, 2000, by and among the Registrant, Cyber
Acquisition Corp. and CyberStorage, as amended by Amendment No. 1 Agreement and
Plan of Reorganization, dated as of September 14, 2000 (together, the "Merger
Agreement"). As a result of the Merger, CyberStorage became a wholly-owned
subsidiary of Registrant. Pursuant to the terms of the Merger Agreement, the
outstanding capital stock, warrants and options of CyberStorage were exchanged
for an aggregate of 2,200,000 shares of common stock and options to purchase
common stock of Registrant. The aggregate purchase price for CyberStorage was
determined through arms-length negotiations between the parties, taking into
account the value of companies comparable to CyberStorage. The Merger was
structured as and will be treated by the Registrant as a purchase for accounting
purposes.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
CYBERSTORAGE SYSTEMS CORPORATION
Nashua, New Hampshire
We have audited the accompanying balance sheets of CyberStorage Systems
Corporation as of August 31, 2000 and September 30, 1999, and the related
statements of income, accumulated deficit, and cash flows for the eleven months
and year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CyberStorage Systems
Corporation as of August 31, 2000 and September 30, 1999, and the results of its
operations and its cash flows for the eleven months and year then ended in
conformity with generally accepted accounting principles.
/s/ Melanson, Heath & Company P.C.
Nashua, New Hampshire
October 11, 2000
<PAGE> 4
CYBERSTORAGE SYSTEMS CORPORATION
Balance Sheets
August 31, 2000 and September 30, 1999
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August 31, September 30,
2000 1999
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ASSETS
Current Assets:
Cash and cash equivalents $ 46,944 $ 100,293
Accounts receivable, net 649,345 579,756
Inventory 222,723 95,468
Prepaid expenses 3,977 1,325
----------- -----------
Total Current Assets 922,989 776,842
Property and equipment, net 108,983 72,258
Deposits 16,747 17,484
Other assets, net 345,785 374,019
----------- -----------
TOTAL ASSETS $ 1,394,504 $ 1,240,603
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current portion of long term debt $ 125,000 $ --
Line of credit 395,000 --
Note payable -- 50,000
Accounts payable 313,367 368,559
Accrued expenses and other liabilities 292,184 290,441
Current portion notes payable, related parties 133,219 224,554
----------- -----------
Total Current Liabilities 1,258,770 933,554
Long Term Liabilities:
Long term debt, net of current portion 375,000 500,000
Deferred compensation 202,834 202,834
Notes payable, related parties, net of current portion 394,550 506,478
----------- -----------
Total Liabilities 2,231,154 2,142,866
----------- -----------
Stockholders' Deficit:
Common stock 101 2,800
Additional paid-in capital 17,466 --
Accumulated deficit (854,217) (905,063)
----------- -----------
Total Stockholders' Deficit (836,650) (902,263)
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 1,394,504 $ 1,240,603
----------- -----------
</TABLE>
See notes to the financial statements.
<PAGE> 5
CYBERSTORAGE SYSTEMS CORPORATION
Statements of Income and Accumulated Deficit
For Eleven Months and Year Ended
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<CAPTION>
August 31, September 30,
2000 1999
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Sales, net $ 3,881,159 $ 2,328,518
Cost of sales 2,027,903 1,406,622
----------- -----------
Gross profit 1,853,256 921,896
Research and development 617,289 349,031
Selling and marketing 436,751 440,027
General and administrative expenses 631,257 639,266
----------- -----------
Income (Loss) From Operations 167,959 (506,428)
Other Income and (Expenses):
Interest expense (118,605) (68,291)
Other income 1,492 4,558
----------- -----------
Total Other Income and (Expenses) (117,113) (63,733)
----------- -----------
Net Income (Loss) 50,846 (570,161)
Accumulated deficit, beginning (905,063) (334,902)
----------- -----------
Accumulated deficit, ending $ (854,217) $ (905,063)
=========== ===========
</TABLE>
See notes to the financial statements.
<PAGE> 6
CYBERSTORAGE SYSTEMS CORPORATION
Statements of Cash Flows
For the Eleven Months and Year Ended
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<CAPTION>
August 31, September 30,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 50,846 $(570,161)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 50,507 43,368
Accounts receivable (69,589) (370,883)
Inventory (127,255) (24,443)
Prepaid expenses (2,652) (28)
Deposits 737 (4,676)
Accounts payable (55,192) 120,038
Accrued expenses and other liabilities 1,743 187,233
--------- ---------
Net cash provided (used) by operating activities (150,855) (619,552)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payments for the purchase of property (58,998) (20,865)
--------- ---------
Net cash provided (used) by investing activities (58,998) (20,865)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 395,000 --
Proceeds from issuance of long term debt -- 500,000
Proceeds from issuance of short term debt, net -- 76,000
Payments of short term debt (50,000) --
Proceeds from notes payable, related parties -- 156,752
Payments of notes payable, related parties (203,263) --
Proceeds from sale of stock 4 800
Paid-in capital 14,763 --
--------- ---------
Net cash provided (used) by financing activities 156,504 733,552
--------- ---------
Net increase / (decrease) (53,349) 93,135
Cash and cash equivalents, beginning 100,293 7,158
--------- ---------
Cash and cash equivalents, ending $ 46,944 $ 100,293
========= =========
</TABLE>
See notes to the financial statements.
<PAGE> 7
CYBERSTORAGE SYSTEMS CORPORATION
ARTICLE 1. Notes to the Financial Statements
August 31, 2000 and September 30, 1999
1. NATURE OF BUSINESS:
The Company designs, manufactures, markets and services a full line of
innovative storage management and multimedia solutions based upon
patented and patent pending technologies. The Company's focus is in
providing high performance integrated storage and network solutions for
the worldwide digital communications market, with applications in
digital prepress graphics and medical imaging and media capture and
delivery; including video-on-demand. The Company provides credit in the
normal course of business to its customers and performs ongoing credit
evaluations of those customers. It maintains allowances for doubtful
accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies of the
Company used in preparing and presenting the accompanying financial
statements:
BUSINESS PURCHASE
In May 1998, the Company purchased the assets of CyberStorage Systems,
Inc., under the terms set for in CyberStorage Systems, Inc.'s Amended
Liquidating Plan of Reorganization filed while in Chapter 11. The
assets were purchased for approximately $600,000 in exchange for the
assumption of post petition liabilities and a short-term note payable
in the amount of $60,000. The purchase method was used to account for
the acquisition, and the purchase was allocated as follows:
Current Assets $160,000
Property and Equipment 50,000
Other Assets 390,000
--------
Total Assets Purchased $600,000
========
The Company continued the operation of the CyberStorage Systems, Inc.
business under the CyberStorage Systems trade name.
<PAGE> 8
NAME CHANGE
The Company was originally incorporated as TLJ Enterprises, Inc.,
in February of 1998. On August 9, 1999 the Articles of Organization
were restated, amending the original Articles. Among the changes was
the name change of TLJ Enterprises, Inc. to CyberStorage Systems
Corporation.
METHOD OF ACCOUNTING
The Company uses the accrual method of accounting for both financial
and tax reporting purposes. This method recognizes revenues and
expenses and the related assets and liabilities when earned or incurred
without regard to the time of receipt or payment. Sales and
corresponding accounts receivable are recorded when the product is
shipped or the services are performed. Maintenance, training, and
support revenue whether attached to product licenses or priced
separately, is recognized ratably over the maintenance period.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
investments with a maturity of three months or less to be cash
equivalents. As of August 31, 2000 and September 30, 1999 cash consists
of deposits in checking accounts; there are no cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The adequacy of the allowance for doubtful accounts is reviewed
regularly by the Company's management and adjusted as required through
the provision for doubtful accounts (Bad Debt Expense). In determining
the amount required in the allowance account management considers a
variety of factors including risk characteristics of the selected
accounts, number of days outstanding and current economic conditions.
The Company's management reserves the right to pursue previously
written-off accounts. For the eleven months and year ended August 31,
2000 and September 30, 1999 bad debt expense of $0 and $18,622,
respectively, was charged to operations.
INVENTORY
Inventory is valued at the lower of cost or market on the first-in,
first-out (FIFO) basis.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are carried at cost. Depreciation of property
and equipment is provided using the straight-line method in amounts
sufficient to
<PAGE> 9
relate to the cost of depreciable assets to operations over
their estimated useful lives for book purposes. Leasehold
improvements are amortized over the shorter of their estimated useful
lives or the period of the lease. The cost of maintenance and repairs
is charged to expense as incurred while renewals and betterment's are
capitalized. Upon sale or other disposition, the cost and related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the bases of
assets and liabilities. The deferred tax assets and liabilities
represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual amounts could differ from those estimates.
AMORTIZATION
Other assets such as goodwill, prepaid loan fees, and reorganization
fee costs are amortized over their estimated useful lives (generally
5-15 years) using the straight line method.
FOREIGN CURRENCY
The functional currency of the Company is in U.S. dollars. Accordingly,
assets and liabilities of the Company are stated in that currency.
The Company requires all amounts collected from foreign customers to
be paid in U.S. dollars.
3. ACCOUNTS RECEIVABLE:
The amounts outstanding are as follows as of:
August 31, September 30,
2000 1999
--------- -------------
Accounts receivable $666,845 $597,256
Less: allowance for doubtful accounts (17,500) (17,500)
-------- --------
Accounts receivable, net $649,345 $579,756
======== ========
<PAGE> 10
4. PROPERTY AND EQUIPMENT:
Property and equipment is summarized below as of:
August 31, September 30,
2000 1999
--------- -------------
Machinery and equipment $134,928 $ 75,930
Furniture and fixtures 14,913 14,913
Leasehold improvements 1,801 1,801
-------- --------
151,642 92,644
Less: accumulated depreciation (42,659) (20,386)
-------- --------
Property and equipment, net $108,983 $ 72,258
Depreciation expense for the eleven month period ended August 31, 2000 and the
year ended September 30, 1999 was $22,273 and $13,650, respectively.
5. OTHER ASSETS:
The following is a summary of other assets as of:
August 31, September 30,
2000 1999
---------- -------------
Goodwill $ 388,758 $388,758
Prepaid organization fees 14,488 14,488
Prepaid loan fees 10,000 10,000
--------- --------
413,246 413,246
Less: accumulated amortization (67,461) (39,227)
--------- --------
Other assets, net $ 345,785 $374,019
========= ========
Amortization expense for the eleven month period ended August 31, 2000 and the
year ended September 30, 1999 was $28,234 and $29,718, respectively.
<PAGE> 11
6. ACCRUED EXPENSES AND OTHER LIABILITIES:
The following is a summary of accrued expenses and other liabilities as
of:
August 31, September 30,
2000 1999
---------- -------------
Accrued other expenses $177,445 $150,376
Accrued vacations 55,633 33,885
Deferred compensation 36,843 55,378
Unearned revenues 16,549 31,944
Accrued payroll taxes -- 8,484
Accrued interest 5,714 10,374
-------- ---------
Accrued expenses and other liabilities $292,184 $ 290,441
======== =========
7. LINE OF CREDIT:
The Company has a $1,000,000 line of credit bearing interest at 2% over
prime (11.5% at August 31, 2000). The instrument is a demand note which
is secured by substantially all of the Company assets and the personal
guarantees of the three principal stockholders. The line is based on
75% of applicable accounts receivable. The balance outstanding at
August 31, 2000 was $395,000.
8. NOTES PAYABLE:
Note payable, reflects a factoring agreement on a per invoice basis.
The terms included a 3% factoring fee, interest free for the first 35
days of receipt of funds with interest at 20% after the 35th day.
Payment was made upon receipt of payment from customer of related
invoice on October 19, 1999.
<PAGE> 12
9. LONG TERM DEBT:
Long term debt consisted of the following as of:
August 31, September 30,
2000 1999
--------- -------------
Note payable, Green Mountain Capital,
LP, monthly interest payments at 12%
only until August 2000. Beginning
September 2000 the outstanding principal
balance of the note, and interest due on
the outstanding balance, will be paid in
48 monthly installments. The note is
secured by all Company assets, and the
personal guarantee of the majority
shareholders, and is subordinated to
Enterprise Bank and Trust Company. $ 500,000 $500,000
Less amount due within one year (125,000) ( -- )
--------- --------
Notes payable, related parties, net of
current portion $ 375,000 $500,000
========= ========
The following is a summary of future principal payments on the
previously mentioned long term debt:
2001 $ 125,000
2002 125,000
2003 125,000
2004 125,000
---------
Total $ 500,000
=========
<PAGE> 13
10. NOTES PAYABLE, RELATED PARTIES:
Notes payable to related parties consist of the following as of:
August 31, September 30,
2000 1999
---------- -------------
Note payable, related party (19%
shareholder), principal and interest
payments monthly of $15,000. Payments
are made monthly until maturity in 2004.
Interest is at 10%. Secured by all
Company assets, and subordinated to
Green Mountain Capital, LP and Enterprise
Bank and Trust Company. $527,769 $629,087
Note payable, related party (20%
shareholder), principal payments of $1,000
per month beginning in October 1999.
The loan carries no interest and is
unsecured. -- 11,945
Note payable, related party (18%
shareholder), reflects factoring
agreement on a per invoice basis.
3% factoring fee, interest free for
the first 35 days of receipt of funds
with interest at 20% after the 35th day.
Payment was made upon receipt of payment
from customer of related invoice. -- 90,000
-------- --------
Total 527,769 731,032
Less amount due within one year (133,219) (224,554)
-------- --------
Notes payable, related parties, net of
current portion $394,550 $506,478
======== ========
The following is a summary of future principal payments on notes
payable, related parties:
2001 $ 133,219
2002 147,169
2003 162,579
2004 84,802
---------
Total $ 527,769
=========
<PAGE> 14
11. CAPITAL STOCK:
As of August 31, 2000 the Company had 200,000 shares of $.001 par value
common stock authorized and 101,075 shares issued and outstanding.
Shares issued during the eleven month period ended August 31, 2000 were
in lieu of compensation for services in the amount of $14,767. As of
the balance sheet date of September 30, 1999, the Company had 200,000
shares of no par value common stock authorized and 100,000 shares
issued and outstanding.
The Company was reorganized as a Delaware corporation effective June
22, 2000. The reorganization was completed through the creation of a
corporation in Delaware and the subsequent merger of the Massachusetts
corporation into the Delaware corporation. Shares of the Massachusetts
corporation no par value common stock were exchanged for equal amounts
of the Delaware corporation's $.001 par value common stock.
12. STOCK OPTIONS AND WARRANTS:
The Company has a stock option plan which was adopted on August 9,
1999. Under the plan the Company may grant options to key individuals.
Under the terms of the plan employees, directors, consultants and
advisors are eligible to participate in the plan. There are currently
15,625 shares of common stock, no par value reserved for issuance upon
exercise of options under the plan. The Company may, in the discretion
of the Board of Directors, grant either non-statutory stock options
(NSO) or incentive stock options (ISO) provided, however, that ISO's
may only be granted to employees in the Company. Options shall vest 25%
every twelve months, with the first 25% vesting twelve months after the
date of the grant. The options shall expire ten years after the date of
the grant. The option price shall be determined by the Board of
Directors and shall not be less than the fair market value at the time
the option is granted. The original exercise price for options granted
under the plan was $.01 per share. There were no options granted during
the year ended September 30, 1999. During the eleven month period ended
August 31, 2000 the Company issued 5,050 stock options to employees and
directors under the terms of its original stock option plan and the
subsequent "Delaware" stock option plan, which terms are substantially
the same. 1,250 options were issued at an exercise price of $.01 per
share in October of 1999. The remaining 3,800 options were issued in
January and February 2000 at the exercise price of $1.00 per share.
There were no exercisable options at the balance sheet date of August
31, 2000. Stock options granted under the "Massachusetts" stock option
plan were converted to options in the Delaware corporation.
The Company issued warrants in the amount of 7.5% of the outstanding
shares of common stock of the corporation on a fully diluted basis at
an exercise price of $.001 per share in connection with a $500,000 long
term note payable from Green
<PAGE> 15
Mountain Capital LP. One half of one percent were issued in replacement
and cancellation of the warrants that were issued at the closing of the
$150,000 bridge loan in June of 1999. The additional seven percent were
issued as additional consideration for the $500,000 loan. The Company
has a right to earn back warrants equaling up to a maximum of two
percent of the share base. The warrants may be earned back by either
meeting a target sale price for the Company in either fiscal year 2000
or 2001 or by meeting annual sales goals for those fiscal years. The
warrants shall expire nine years after the date of the grant. The
warrants also contain anti-dilution provisions for the next $2,000,000
of investment. The warrants issued will not be diluted until after the
Company has received additional equity investment in excess of
$2,000,000.
13. INCOME TAXES:
The Company utilizes Statement of Financial Accounting Standards (FAS)
No. 109, Accounting for Income Taxes, which requires an asset and
liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities result in taxable or
deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is tax payable or refundable for the
period plus or minus the change during the period in deferred tax
assets and liabilities.
Significant components of the Company's deferred tax assets and
(liabilities) are as follows as of:
August 31, September 30,
2000 1999
---------- -------------
Deferred tax assets:
Net operating losses $247,259 $ 261,153
Research and development credit 102,886 57,717
State deferred tax assets 59,583 57,050
Other, net 16,606 15,754
-------- ---------
Total deferred tax assets 426,334 391,674
Valuation allowance (426,334) (391,674)
------- ---------
Net deferred tax assets $ -- $ --
======== =========
<PAGE> 16
At August 31, 2000 and September 30, 1999, the Company had federal net
operating loss carryforwards of $727,233 and $768,096, respectively,
which will begin to expire in the year 2018. The Company also has
federal research and development credits of $102,886 and $57,717,
respectively, which will also begin to expire in 2018. For financial
reporting purposes, a valuation allowance of $426,334 and $391,674 has
been recognized at August 31, 2000 and September 30, 1999,
respectively, relating primarily to federal and state net operating
losses and the research and development credits.
14. OPERATING LEASES:
The Company leases its office and manufacturing space under a
non-cancelable gross operating lease. The lease is dated August 15,
1998 and contains two additional one year renewal options with an
increase in rent in the amount of the greater of the CPI or 6% for each
year.
The future minimum lease payments required under the lease are $63,439
through the expiration of the first renewal period was set to expire on
August 14, 2000. Minimum lease payments exclude contingent rentals and
rentals under renewal options, which, as of August 31, 2000 and
September 30, 1999, were not reasonably assured of being exercised.
Rent expense for the eleven months and year ended August 31, 2000 and
September 30, 1999 consisted of the following components: minimum lease
payments $74,642 and $70,939, respectively, and trash disposal fees of
$1,800 and $1,800, respectively.
The Company entered into a non-cancelable operating lease dated
February 9, 2000, for engineering equipment. The lease term is for 48
months, and began on April 1, 2000. Equipment lease expense consisted
of $4,743 for the eleven months ended August 31, 2000. Future minimum
lease payments through the year 2004 are estimated at $36,418.
15. RELATED PARTY TRANSACTIONS:
The Company is currently leasing equipment from Loggi, Inc., which is
owned and operated by a 30% shareholder of the Company. The lease
payments amount to $745 per month under an annual lease beginning in
September 1997, and renews automatically on an annual basis.
<PAGE> 17
The Company purchases a portion of its products from International
Hi-Tech Partners (IHP), and entity owned and operated by the Company's
President and Chief Executive Officer, John Thonet. Following is a list
of transactions and balances with IHP as of:
August 31, September 30,
2000 1999
---------- -------------
Purchases from affiliate $ -- $259,000
Due to affiliate $ -- $ 61,325
16. MAJOR CUSTOMERS:
A material part of the Company's business is dependent on one customer
and three customers, as of August 31, 2000 and September 30, 1999,
respectively, the loss of any one of which could have a materially
adverse effect on the Company. During the eleven months ended August
31, 2000 and year ended September 30, 1999, these customers accounted
for approximately 52% and 71% of the Company's revenues, respectively.
17. RECAPITALIZATION:
On August 9, 1999, the Company approved a plan of recapitalization
pursuant to which each share of common stock issued and outstanding was
exchanged on a 1 for 10 basis into .1 shares of common stock. As a
result of the transactions, 190,000 shares owned by John Thonet were
converted to 19,000 shares of common stock, no par value and 10,000
shares owned by International Hi-Tech Partners were converted to 1,000
shares of common stock, no par value.
18. CONCENTRATION OF CREDIT RISK:
The Company maintains cash in bank deposit accounts at one financial
institution. The balances, at times, may exceed federally insured
limits. As of August 31, 2000 and September 30, 1999, the Company
deposits exceeded the insured limit by $373 and $114,198, respectively.
19. SUBSEQUENT EVENTS:
The Company is currently a co-plaintiff in a product liability suit
with the CyberStorage Systems, Inc. Creditors Trust. This position was
purchased as part of the asset acquisition described in Note 2.
Proceeds from any successful outcome of this litigation would be
divided between the attorney trying the matter, the Trust and the
Company. The trial by jury was completed in Federal
<PAGE> 18
Court on June 9, 2000 with a verdict for the plaintiffs in the amount
of $291,000. The decision will be sent down by the Court upon
resolution of Massachusetts 93A issues relating to interest period and
awarding of attorney's fees to the plaintiffs.
On September 14, 2000, the Company completed a merger with Storage
Computer Corporation (SCC) and became a wholly owned subsidiary of SCC.
SCC is a publicly traded company on the American Stock Exchange under
the ticker symbol of SOS. The shares of the Company were exchanged for
1,980,069 shares of SCC stock, plus the assumption of all outstanding
stock options and warrants. Approximately, 19.59 shares of SCC were
exchanged for each share of the Company.
20. SUPPLEMENTAL CASH FLOW INFORMATION:
The amounts of interest and income taxes paid during the eleven months
and year ended are as follows:
August 31, September 30,
2000 1999
--------- -------------
Interest $123,265 $ 68,291
Income taxes -- --
21. REPURCHASE AGREEMENTS:
The Company has stock repurchase agreements in place for 80% of its
share base, encompassing most of its shareholders. Under the terms of
the agreement the affected shareholders must resell 50% of their share
holdings to the Company, at the original purchase price, upon voluntary
or involuntary termination of his or her employment with the Company.
The Company's right of repurchase for these shareholder/ employees
shall lapse 6.25% every three months after the date of the stock
purchase. Therefore, the right of repurchase shall expire after the
shareholder/employee has been under the employ of the Company two years
after the date of the original stock acquisition, August 30, 1999. The
shares shall become fully vested upon a change of control of the
Company. In addition, the Company holds a right of first refusal after
the shares have been fully vested for those affected shareholders.
22. RETIREMENT PLAN:
The Company has instituted a 401K retirement plan in which all
employees may participate. As of August 31, 2000 and September 30,
1999, the Company's policy is to make no matching contributions to the
participating employees' accounts.
<PAGE> 19
(b) Pro Forma Financial Information.
On September 14, 2000, Storage Computer Corporation ("the Company")
acquired all of the outstanding common stock of CyberStorage Systems Corporation
("CyberStorage") in a transaction accounted for as a purchase for 2,200,000
shares of the Company's common stock valued at approximately $22,440,000,
approximately $380,600 of direct costs of the acquisition and the assumption of
approximately $2,285,100 of liabilities of CyberStorage.
The unaudited Consolidated Statement of Financial Position of the
Company at September 30, 2000 included in the Company's Quarterly Report Form
10Q for the third quarter ended September 30, 2000, which is incorporated
herein by reference, includes the accounts of CyberStorage.
The unaudited Pro Forma Combined Statements of Operations for the year
ended December 31, 1999 and for the nine months ended September 30, 2000 give
effect to the acquisition as if it had occurred on January 1, 1999. The
unaudited Pro Forma Statement of Operations for the year ended December 31, 1999
is based on historical results of operations of the Company for the year ended
December 31, 1999 and the historical results of CyberStorage for the year ended
September 30, 1999. The unaudited Pro Forma Combined Statement of Operations for
the nine months ended September 30, 2000 is based on historical results of the
Company for the nine months ended September 30, 2000 and the historical results
of CyberStorage for the nine months ended June 30, 2000.
The unaudited Pro Forma Combined Statements of Operations and the
accompanying notes (collectively the "Pro Forma Financial Information") should
be read in conjunction with and are qualified by the historical financial
statements of the Company and notes thereto included in the Company's Annual
Report Form 10KA for the year ended December 31, 1999 and its Quarterly Report
Form 10Q for the quarter ended September 30, 2000.
The Pro Forma Financial Information is intended for informational
purposes only and is not necessarily indicative of the future results of
operations of the consolidated company after the acquisition of CyberStorage, or
of results of operations of the consolidated company that would have actually
occurred had the acquisition of CyberStorage been effected as of the dates
described above.
<PAGE> 20
STORAGE COMPUTER CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Storage Cyberstorage
Computer Systems
Corporation Corporation
12 Months Ended 12 Months Ended Pro Forma Pro Forma
December 31, 1999 September 30, 1999 Adjustments as Adjusted
----------------- ------------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenue $ 10,525,658 $ 2,328,518 $ 12,854,176
Product costs 6,303,125 1,406,622 7,709,747
------------ ------------ ------------
Gross margin 4,222,533 921,896 5,144,429
Operating expenses:
Research and development 1,980,988 349,031 2,330,019
Selling and marketing 4,098,347 440,027 4,538,374
General and administrative 2,357,254 611,781 2,969,035
Amortization of intangibles 27,485 $ 2,694,955(B) 2,722,440
------------ ------------ ------------ ------------
Total 8,436,589 1,428,324 2,694,955 12,559,868
------------ ------------ ------------ ------------
Operating loss (4,214,056) (506,428) (2,694,955) (7,415,439)
Other income (expense):
Interest expense, net (840,253) (68,291) (908,544)
Other income 278,114 4,558 282,672
------------ ------------ ------------
Total (562,139) (63,733) (625,872)
------------ ------------ ------------ ------------
Loss before income tax benefit (4,776,195) (570,161) (2,694,955) (8,041,311)
Income tax benefit (199,868) (199,868)
------------ ------------ ------------ ------------
Net loss $ (4,576,327) $ (570,161) $ (2,694,955) $ (7,841,443)
============ ============ ============ ============
Net loss per basic and $ (0.40) $ (0.58)
dilutive share
Basic and dilutive shares 11,376,082 2,200,000(D) 13,576,082
</TABLE>
See notes to the unaudited pro forma combined financial statements.
<PAGE> 21
STORAGE COMPUTER CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Storage CyberStorage
Computer Systems
Corporation Corporation
9 Months Ended 9 Months Ended Pro Forma Pro Forma
September 30, 2000 June 30, 2000 Adjustments as Adjusted
------------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 5,187,596 $ 3,086,911 $ (129,056)(C) $ 8,145,451
Product costs including inventory
restructuring costs 5,688,941 1,594,301 (73,848)(C) 7,209,394
------------ ------------ ------------ ------------
Gross margin (501,345) 1,492,610 (55,208) 936,057
Operating expenses:
Research and development 997,776 485,958 37,421 (C) 1,446,313
Selling and marketing 1,664,500 386,219 (14,368)(C) 2,036,351
General and administrative 1,702,631 408,211 (19,858)(C) 2,090,984
Amortization of intangibles 186,855 20,934 1,834,041 (B,C) 2,041,830
Restructuring costs 740,130 0 0 740,130
------------ ------------ ------------ ------------
Total 5,291,892 1,301,322 1,762,394 8,355,608
------------ ------------ ------------ ------------
Operating income (loss) (5,793,237) 191,288 (1,817,602) (7,419,551)
Other income (expense):
Interest expense, net (354,307) (91,886) 6,905 (C) (439,288)
Other income (expense) (128,854) 1,367 (127,487)
------------ ------------ ------------ ------------
Total (483,161) $ (90,519) 6,905 (566,775)
------------ ------------ ------------ ------------
Income (loss) before income taxes (6,276,398) 100,769 (1,810,697) (7,986,326)
Provision for income taxes 13,763 13,763
------------ ------------ ------------ ------------
Net income (loss) (6,290,161) 100,769 (1,810,697) (8,000,089)
Imputed preferred stock dividend 2,993,721 2,993,721
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders $ (9,283,882) $ 100,769 $ (1,810,697) $(10,993,810)
============ ============ ============ ============
Net loss per basic and dilutive share $(0.51) $(0.56)
Net loss available to common stockholders
per basic and diluted share $(0.75) $(0.77)
Basic and dilutive shares 12,417,098 14,254,460
</TABLE>
See notes to the unaudited pro forma combined financial statements.
<PAGE> 22
Notes to the Unaudited Pro Forma Combined Financial Information
Pro Forma Adjustments and Assumptions
(A) The Company acquired all of the outstanding stock of CyberStorage for
2,200,000 shares of the Company's common stock valued at approximately
$22,440,000 plus direct costs of acquisition and the assumption of CyberStorage
liabilities on September 14, 2000.
The actual purchase price was allocated over the fair values of the
acquired assets and liabilities as of the actual acquisition date, September 14,
2000 as follows:
Current assets $ 878,400
Property, plant and equipment 151,600
Other non-current assets 16,700
Identifiable intangibles 5,200,000
Residual purchase price - Goodwill 18,859,000
-----------
Purchase price $25,105,700
===========
(B) In the unaudited Pro Forma Combined Statement of Operations for the twelve
month ended December 31, 1999, the pro forma adjustment includes $2,722,440 in
amortization of goodwill and other intangible assets that would have been
recorded during that period reduced by $27,845, which represents amortization of
goodwill recorded in the historical financial statements of CyberStorage.
In the unaudited Pro Forma Combined Statement of Operations for the nine months
ended September 30, 2000, the pro forma adjustment includes $2,041,830 in
amortization of goodwill and other intangible assets that would have been
recorded during that period reduced by $20,934, which represents amortization of
goodwill recorded in the historical statements of CyberStorage.
<PAGE> 23
The pro forma adjustment is based on the amortization of goodwill
and other intangible assets determined as of the acquisition date
and are amortized on a straight-line basis as follows:
Identified intangibles 5 to 7 years
Residual purchase price - Goodwill 10 years
(C) The pro forma adjustment is made to eliminate the revenue and expenses
of CyberStorage from September 14, 2000, the date of acquisition, through
September 30, 2000 which are included in the accounts of the Company at
September 30, 2000.
(D) Since the unaudited Pro Forma Combined Statements of Operations
results in a net loss, the pro forma basic and diluted loss per common share
are computed by dividing the diluted net loss available to common
stockholders by the weighted average number of common shares outstanding. The
calculation of the weighted average number of common shares outstanding
assumes that the 2,200,000 shares of the Company's common stock issued in the
acquisition of CyberStorage were outstanding for each entire period.
(c) Exhibits
2.1+ Agreement and Plan of Reorganization dated as of August 22, 2000 by and
among Storage Computer Corporation, Cyber Acquisition Corporation, and
CyberStorage Systems Corporation.
2.2+ Amendment No. 1 to Agreement and Plan of Reorganization dated as of
September 14, 2000 by and among Storage Computer Corporation, Cyber Acquisition
Corporation, and CyberStorage Systems Corporation.
13.1++ The Company's Form 10-Q for the period ending September 30, 2000, filed
on November 14, 2000.
23.1 Consent of Melanson, Heath & Company P.C., independent auditors.
99.1+ Press release issued by Storage Computer Corporation on September 14,
2000.
-------------
+ Previously filed.
++ Incorporated by reference to the Registrant's Current Report on Form 8-K/A
dated November 28, 2000.
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 28, 2000 STORAGE COMPUTER CORPORATION
By: /s/ Theodore J. Goodlander
--------------------------------
Name: Theodore J. Goodlander
Title: Chief Executive Officer
<PAGE> 25
EXHIBIT INDEX
2.1+ Agreement and Plan of Reorganization dated as of August 22, 2000 by and
among Storage Computer Corporation, Cyber Acquisition Corporation, and
CyberStorage Systems Corporation.
2.2+ Amendment No. 1 to Agreement and Plan of Reorganization dated as of
September 14, 2000 by and among Storage Computer Corporation, Cyber Acquisition
Corporation, and CyberStorage Systems Corporation.
13.1++ The Company's Form 10-Q for the period ending September 30, 2000, filed
on November 14, 2000.
23.1 Consent of Melanson, Heath & Company P.C., independent auditors.
99.1+ Press release issued by Storage Computer Corporation on September 14,
2000.
------------
+ Previously filed.
++ Incorporated by reference to the Registrant's Current report on Form 8-K/A
dated November 28, 2000.
