SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
for the fiscal year ended December 31, 1999
Commission File Number 1-13616
STORAGE COMPUTER CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
02-0450593
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
11 RIVERSIDE STREET, NASHUA, NEW
HAMPSHIRE
03062-1373
(Address of Principal Executive Offices)
(Zip Code)
(603) 880-3005
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the act:
Common Stock $0.001 par value American
Stock Exchange
(Title or Class)
Securities registered pursuant to section 12(g) of the act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in a definitive proxy
or information statement incorporated in Part III of this Form 10-K or any
amendments to this Form 10-K. X
The aggregate market value of the Common Stock of the Registrant held by non-
affiliates was approximately $43,750,960 at April 10, 2000.
At March 31, 2000 there were issued and outstanding 11,929,754 shares of the
Registrant's Common Stock, with a par value of $.001.
Documents Incorporated by Reference
Portions of the Company's Proxy Statement relating to the Company's Annual
Meeting of Stockholders to be held on June 12, 2000 are incorporated by
reference into Part III hereof.
STORAGE COMPUTER CORPORATION
Securities and Exchange Commission
Item Numbers and Description
PART I
PAGE
ITEM
1
Business
3
ITEM
2
Properties
10
ITEM
3
Legal Proceedings
10
ITEM
4
Submission of Matters to a Vote of
Security Holders
11
PART II
ITEM
5
Market for Registrant's Common
Equity
And Related Stockholder Matters
12
ITEM
6
ITEM
7
Selected Financial Data
Management's Discussion and Analysis
of Financial
13
Condition and Results of Operations
14
ITEM
7A
Quantitative and Qualitative
Disclosure About Market Risk
22
ITEM
8
ITEM
9
Financial Statements and
Supplementary Data
Changes in and Disagreements with
Accountants
23
on Accounting and Financial
Disclosure
23
PART III
ITEM
10
Directors and Executive Officers of
the Registrant
24
ITEM
11
Executive Compensation
24
ITEM
12
Security Ownership of Certain
Beneficial Owners
and Management
24
ITEM
13
Certain Relationships and Related
Transactions
24
ITEM
14
PART IV
Exhibits, Financial Statement
Schedules and reports on Form 8-K
15
Inasmuch as the calculation of shares of Registrant's voting stock held by
non-affiliates requires a calculation of the number of shares held by
affiliates, such figure, as shown on the cover page hereof, such calculation
has been made solely on the basis of information, reports and notices filed
by affiliates of the Registrant under the Securities Exchange Act of 1934, as
amended. The aggregate market value of Common Stock indicated is based upon
the closing sale price of the Common Stock ($11.00) as reported by the
American Stock Exchange for trading on April 10, 2000. All outstanding shares
beneficially owned by executive officers and directors of the Registrant or
by any shareholder beneficially owning more than 5% of Registrant's common
stock, as disclosed herein, were considered solely for purposes of this
disclosure to be held by affiliates.
PART I
ITEM 1. Business
The Company
Storage Computer Corporation (the "Company" or "SCC") develops and
manufactures software-driven multi-host storage solutions used to drive core
business applications. Storage Computer solves its customers' business
problems through its StorageSuiteT product line and patented OmniRAIDT and
OmniFORCET storage software. Based on an open systems, standards-based
architecture, these solutions support highly interactive applications; many
different servers accessing the same data; and multiple users accessing data
from different locations.
The Company pioneered the RAID 7r technology incorporated in its Virtual
Storage ArchitectureT, which forms the basis for its StorageSuiteT product
family. Based upon this performance-optimized architecture, the StorageSuiteT
family combines intelligent controller, disk drive, and memory technology with
patented memory mapping techniques and a powerful real-time operating system
to deliver high-performance and data protection across the mix of applications
found in today's open system environments.
Company History
The Company's predecessor, Cab-Tek, Inc., began development of
RAID ("Redundant Array of Independent Disks") in late 1984. From 1984 to
1990, products at RAID levels 3, 4, 5 and 6 were developed and tested.
Development then commenced on the Virtual Storage Architecture to overcome the
performance bottlenecks inherent in other RAID implementations and to achieve
fault tolerant storage without impeding performance. The resultant RAID 7
technology was transferred to the Company, which was incorporated in Delaware
in August, 1991. Products based upon the Company's RAID 7 technology began
shipping to customer production sites in the second half of 1992.
Pursuant to the Agreement and Plan of Organization dated October 4, 1994,
as amended by a First Amendment to the Agreement and Plan of Organization
dated January 31, 1995, Vermont Research Products, Inc. ("VRP"), a wholly-
owned subsidiary of the Company, acquired the entire business and
substantially all the property and assets of Vermont Research Corporation
("VRC") in exchange for shares of the Company's Common Stock (the
"Reorganization"). The Reorganization became effective on March 6, 1995 and
was accounted for as a pooling of interests.
Industry Overview
The computer systems market is undergoing a dramatic shift to new
information processing modes, such as client/server computing incorporating
enterprise databases, data warehousing, image processing, multi-media, video-
on-demand, virtual reality processing and Internet/Intranet services. These
new application modes are increasing demand for data storage that is scalable
in terms of capacity, performance, connectivity and manageability. The market
for high performance storage is also driven by host computing platforms which
continue to make quantum leaps in processing performance. The Company believes
that users and networks will increasingly demand high-performance storage
systems to eliminate performance bottlenecks and to take full advantage of
increased server/workstation processing power. International Data Corporation
(IDC), a Framingham, MA research firm, predicts disk storage compound annual
growth rates of 88.1% for UNIXr and 133.8% for Windows NTr between the years
1997 and the year 2001. The U.S. Department of Commerce predicts that the data
storage market will grow to $1 trillion by the year 2004. Based on the market
estimates of IDC, the Company believes the market space for its products is in
the range of $6 billion to $10 billion annually.
RAID Technology
The Company's product line is based on RAID storage technology. RAID
technology links together several industry standard disk drives into a single
large disk drive using a combination of hardware, firmware and software to
achieve extremely fast data transfer rates, high levels of redundancy and
large storage capacities at a relatively lower cost than embedded storage
solutions.
Virtual Storage Architecture
Storage Computer's unique Virtual Storage ArchitectureT (VSA) forms the
basis for all its StorageSuiteT product families. VSA views the storage area
as a whole, coherent and extendible space, a "storage fabric," which can be
allocated to multiple hosts concurrently.
The intelligent storage management system controls the interaction between
the attached host processors and the physical drives. It tracks the location
of every piece of information and allows the host to access that data.
Employing dedicated independent I/O channels for each disk drive, the system
transfers data to the hosts and the processors asynchronously. In the
extensions to the architecture, additional performance optimizations are
achieved by fully distributing the intelligence, memory, parity and flow
control throughout the array. By controlling data flow, the system reduces or
eliminates the processing bottlenecks inherent in many other storage
implementations.
The STORAGESUITET Product Family
SERIES:70 DESKTOP STORAGE SERVER:
Provides flexible high performance storage for departmental workgroups
and server clusters. An intelligent storage solution for applications
with smaller storage requirements, the DESKTOP STORAGE SERVER scales to
218 GB and supports up to two external channels for host connections.
SERIES:71 STORAGE SERVER:
Provides high performance storage for large departmental workgroups and
server clusters. An intelligent storage solution for users with medium-
to-large storage capacity requirements, the STORAGE SERVER scales up to 1
TB+ and supports up to four external channels for host connections.
SERIES:72 OMNIRAIDT SERVER:
Enables widely diverse applications to share centrally managed storage
with optimal performance, data protection, efficiency, and flexibility.
OMNIRAID SERVERS enable multiple data protection levels to be set at the
logical transaction or data set level, independent of the physical array
topology. Ideal for regional operating divisions, large workgroups, or
medium-sized enterprises, the OMNIRAID SERVERS scales up to 2 TB+ and
supports up to 12 external channels for host connections.
SERIES:73 OMNIRAID SUPERSERVERT:
Provides enterprise-class storage services enabling widely diverse
applications across an enterprise to share centrally managed storage with
optimal performance, data protection, efficiency, and flexibility. The
highest performing storage server in the industry, the OMNIRAID
SUPERSERVER delivers even higher read and write performance than the
OMNIRAID STORAGE SERVER. Ideal for both high-performance commercial
applications and very high bandwidth applications, the OMNIRAID
SUPERSERVER supports storage environments to 2 TB+ and 12 external
channels for host connections.
SERIES:74 OMNIRAID SUPERSERVER/ES:
At the top end of the highest performing storage servers in the industry,
the OMNIRAID SUPERSERVER/ES delivers even higher read and write
performance than the OMNIRAID SERVER. Ideal for very high bandwidth
applications, the OMNIRAID SUPERSERVER/ES supports clustered storage
environments up to 16 TB and 48 external channels for host connections.
Disaster Recovery and Business Continuance Products
OMNIFORCE is an advanced intelligent software product that runs on the
SERIES:73 and 74 OMNIRAID SUPERSERVER/ES. It provides an online data
protection facility to allow primary production sites to be multi-level
mirrored, locally and/or remotely, to ensure "hot recovery" of critical
data to keep the business running with minimal interruption of service.
OMNIFORCE offers scalable data continuity features, such as the ability to
configure multiple concurrent levels of local and remote data protection,
based on data prioritization. OMNIFORCE provides fully user-scalable
protection at the file level, rather than the array level. Six levels of
mirroring are supported: intramirroring, local, cross, remote, replicated,
and reflective.
The Company entered into OEM agreements during 1998 with ATL Products
and Intelliguard Software to offer serverless backup. This combination of
OMNIRAID STORAGE SERVERS with ATL's tape library and Intelliguard's
Celestra backup software will enable the Company's OMNIRAID products to
perform realtime backup, without requiring host intervention, at speeds
ranging up to one terabyte per hour.
Storage Management
STORAGE ADMINISTRATORT enhances the monitoring and control of the
Company's storage product using an open, standards-based management
protocol, SNMP (Simple Network Management Protocol), the industry-standard
IP (Internet) communications protocol and a built-in Ethernet LAN (local
area network) connection. This "open systems" design allows information
from the Storage Administrator to be accessed through any SNMP management
station, and alarm conditions can be sent to multiple managers
simultaneously, anywhere in the world, over local or remote network
connections. Mission-critical applications requiring uninterrupted access
to data on the arrays are protected by operational controls within the
Storage Administrator, which enable early detection and automatic alert
notification when any user-defined alarm thresholds are reached. This
advanced "Call Home" technology can simultaneously report to local,
regional, or to the Company's global corporate monitoring center.
Customers and Applications
The Company has an extensive worldwide customer list. Products based upon
the Virtual Storage Architecture have been sold to customers across a broad
range of industries including banking and financial services, education,
technology, telecommunications, military/aerospace, general services,
government, and manufacturing. It is the goal of the Company to continue to
market to existing customers to leverage its multiple product offerings and to
continue to expand its customer base for its high-performance storage
solutions.
Customer Service And Support
The Company offers its customers a full array of customizable support
options and programs. Customers have the option to decide how they want their
service and support structured, so that the maintenance of the customer's data
storage equipment fits into the customer's business model. Storage Computer's
technical services organization comprises a group of skilled support
personnel, located at Storage Computer's corporate headquarters in Nashua, New
Hampshire and in field locations in the United States, Europe and Asia.
In addition to the Company's own support engineers and technicians, its
strategic service alliances with third-party service providers enable it to
offer comprehensive, high-quality programs to support customers on a worldwide
basis. Storage Computer's strategic service alliances formed with third-party
providers include some of the largest and most highly respected organizations
in the service industry. Those alliances include IBM Service Organization,
Technology Service Solutions (a subsidiary of IBM) and DecisionOne. All in-
house and third-party service technicians supporting the Company's customers
are trained by Storage Computer, and service parts are generally stocked in
local service offices. Service technicians are backed by a technical support
hotline staffed by support analysts at Storage Computer. Storage Computer
always takes the initial service call, determines the logistics of the support
plan, and manages the process. Onsite services may be tailored to customer
requirements in terms of hours covered, response times and onsite hardware
service providers.
Year 2000
At the turn of Year 2000, the Company experienced no material events in any
of its products externally, or in its internal business transaction systems
after 12:00 AM January 1, 2000, and anticipates no future issues as a result
of the Year 2000 problem.
Many computer systems and software products were not designed to handle any
dates beyond the year 1999. As a result, computer systems and/or software
used by many companies may have needed to be modified prior to the Year 2000
in order to remain functional. Significant uncertainty existed in the
hardware and software industry concerning the potential effects associated
with such compliance.
In mid-1997, the Company formed an internal task force to evaluate those
areas of the Company that may have been affected by the Year 2000 problem and
devised a plan for the Company to become Year 2000 compliant in a timely
manner (the "Plan"). The Plan focused on three major areas; the Company's
internal business transaction systems; the products the Company sells and the
business transaction systems of its business partners, including suppliers,
customers and bankers. To date, the Company has completed the execution of its
Plan and anticipates no further testing on this issue.
Internal Business Transaction Systems
The Company had completed a review of its critical business transaction
systems, and its Year 2000 compliance related to business transaction systems
is as follows:
All of the Company's systems for processing business transactions prior to
and following 12:00am January 1, 2000. This compliance extended to the
underlying hardware, operating systems, and other software on which the
Company's business system operates. This compliance included the following
transactions and related printed documents: accepting orders from customers,
fulfilling customer orders, invoicing customers, crediting customer accounts,
applying customer payments, refunding customers, placing orders with vendors,
receiving vendor shipments, processing vendor invoices, and paying vendors.
The Company incurred no loss of function to date and no incremental
material costs associated with its efforts to become Year 2000 compliant, as
the majority of the costs which had occurred were as a result of normal
upgrade procedures. Based on current information, the Company does not expect
any future costs to modify its information technology infrastructure to be
material to its financial condition or results of operations. However, there
can be not assurances that there will not be interruptions or other
limitations of financial and operating systems functionally or that the
Company will not incur significant costs to avoid such interruptions or
limitations.
Products the Company Sells
The Company had completed a review of its manufactured product line and
third party products and software sold by Storage Computer for Year 2000
compliance. The Company's Year 2000 compliance related to the products it
sells is as follows:
All StorageSuite storage products are Y2K compliant. The Company had
completed its review and testing of all products. Current and past products
are currently Y2K compliant as will be any future product developments.
Expenditures related to this portion of the Company's Y2K plan were expensed
as incurred and are immaterial in their impact on the Company's operating
results.
The Company is continuing to work with its major vendors and suppliers to
ensure that the Company's manufacturing and infrastructure systems will not
experience any difficulties as a result of their products. Any effects on the
Company's results of operations as a result of such parties' failures are not
estimable. However, management does not believe that any individual vendor's
failure to comply will have a material effect on the Company's products,
financial condition or continuing operations.
The Company's Business Partners
The Company's suppliers (particularly sole-source and long lead-time
suppliers), key customers and other key business partners (e.g. bankers)
experienced no material events or significant computer outages related to Y2K
issues at the turn of the year 2000. In the event any of the Company's
suppliers, key customers or business partners encounter any lingering, latent
Year 2000 problems in the future, such an event may have a material adverse
effect on the Company's results of operations. Management does not anticipate
any significant event from any latent Year 2000 issues which could also have a
material adverse effect on the Company.
The Company has incurred to date no incremental material costs associated
with the Year 2000 issue. Based on current information, the Company does not
expect future costs, if any, to be material to its financial condition or
results of operations. Costs incurred relating to Year 2000 issue were
expensed by the Company during the period in which they were incurred.
Competition
The information storage market is extremely competitive. Companies such as
Compaq, EMC Corporation, IBM Corporation, Hewlett-Packard, NCR Corporation,
Storage Technology, Sun Microsystems, and more than 100 other public and
private companies provide disk arrays for a wide variety of computer systems,
workstations and PCs. Although SCC is currently unaware of any other vendor
offering an asynchronous transfer RAID 7 disk array, there can be no assurance
that the Company will be able to compete successfully against existing
companies or future entrants to the marketplace. While the Company believes
that the price-performance characteristics of its products are currently
competitive, increased competition including the introduction of new products
by the Company's competitors, could result in price reductions, reduced gross
margin and loss of market share, any of which could materially adversely
affect the Company's business, operating results and financial condition. Many
of the Company's current and potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products
than the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
Sales And Marketing
Domestic. The Company's products are sold domestically through a
combination of direct sales personnel, value-added resellers and other
distributors. The Company's direct sales organization coordinates the
activities of the Company's resellers and distributors and seeks to actively
participate with them in selling efforts in order to enable the Company to
establish strong direct ties with its customers and end users.
International. The Company has established several different operational
methods in order to penetrate and develop international markets. The Company
uses distributors and value-added resellers, combined with the selling efforts
of wholly-owned subsidiaries, and affiliated, minority-owned entities, to
penetrate certain international markets and maximize returns on its marketing
and sales efforts.
Storage Computer Europe, GmbH, a wholly-owned subsidiary of the Company
located in Kelkheim, Germany, provides sales and product support throughout
Central and Eastern Europe. In September 1992, the Company entered into a
joint venture agreement as a minority shareholder and formed Storage Computer
(Asia) Ltd. for the purpose of selling and servicing the Company's products in
Hong Kong and China. Similarly, in December 1995, the Company made a minority
equity investment in Open Storage Solutions, S.A., in France, for the purpose
of collaborating to sell and service products in France. Storage Computer (UK)
Ltd. manufactures products and supports the sales and service of the Company's
products in certain countries in Western Europe. In October of 1998 the
Company made an additional investment in Open Storage Solutions, S.A.,and
acquired majority interest. In February of 1998 the Company formed Storage
Computer Pty., Ltd. for the purpose of sales and support in Australia.
The remaining international markets served by the Company are coordinated
and supported from the United States through the use of the Company's
independent distributor network. The Company's distributors are responsible
for penetrating and developing their respective markets, providing support and
maintenance services and maintaining an inventory of spare parts. The
distributors are also responsible for establishing relationships with value-
added resellers, who sell the Company's products to final end users. (See the
Company's financial statements included elsewhere herein for more detailed
information regarding revenues.)
Manufacturing
The Company's manufacturing operations, which are located in Nashua, New
Hampshire, U.S.A. and Leatherhead, England, undertake procurement of
materials, product assembly, product assurance, quality control and final
testing. The Company's manufacturing strategy has been to develop close
relationships with its suppliers and subcontractors and to exchange critical
information, in order to minimize capital investment and overhead expenditures
and to control inventories.
The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. The Company
purchases disk drives and enclosures from a number of major disk drive
suppliers. The Company's reliance on its suppliers involves certain risks,
including a potential inability to obtain an adequate supply of required
components, price increases, timely delivery and component quality. This risk
is particularly significant with respect to suppliers of disk drives because
in order to meet product performance requirements, the Company must obtain
disk drives with extremely high quality and data storage capacity. In
addition, there is currently a significant market demand for disk drives and
for semiconductor memory components, which could result in component
shortages, selective supply allocations and increased prices of such
components. Although to date the Company has been able to purchase its
requirements of such components, there is no assurance that the Company will
be able to obtain its full requirements of such components in the future or
that prices of such components will not increase. In addition, there can be no
assurance that problems with respect to yield and quality of such components
and timeliness of deliveries will not occur. Disruption or termination of the
supply of these components could delay shipments of the Company's products and
could have a material adverse effect on the Company's business, operating
results and financial condition.
Research And Development
Since its inception, the Company has made substantial investments in
research and development. The Company believes that its future performance
will depend in large part on its ability to maintain and enhance its current
products, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. The Company's future growth depends substantially upon the
success of the Company's StorageSuite product line and related products as
well as new products which may be developed; however, there can be no
assurance that the Company's products will attain broad market acceptance. Due
to the complexity of the engineering effort required to produce new data
storage subsystem products, the development and commercial exploitation of new
products are subject to significant technical risks. There can be no assurance
that new products will be introduced on a timely basis or at all. If new
products are delayed or do not achieve market acceptance, the Company's
business, operating results and financial condition will be materially
adversely affected. In addition, there can be no assurance that customers will
not defer orders in anticipation of new product introductions by the Company
or its competitors.
Products like those offered by the Company may contain undetected software
errors or failures when first introduced or as new versions are released.
There can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found in new products after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
The Company's total expenses for research and development for fiscal years
1999, 1998 and 1997 were $1,980,988, $4,258,249 and $2,851,739 respectively.
Research and development efforts are expected to be focused on increasing the
individual capabilities and performance of existing products and developing
new value added software and hardware products to provide the Company's
installed base with greater functionality, as well as to attempt to expand
that installed base.
Proprietary Rights
The Company's policy is to protect its technology by, among other things,
filing patent applications with respect to technology considered important to
the development of its business. The Company has been awarded certain U.S.
patents and has additional U.S. patent applications pending. Foreign
counterparts of certain of these applications have been filed or may be filed
at the appropriate time. The Company decides on a case-by-case basis whether
and in what countries it will file foreign counterparts of a U.S. patent
application.
The Company believes that its products, trademarks and service marks do not
infringe on the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Company in the future. If such a claim is made, the Company will
evaluate the claim as it relates to its products and, if appropriate, may seek
a license to use the protected technology. There can be no assurance that the
Company would be able to obtain a license to use any such protected technology
or that any such license could be obtained on terms that would not have a
material adverse effect on the Company. If the Company or its suppliers are
unable to license any such protected technology, the Company could be
prohibited from incorporating or marketing such products. The Company could
also incur substantial costs to redesign its products or to defend any legal
action taken against it. In the event the Company's products are found to
infringe protected technology, the Company could be required to pay damages to
the infringed party or be enjoined from manufacturing and selling such
products.
The Company requires all employees, and technical and other consultants and
advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
generally provide that all confidential information developed or made known to
the individual during the course of the individual's relationship with the
Company is to be kept confidential and not disclosed to third parties except
in specific circumstances. All of the Company's key technical employees have
also entered into agreements providing for the assignment of rights to
inventions made by them while in the employ of the Company. Although the
Company continues to take protective measures to protect its proprietary
technology, there can be no assurance that these measures will be successful.
In addition, the laws of certain foreign countries may not protect the
Company's rights to the same extent as U.S. law.
During 1999, the Company completed a thorough evaluation of its patents,
claims and other intellectual property rights. Upon completion of such
evaluation, management firmly believes that several of its patents have been
infringed by several manufacturers in the computer storage marketplace.
Presently, the Company is aggressively pursuing the enforcement of its
intellectual property rights secured by the patents and has retained a major
law firm, on a contingency basis, to enforce the Company's rights. The
Company will be seeking royalties for the past infringement in addition to
licensing agreements covering future production and sale of such infringing
products.
Employees
As of December 31, 1999, the Company had 62 full time employees. Of the
total, 46 were based in North America, 9 in the United Kingdom, and 7 in
Germany. The Company's ability to develop, manufacture and market its products
and to establish and maintain a competitive position in its industry will
depend, in large part, upon its ability to attract and retain qualified
technical, marketing and managerial personnel, of which there can be no
assurance. The Company believes that its relations with its employees are
good. None of the Company's employees are represented by a collective
bargaining agreement.
ITEM 2. Properties
The Company currently leases, from an affiliate, a 35,000 sq. ft. facility
which is occupied by its light manufacturing, research and development and
office operations in Nashua, New Hampshire. In 1999, the Company paid a
monthly rental of $18,800 to lease this facility. The current monthly rental
is $18,800 which the Company believes is comparable to rentals of similar
properties in the area and indicative of the fair market rental which could be
obtained from an unrelated third party in an arm's-length transaction. See
"Item 13 - Certain Relationships and Related Transactions." The Company
leases all of its domestic and international outside sales offices. All
Company properties and premises are adequately protected by insurance
coverage. The Company believes that its existing facilities are adequate for
its current needs and that additional space will be available as needed.
ITEM 3. Legal Proceedings
During 1999, the Company settled its claims against one of its disk
drive suppliers Micropolis (USA), Inc. and its parent company, Micropolis
Singapore Ltd. As part of the settlement, the Company filed an allowed claim
against Micropolis (USA) Inc., with the Bankruptcy Court and final payment is
expected to be approximately ten percent of the claim. All settlement sums in
agreement with the bankruptcy court have either been received or are expected
to be received by June 30, 2000. Also in 1999, the claim against Micropolis
Singapore Ltd. was filed with the bankruptcy court in Singapore and payment
was received in settlement of the claim as part of that company's liquidation.
The Company does not believe that its involvement in, final settlement of,
litigation costs or settlement receipts will have any material effect on the
Company's business, operating results or financial condition.
The Company is not involved presently in any other material legal
proceedings that the Company believes would have a material effect upon its
business, operating results or financial condition. However, the Company is
involved in various other minor legal actions in the ordinary course of its
business. While the Company currently believes that the amount of any ultimate
potential loss would not be material to the Company's financial position, the
outcome of these actions is difficult to predict. In the event of such adverse
outcome, the ultimate potential loss could have an adverse effect on the
Company's financial position or reported results of operations in a particular
quarter.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders during its
fourth quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder
Matters
The Company's Common Stock is traded on the American Stock Exchange under
the symbol "SOS".
The following table sets forth the range of the high and low closing sales
prices for the Common Stock of the Company for the fiscal years ended December
31, 1999 and 1998, as reported by the American Stock Exchange.
FISCAL 1999
High
Low
First Quarter
$3.50
$1.9
4
Second Quarter
$2.38
$1.5
0
Third Quarter
$1.88
$0.8
8
Fourth Quarter
$5.63
$0.7
5
FISCAL 1998
High
Low
First Quarter
$9.62
$5.50
Second Quarter
$7.38
$3.63
Third Quarter
$4.38
$2.44
Fourth Quarter
$5.00
$1.00
On March 31, 2000, there were 330 record holders of the Company's Common
Stock. The Company believes the actual number of beneficial owners of the
Common Stock is much greater than the stated number of holders of record
because a number of the shares of the Company's Common Stock is held in
custodial or nominee accounts for the benefit of persons other than the record
holder.
The Company has never paid any cash dividends and does not anticipate
paying any cash dividends in the foreseeable future. The Company is also
restricted from paying cash dividends under the terms of its bank credit
facility.
During the first quarter of the Company's fiscal year 2000, the common
stock traded at increased prices, ranging from a low closing price of $3.31,
to a high closing price of $15.88.
ITEM 6. Selected Financial Data
The following data, insofar as it relates to the three fiscal years 1997
through 1999 (except for the 1997 Balance Sheet Data) has been derived from
the consolidated financial statements appearing elsewhere herein, including
the Consolidated Balance Sheet as of December 31, 1999 and December 31, 1998,
and the related Consolidated Statement of Operations for each of the three
years in the period ended December 31, 1999, and notes thereto. The data,
insofar as it relates to the Balance Sheet Data as December 31, 1997, December
31, 1996 and December 31, 1995, and the Statement of Operations Data for the
fiscal years 1996 and 1995, has been derived from the historical financial
statements of the Company for such periods.
YEAR ENDED DECEMBER 31
STATEMENT OF OPERATIONS DATA
1999
1998
1997
1996
1995
Revenue
$10,525
,658
$17,051,
749
$37,146
,103
$31,011
,429
$23,130,
413
Cost of Revenue
6,303,1
25
11,838,6
57
18,152,
978
15,326,
909
12,054,2
65
Gross Profit
4,222,5
33
5,213,09
2
18,993
,125
15,684,
520
11,076,1
48
Operating
Expenses
Research and
development
1,980,9
88
4,258,24
9
2,851,7
39
2,785,2
80
2,116,54
2
Selling and
marketing
4,098,3
47
8,871,80
5
7,959,5
21
6,117,9
47
5,469,23
8
General and
Administrative
2,357,2
54
2,387,74
8
1,526,4
77
1,186,2
39
1,089,79
7
Write Down of
Investment
0
2,094,13
4
0
0
0
Total
8,436,5
89
17,611,9
36
12,337,
737
10,089,
466
8,675,57
7
Operating Income
(loss)
(4,214,
056)
(12,398,
844)
6,655,3
88
5,595,0
54
2,400,57
1
Other income
(expense)
(562,13
9)
(636,668
)
(399,63
5)
(92,523
)
58,986
Income (loss)
before income
taxes
(4,776,
195)
(13,035,
512)
6,255,7
53
5,502,5
31
2,459,55
7
Provision
(benefit) for
income taxes
(199,86
8)
(2,145,0
20)
2,364,0
00
440,980
(27,038)
Net income
(loss)
$(4,576
,327)
$(10,890
,492)
$
3,891,7
53
$
5,061,5
51
$
2,486,59
5
Net income
(loss) per
diluted share
$
(.40)
$
(.97)
$
.33
$
.43
$
.21
BALANCE SHEET
DATA
Total assets
$14,228
,668
$
22,899,9
02
$30,811
,953
$
20,935,
309
$
14,767,6
14
Long term
obligations
$
1,176,0
00
$
710,000
$
710,000
$
742,672
$
1,565,10
0
ITEM 7. Management's Discussion and Analysis of Financial Condition And
Results of Operations
Forward-looking Statements
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 CONTAINS CERTAIN SAFE
HARBORS REGARDING FORWARD-LOOKING STATEMENTS. FROM TIME TO TIME, INFORMATION
PROVIDED BY THE COMPANY OR STATEMENTS MADE BY ITS DIRECTORS, OFFICERS OR
EMPLOYEES MAY CONTAIN "FORWARD-LOOKING" INFORMATION SUBJECT TO NUMEROUS
RISKS AND UNCERTAINTIES. ANY STATEMENTS MADE HEREIN THAT ARE NOT STATEMENTS OF
HISTORICAL FACT ARE FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO,
STATEMENTS CONCERNING THE CHARACTERISTICS AND GROWTH OF THE COMPANY'S MARKETS
AND CUSTOMERS, THE COMPANY'S OBJECTIVES AND PLANS FOR FUTURE OPERATIONS AND
PRODUCTS AND THE COMPANY'S EXPECTED LIQUIDITY AND CAPITAL RESOURCES. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON A NUMBER OF ASSUMPTIONS AND INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES, AND, ACCORDINGLY, ACTUAL RESULTS COULD
DIFFER MATERIALLY. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO: THE CONTINUED AND FUTURE ACCEPTANCE OF THE COMPANY'S PRODUCTS;
THE RATE OF GROWTH IN THE INDUSTRIES OF THE COMPANY'S PRODUCTS; THE PRESENCE
OF COMPETITORS WITH GREATER TECHNICAL, MARKETING AND FINANCIAL RESOURCES; THE
COMPANY'S ABILITY TO PROMPTLY AND EFFECTIVELY RESPOND TO TECHNOLOGICAL CHANGE
TO MEET EVOLVING CUSTOMER NEEDS; RISKS ASSOCIATED WITH SALES IN FOREIGN
COUNTRIES; AND THE COMPANY'S ABILITY TO SUCCESSFULLY EXPAND ITS OPERATIONS.
Liquidity and Capital Resources
Cash flow
Cash flow from operations in 1999 has increased significantly as compared to
1998 and 1997. As compared to 1998, 1999 cash flow from operations increased
primarily due to a reduced net loss, an income tax refund received and a
decrease in inventories. As compared to 1997, 1999 cash flow from operations
increased primarily due to a collection on accounts receivable, the income tax
refund received and a reduction in inventories. Cash used in investing
activities was insignificant in 1999 as compared to 1998 and 1997 due to
reductions in capital expenditures and the acquisitions of other assets
because of the Company's limited working capital. Cash flow from financing
activities was positive in 1997 and 1998 because the Company increased its
borrowings under its bank credit line. In 1999, the Company reduced its
balance on its line of credit resulting in using cash for financing
activities. See the Statements of Consolidated Cash Flows included in the
financial statements included elsewhere herein for additional information.
Accounts Receivable
The reduction in accounts receivable from December 31, 1998 to December 31,
1999 of $4,436,274 was due to the reduced level of revenue during the 1999
year and additional allowances made for doubtful accounts.
Inventory
Inventory decreased $1,467,563 from December 31, 1998 to December 31, 1999.
During 1999 the Company continued programs to reduce the level of component
parts in inventory. The investment in inventory is impacted by several
factors, including, but not limited to, new product and product enhancement
introduction; the increased cost of parts associated with larger storage
units; the timing of purchased component parts such as disk drives; the non-
recognition of revenue and corresponding inventory increases due to inventory
transfers deemed to be evaluation units; and increased inventory locations
throughout the United States and Europe.
Total Assets
The Company's total assets for the fiscal years 1999, 1998, 1997, 1996 and
1995 were $14,228,668, $22,899,902, $30,811,953, $20,935,309, and
$14,767,614, respectively. Based on historically significant fluctuations for
the Company's Total Assets over the past five years, the Company's management
cannot predict whether the trend of the last three years will continue,
plateau or reverse itself.
Borrowing Arrangements
The Company has a revolving credit facility which originally expired on
January 4, 2000. Previously, the Company had signed an amended loan agreement
with the bank, decreasing the commitment from a $10,300,000 secured demand
line of credit to $6,900,000, which was used for the working capital needs of
the Company. The amended loan agreement is secured by the Company's assets and
requires, among other things, maintenance of a defined minimum tangible net
worth. Borrowings against such credit facility bear interest at the bank's
prime rate plus a stipulated fee. As of December 31, 1999 the Company had
drawn down $6,513,771 against the credit line. The credit line was further
amended, and extended to expire on May 5, 2000. Further, the Company also
received a commitment letter from its bank to extend the due date of up to
$3,550,000 of the balance due under its line of credit to January 2000.
Working Capital
The Company's working capital at December 31, 1999 was $545,393. In
management's opinion, the Company's current working capital position, together
with anticipated receipt of various equity investments and other financing
proceeds which the Company is seeking, and cash from operations, will be
sufficient to accommodate working capital requirements for the fiscal year
ending December 31, 2000. The Company's working capital at December 31 of 1998
and 1997 was $3,398,897 and $12,605,866, respectively. Based on historically
significant fluctuations for the Company's Working Capital over the past three
years, the Company's management cannot predict whether the trend of the last
three years will continue, plateau or reverse itself.
Equity Financing
The Company has been actively seeking equity financial investment
partners and is currently negotiating the final terms with several investors.
The Company is in receipt of several investors' offers to purchase $7,000,000
of convertible preferred stock of the Company.
Results of Operations
The following table presents the Company's consolidated statement of
operations stated
as a percentage of revenue for the years ended December 31, 1999, 1998,
1997, 1996 and 1995.
1999
1998
1997
1996
1995
Revenue
100.00%
100.00%
100.00%
100.00%
100.00%
Product cost
59.88
69.43
48.87
49.42
52.11
Gross margin
40.12
30.57
51.13
50.58
47.89
Operating Expenses
Research and
development
18.82
24.97
7.68
8.98
9.15
Selling and marketing
38.94
52.03
21.43
19.73
23.65
General and
administrative
22.40
14.00
4.11
3.83
4.71
Write Down of Investment
0
12.28
0
0
0
Total
80.16
103.28
33.22
32.54
37.51
Operating income (loss)
(40.04)
(72.71)
17.91
18.04
10.38
Other income (loss)(expense)
(5.34)
(3.73)
(1.08)
(.30)
0.26
Income (loss) before income
taxes
(45.38)
(76.44)
16.83
17.74
10.64
Provision for income taxes
Current tax (benefit)
(1.90)
(12.58)
5.44
6.00
3.76
Deferred tax (benefit)
0
0
.
93
(4.58)
(3.88)
Total
(1.90)
(12.58)
6.37
1.42
(0.12)
Net income (loss)
(43.48)
%
(63.86)
%
10.46%
16.32%
10.76%
Revenue
Revenue for the year ended December 31, 1999 was $10,525,658 reflecting a
decrease in combined product sales of $6,526,091 or 38%, compared with the
year ended December 31, 1998. Revenue for the year ended December 31, 1998 was
$17,051,749, reflecting a decrease in combined product sales of $20,094,354 or
54% compared with the year ended December 31, 1997. The decrease in revenue
resulted from a variety of causes including, but not limited to, continued
constriction in the existing customer base due to customer concern as to the
Company's financial condition, delay in the delivery of several upgrade
features, and restricted working capital conditions impeded the sales efforts
toward reestablishing the re-seller sales and marketing channel until late in
the fiscal year end.
During the year the Company undertook the following actions to facilitate
the cohesive focus towards revenue growth: appointed a new Senior Vice
President of Sales and Marketing and commenced a restructuring, including
the expansion of North America territories from three designated regions to
five regions, the initiation of the plan to re-establish the re-seller sales
channel, and consolidation of the European sales, marketing and service
organizations; implemented strategic marketing programs and product
repositioning and pricing directives with respect to the Company's existing
products offering. The Company believes these actions will provide revenue
growth that will enable the Company to return to profitability.
Revenue by geographic region expressed as a percentage of total revenue is
as follows:
Year Ended
December 31,
1999
Year Ended
December 31,
1998
Year Ended
December 31,
1997
North America
44%
54%
50%
Asia
22%
22%
23%
European Sales
33 %
22%
26 %
Other Regions
1%
2%
1%
The shift in revenue resulted from a reduction in the U.S. direct sales
force. For the years ended December 31, 1999, 1998 and 1997, sales to one
customer were in excess of ten percent of revenue.
All United States export sales are denominated in United States dollars to
limit the amount of foreign currency risk. Export sales from the European
sales offices are denominated in United States dollars. Sales occurring
through the Company's subsidiaries located in England and Germany are
conducted in the local functional currency.
Product Cost
Product cost for the years ended December 31, 1999, 1998 and 1997 was
$6,303,000, $11,839,000 and, $18,153,000, or 60%, 69% and 49%, of revenue,
respectively.
The increased product costs as a percentage of revenue in 1999 and 1998,
as compared to 1997, are attributable to various factors, including, but not
limited to, a lower dollar product margin contribution to cover non-variable
expenses associated with product production and support and increased
provisions for inventory obsolescence, based on various factors.
Research and Development
Research and development expenses for the years ended December 31, 1999,
1998 and 1997 were $1,981,000, $4,258,000, and $2,852,000, or 19%, 25% and 8%
of revenue, respectively.
In 1998 the Company had increased expenditures for research and development
in order to maintain the technology advantage for its software, and to develop
new hardware packaging. These increased expenditures resulted from the
Company's emphasis on completion of new hardware, from continued prototype and
piece-part costs, as well as payments to contractors for out-sourced design
and development costs associated with the project. In 1999, the Company
decreased its expenditures due to the decreased revenue and cash flow. The
limited cash resources limited new product development and costs were
restricted to providing continuous software upgrades and support for its
existing products.
Sales and Marketing
Sales and marketing expenses for the years ended December 31, 1999, 1998
and 1997 were $4,098,000, $8,872,000, and $7,960,000 or 39%, 52% and 21% of
revenue, respectively. The increase in absolute dollar expenditures from 1997
to 1998 was due to increased headcount and resulting support expense
associated with the company's expansion of the direct sales force and
implementation of strategic marketing programs introduced in the fourth
quarter of 1998, and increased allowance for bad debts. In 1999, the Company
decreased its expenditures due to the decreased revenues and a decrease in
headcount.
General and Administrative
General and administrative expenses for the years ended December 31, 1999,
1998 and 1997 were approximately $2,357,000, $2,388,000 and $1,526,000, or
22%, 14% and 4% of revenue, respectively. These expenses remained constant
between 1998 and 1999 as the Company elected to maintain its core facilities
and personnel. In 1999, this enabled the Company to maintain its in-house
manufacturing operations and service department, which provided for the proper
level of maintenance and service required by the customer base of installed
equipment at various customer locations.
Loss on Investment
In August, 1998, the Company acquired, in conjunction with another
investor, ownership of a new product technology developed by a former customer
("the developer"). The transfer of ownership was effected through a series
of transactions. During the third quarter 1997 the Company reclassified a
delinquent account receivable to a long term asset in its financial statement
and entered negotiations to secure the debt. In March 1998, the parties
agreed to convert the account receivable to convertible preferred stock. When
the developer failed to file a timely registration statement the Company
surrendered that stock and entered into new negotiations. In return for
additional cash advances made by the Company and the other investor, the
ownership of the technology was transferred. The developer was granted an
exclusive license to manufacture the new product and the purchase and sale
agreement provided for royalty payments to the purchasers. Subsequently, the
developer ceased doing business which caused the Company to terminate the
license agreement. At the end of 1998, the Company wrote down its investment
on this asset to $100,000.
Additional significant resources would have been required to continue
research and development on the new product technology, and to bring it to
market. The Company did not have the additional resources to enter such
business at that time. Citing the costs, the previous write down of such
asset's value to a nominal amount and the potential for a long delay in
recovering the value of the investment and the associated risks of such delay,
the Company sold the technology for $100,000 in 1999.
Other Income(Expense)
Other Income (Expense) aggregated $562,000, $637,000 and $400,000 in the
years 1999, 1998 and 1997, respectively. The major component of other income
(expense) is interest expense, which increased from 1997 to 1999, as the
result of increased short-term borrowing under the Company's line of credit.
Provision for Federal and State Income Taxes
The provision for federal, state and foreign income taxes (benefit)
aggregated ($200,000), ($2,145,000) and $2,364,000 for the years 1999 through
1997, respectively. The aggregate tax rate percentage was (4%), (16%) and 38%
for the same periods.
The 1999 and 1998 tax benefits were the result of a tax loss carryback to
earlier reporting periods.
At December 31, 1999, the Company has deferred tax assets recorded in its
statement of financial position of $2,194,000 that is net of a valuation
reserve of $4,599,000 on total deferred tax assets of $6,793,000. The amount
of the unreserved tax asset, $2,194,000, is based on management's
determination of the amount of tax benefit to be realized in the relatively
near term.
Foreign Currency Transactions
Management does not currently utilize any derivative products to hedge its
foreign currency risk. The Company's foreign subsidiaries' obligations to
their parent are denominated in United States dollars. There is a potential
for a foreign currency gain or loss based upon fluctuations between the United
States dollar and its subsidiaries' functional currencies, currently the
German mark and the British pound. This exposure is limited to the period
between the time of accrual of such liability to the parent in the
subsidiaries' functional currency and the time of its payment.
Other than the intercompany balances noted above, the Company does not
believe it has material unhedged monetary assets, liabilities or commitments
which are denominated in a currency other than the operations' functional
currency. Management expects such exposure to continue until its foreign
subsidiaries reach a more mature level of operation. Management currently has
no plans to utilize any derivative products to hedge its foreign currency
risk.
The Euro Conversion
During 1998, the Company investigated the impact of the euro conversion on
its subsidiaries in the United Kingdom and in Germany. Because Germany is a
participating country, the Company purchased accounting software in order to
accommodate the dual currency requirements for the transition period. The
purchase of that software was accounted for in accordance with the Company's
accounting policy for asset capitalization. The Company does not expect the
euro conversion to have a material impact on its business or its financial
condition.
Inflation
The Company does not believe that inflation has had a material impact on
its operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's Stock Price is Volatile
The Company's stock price, like that of other technology companies, is
subject to significant volatility because of factors such as:
- - - the announcement of new products, services or technological
innovations by the Company or its competitors
- - - quarterly variations in its operating results
- - - changes in revenue or earnings estimates by the investment community
- - - speculation in the press or investment community
- - - failure to meet earning expectations
In addition, the Company's stock price may be affected by general market
conditions and domestic and international economic factors unrelated to the
Company's performance. Further, until recently, the Company's stock was thinly
traded. Because of these factors, recent trends should not be considered
reliable indicators of future stock prices or financial results.
The Company's Business May Suffer If It Cannot Protect its Intellectual
Property
The Company generally relies upon patent, copyright, trademark and trade
secret laws and contract rights in the United States and in other countries to
establish and maintain the Company's proprietary rights in its technology and
products. However, there can be no assurance that any of the Company's
proprietary rights will not be challenged, invalidated or circumvented. In
addition, the laws of certain countries do not protect the Company's
proprietary rights to the same extent, as do the laws of the United States.
Therefore, there can be no assurance that the Company will be able to
adequately protect its proprietary technology against unauthorized third-party
copying or use, which could adversely
affect the Company's competitive position. Further, there can be no assurance
that the Company will be able to obtain licenses to any technology that it may
require to conduct its business or that, if obtainable, such technology can be
licensed at a reasonable cost.
Intellectual Property Rights
The Company is aggressively pursuing the enforcement of its intellectual
property rights after an extensive patent review conducted in 1999.
Subsequently, the Company retained a major law firm to enforce these rights
against infringing parties, which management believes to be extensive. Despite
the Company's and its legal representatives' efforts, there can be no
assurance or predictability as to any amount of recovery or the length of time
it will take the Company to recover any royalties or license fees which may be
recoverable. Despite the Company's efforts to protect its intellectual
property rights, unauthorized use may still occur, particularly in foreign
countries.
Development of New Products and Solutions
The Company must make continuous investment in research and development to
maintain its ongoing effort to continually improve its products and provide
innovative solutions to its customers. The development of software products
is a difficult and costly process and subject to many other products'
requirements. The Company's inability to timely deliver new products in the
past has had an adverse effect on the Company's operating and financial
results. There can be no assurance that the Company will be able to
effectively develop new products in the future.
Competition
The Company competes with many established companies in the computer storage
and server industries and certain of these companies have substantially
greater financial, marketing and technological resources, larger distribution
capabilities, earlier access to customers and more opportunity to address
customers' various information technology requirements than the Company. The
Company's business may be adversely affected by the announcement or
introduction of new products by its competitors, including hardware, software
and services, price reductions of its competitors' equipment or services and
the implementation of effective marketing strategies by its competitors.
Competitive pricing pressures exist in the computer storage and server markets
and have had and may in the future have an adverse effect on the Company's
revenues and earnings. There also has been and may continue to be a
willingness on the part of certain competitors to reduce prices in order to
preserve or gain market share, which the Company cannot foresee. The Company
currently believes that pricing pressures are likely to continue. The relative
and varying rates of product price and component cost declines could have an
adverse effect on the Company's earnings.
Rapid Technological Changes
The computer industry is changing both dramatically and rapidly. The
development of "open systems computing", the introduction of the Internet,
new fibre technologies (SAN) and the increasing storage density in disk drive
technologies, have caused an increase in new product development and shorter
time to bring the new products to market. While the Company believes that its
Virtual Storage Architecture and StorageSuite products are advanced when
compared to competitive products, and compliment many other products utilized
in total customer solutions, there can be no assurance that this will continue
in the future. The failure to remain consistently ahead of competitive
technologies would have a negative impact on the Company's operating results
and financial condition.
Business Alliances
Many companies are forming business alliances with their competitors, to be
able to provide totally integrated storage solutions to their customers. One
result of these alliances is to effectively preclude competitive products from
being offered to the customers. Many of the relationships are exclusive and
the Company's failure to develop similar relationships will effectively reduce
the number of qualified sales opportunities the Company will have for its
products in the future. The Company believes that it addresses this issue by
its return to the reseller channel sales model and having the
integrator/solution providers/value added-resellers perform the solution
selling required. The Company's failure to open these sales channels will have
a negative effect on the Company's operating results and financial condition.
Operations
The Company's products operate near the limits of electronic and physical
performance and are designed and manufactured with relatively small
tolerances. If flaws in design, production, assembly or testing were to occur
by the Company or its suppliers, the Company could experience a rate of
failure in its products that would result in substantial repair or replacement
costs and potential damage to the Company's reputation. Continued improvement
in manufacturing capabilities and control of material and manufacturing
quality and costs are critical factors in the future growth of the Company.
The Company frequently revises and updates manufacturing and test processes to
address engineering and component changes to its products and evaluates the
reallocation of manufacturing resources among its facilities. There can be no
assurance that the Company's efforts to monitor, develop and implement
appropriate test and manufacturing processes for its products will be
sufficient to permit the Company to avoid a rate of failure in its products
that results in substantial delays in shipment, significant repair or
replacement costs and potential damage to the Company's reputation, any of
which could have a material adverse effect on the Company 's business, results
of operations or financial condition.
Additionally, most companies in the high technology arena are under pressure
to be able to acquire and retain the services of talented individuals. At
present, there is a shortage in the number of qualified employees who are
available, creating a lucrative job market for qualified and talented high
tech employees. The Company has had a decline in revenue in each of the two
previous years and comparable reduction in its work force. While the Company
believes that it has the required core personnel to effectively manage and
grow the Company, there can no assurance that key employees may leave the
company in the future. The failure to maintain key employees could adversely
affect the Company's operating and financial results in the future.
Liquidity and Working Capital
The Company's continued success depends on maintaining adequate liquidity and
working capital to meet its operational requirements. Given the recent
volatility in the securities markets and, in particular, the securities of
technology companies, there can be no assurances that anticipated investors'
investments in the Company will close and that the Company will receive
additional equity financing. The failure of the Company to maintain adequate
liquidity and working capital could have a material adverse impact on the
Company.
Failure of Suppliers to Provide Quality Products
The Company purchases several sophisticated components and products from one
or a limited number of qualified suppliers. These components and products
include disk drives, high density memory components and power supplies. The
Company has experienced delivery delays from time to time because of high
industry demand or the inability of some vendors to consistently meet its
quality and delivery requirements. If any of its suppliers were to fail to
meet the quality or delivery requirements needed to satisfy customer orders
for its products, the Company could lose time-sensitive customer orders and
have significantly decreased quarterly revenues and earnings, which would have
a material adverse effect on the Company's business, results of operations or
financial condition. Additionally, the Company periodically transitions its
product line to incorporate new technologies. The importance of transitioning
its customers smoothly to new technologies, along with its historically uneven
pattern of quarterly sales, intensifies the risk that a supplier who fails to
meet its delivery or quality requirements will have an adverse impact on the
Company's revenues and earnings.
Changes in Laws, Regulations Or Other Conditions That Could Adversely Impair
The Company's Condition
The Company's business, results of operations and financial condition could be
adversely affected if any laws, regulations or standards, both foreign and
domestic, relating to the Company or its products were newly implemented or
changed.
Litigation That The Company May Become Involved In May Adversely Affect The
Company
In the ordinary course of business, the Company may become involved in
litigation, administrative proceedings and governmental proceedings. Such
matters can be time-consuming, divert management's attention and resources and
cause the Company to incur significant expenses. Furthermore, there can be no
assurance that the results of any of these actions will not have a material
adverse effect on its business, results of operations or financial condition.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in the Company's financial instruments relates
primarily in fluctuations in the prime rate of interest to be charged to the
Company under the terms of the promissory note for the revolving credit
facility. The Company does not use derivative products or have any material
unhedged monetary assets, except for the inter-company balances outstanding,
which are detailed above in ITEM 7 "Foreign Currency Transactions".
ITEM 8. Financial Statements and Supplementary Data
The financial statement data listed in the Index to Consolidated Financial
Statement at Item 14 of this Form 10-K are incorporated by reference into this
Item 8 of Part II of this Form 10-K.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no disagreements with the Company's independent
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or any reportable events.
PART III
ITEM 10. Directors, Executive Officers, Promoters and Control
Persons The information required by this item may be found under the
sections captioned "Election of the Directors;" and "Executive Officers,"
in the Company's Proxy Statement (the "2000 Proxy Statement") for the
Company's Annual Meeting of Stockholders to be held on June 12, 2000, and is
incorporated by reference.
The information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, required by this Item is incorporated by
reference to the information set forth under the caption "Compensation of
Executive Officers - Section 16(a) Beneficial Ownership reporting Compliance"
in the 2000 Proxy Statement.
ITEM 11. Executive Compensation
The information required by this item may be found under the section
captioned "Compensation of Executive Officers" and "Director Compensation"
in the Company's 2000 Proxy Statement and is incorporated by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item may be found under the section
captioned "Voting Securities of the Company - Security Ownership:" in the
Company's 2000 Proxy Statement and is incorporated by reference.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item may be found under the section
captioned "Certain Relationships and Related Transactions" in the Company's
2000 Proxy Statement and is incorporated by reference.
PART IV
ITEM 14. Exhibits, financial statement schedules and reports on Form 8-
K
(a) The following documents are included as part of the report:
(1) Financial Statements
The following financial statements of the Company and the report of the
independent auditors are filed as part of this report:
(1) Index to Financial Statements
Report of Independent Auditors
Consolidated Financial Position
Statement of Consolidated Operations
Statement of Consolidated Stockholders' Equity
Statement of Consolidated Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
None
(3) Exhibits
Certain of the exhibits listed hereunder have been previously filed with
the Commission as exhibits to certain prior registration statements and
periodic reports as indicated in the footnotes below. The location of each
document so incorporated is indicated by footnote.
*3.1
Restated Articles of Organization (Incorporated by
reference as Exhibit 3.1 to the
Company's Form S-4, Registration No. 33-87028, as filed on
December 2, 1994).
*3.2
Amended and Restated By-Laws (Incorporated by reference as
Exhibit 3.2 to the
Company's Form S-4, Registration No. 33-87028, as filed on
December 2, 1994).
*4.1
Specimen Common Stock Certificate (Incorporated by
reference as Exhibit 4.1 to the
Company's Form S-4, Registration No. 33-87028, as filed on
December 2, 1994).
*10.1
Restated and Amended Stock Incentive Plan. (Incorporated
by reference as Exhibit 4.1 to
the Company's Form S-8, Registration No. 333-31297, as
filed on July 14, 1997).
*10.2
Form of Restated and Amended Stock Incentive Plan, Stock
Award (Incorporated by reference
As Exhibit 4.2 to the Company's Form S-8, Registration No.
333-31297, as filed on July 14, 1997).
* 10.3
Promissory Note in the principal amount of $710,000 dated
December 6, 1997 made
Payable to Theodore J. Goodlander.
*10.4
Letter Agreement dated July 14, 1994 between the
Registrant and Eddie Lu Hwang
(Incorporated by reference as Exhibit 10.8 to the
Company's Form S-4, Registration
No. 33-87028, as filed on December 2, 1994).
*10.5
Joint Venture Agreement between the Registrant, Micro
Research Computer Limited and
Eddie Lu Hwang (Incorporated by reference as Exhibit 10.6
to the Company's Form S-4,
Registration No. 33-87028, as filed on December 2, 1994).
*10.5b
Amended and Restated 1992 Stock Incentive Plan
(Incorporated by reference as Exhibit
10.5 to Amendment No. 4 to the Company's Form S-3,
Registration No. 333-04145, as
Filed on September 13, 1996).
*10.6
Amendment dated August 20, 1997, to the Revolving Credit
Agreement dated August 6,
1996 between the Company and State Street Bank and Trust
Company (Incorporated by reference to Exhibit 10.6 to the
Company's 1998 Form 10-K, as filed on April 16, 1999).
*10.7
$10,000,000 Line of Credit Note from Registrant to State
Street Bank and Trust
Company dated August 20, 1997 (Incorporated by reference
to Exhibit 10.7 to the Company's 1998 Form
10-K, as filed on April 16, 1999).
*10.8
Loan Agreement dated August 6, 1996 between the Company
and State Street Bank and
Trust Company (Incorporated by reference to Exhibit 10.2
to Amendment No. 4 to the
Company's Form S-3, Registration No. 333-04145, as filed
on September 13, 1996).
10.9
Third Amendment to the Second Amended and Restated Loan
Agreement dated October 1999 between the Company and State
Street Bank.
10.10
Fourth Amended and Restated Line of Credit Note dated
October 1999 between the Company and State Street Bank.
*21
Subsidiaries of the Company (Incorporated by reference to
Exhibit 21 to the Company's 1998 Form 10-K, as filed on
April 16, 1999).
23.1
Consent of BDO Seidman, LLP.
23.2
27
Consent of Richard A. Eisner & Company, LLP.
Financial Data Schedule.
99
"Safe Harbor" Statement under Private Securities
Litigation Reform Act of 1996.
- - ---------------
* previously filed
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Nashua, New Hampshire, on the 14th
day of April, 2000.
STORAGE COMPUTER CORPORATION
BY:
Theodore J. Goodlander
Chairman of the Board of Directors,
CEO
(Principal Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in their capacities and on the date indicated.
Signature Capacity Date
/s/ Theodore J. Goodlander Chairman of the Board of Directors April 14, 2000
Theodore J. Goodlander CEO (Principal Executive Officer and
Principal Accounting Officer)
/s/ Shigeho Inaoka Director April 14, 2000
Shigeho Inaoka
/s/ Steven S. Chen Director April 14, 2000
Steven S. Chen
STORAGE COMPUTER CORPORATION
- - - I N D E X -
Page
Number
Reports of Independent Auditors
30
Consolidated Financial Position at
December 31, 1999 and December 31,
1998
32
Statement of Consolidated
Operations
for the Years Ended December 31,
1999,
December 31, 1998 and December 31,
1997
33
Statement of Consolidated
Stockholders=
Equity for the Years Ended December
31,
1999, December 31, 1998 and
December 31, 1997
34
Statement of Consolidated Cash
Flows
for the Years Ended December 31,
1999,
December 31, 1998 and December 31,
1997
35
Notes to Consolidated Financial
Statements. . . . . .
36
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Storage Computer Corporation
Nashua, New Hampshire 03062
We have audited the accompanying statements of consolidated
financial position of Storage Computer Corporation and subsidiaries,
as at December 31, 1999 and 1998, and the related statements of
consolidated operations, stockholders= equity, and cash flows for
the years then ended. These consolidated financial statements are
the responsibility of the Company=s management. Our responsibility
is to express an opinion on these consolidated 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 consolidated financial
position of Storage Computer Corporation and subsidiaries, at
December 31, 1999 and 1998, and the consolidated results of their
operations and their consolidated cash flows for the years then
ended in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Boston, Massachusetts
March 17, 2000,
except for Note E and Note N, which are as of April 14, 2000.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Storage Computer Corporation
Nashua, New Hampshire 03062
We have audited the accompanying consolidated statements of operations,
stockholders= equity and
cash flows of Storage Computer Corporation and subsidiaries, for the
year ended December 31, 1997. These consolidated financial statements
are the responsibility of the Company=s management. Our responsibility
is to express an opinion on these consolidated financial statements
based on our audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of their
operations and their consolidated cash flows of Storage Computer
Corporation and subsidiaries for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 25, 1998
STORAGE COMPUTER CORPORATION
CONSOLIDATED FINANCIAL POSITION
December 31,
1999
1998
A S S E T S (Note E)
Current assets:
Cash and cash equivalents
$
1,182,194
$
925,259
Accounts receivable (net of allowance
for doubtful accounts) (Note L)
751,077
5,187,351
Income tax refund receivable
2,160,211
Inventories (Note B)
6,795,477
8,263,040
Other current assets
852,774
707,300
Total current assets
9,581,522
17,243,16
1
Property and equipment (Note C)
1,842,733
2,742,252
Deferred tax asset (Note I)
2,194,000
2,194,000
Other assets (Note D)
610,413
720,489
Total
$14,228,668
$22,899,9
02
LIABILITIES AND STOCKHOLDERS= EQUITY
Current liabilities:
Notes payable (Note E)
$
6,640,445
$
9,336,377
Accounts payable
257,440
2,298,655
Accrued expenses
1,194,654
1,122,685
Accrued taxes
238,466
164,600
Deferred revenue
705,124
921,947
Total current liabilities
9,036,129
13,844,26
4
Long-term debt (Note E)
1,175,899
710,000
Commitments and contingencies (Notes
F, G and J)
Stockholders= equity (Notes E, H and
N):
Preferred stock, par value
$.001;
Authorized 1,000,000 shares;
none
Issued and outstanding.
Common stock par value $.001;
Authorized 25,000,000 shares;
issued and outstanding
11,434,863
shares (1999) and 11,347,823
shares (1998)
11,435
11,348
Additional paid-in capital
13,968,263
13,721,02
1
Accumulated deficit
(9,963,058)
(5,386,73
1)
Total stockholders= equity
4,016,640
8,345,638
Total
$
14,228,668
$
22,899,90
2
The accompanying notes are an integral part of the financial statements.
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
Year Ended December 31,
1999
1998
1997
Revenue
$
10,525,65
8
$17,051,7
49
$37,146,10
3
Product cost
6,303,125
11,838,65
7
18,152,978
Gross margin
4,222,533
5,213,092
18,993,125
Operating expenses:
Research and
development
1,980,988
4,258,249
2,851,739
Selling and marketing
4,098,347
8,871,805
7,959,521
General and
administrative
2,357,254
2,387,748
1,526,477
Write down of
investment (Note D)
0
2,094,134
0
Total Operating
Expenses
8,436,589
17,611,93
6
12,337,737
Operating income (loss)
(4,214,05
6)
(12,398,8
44)
6,655,388
Other income (expense):
Interest expense, net
(Note E)
(840,253)
(647,557)
(438,649)
Other income (Note D)
278,114
10,889
39,014
Total
(562,139)
(636,668)
(399,635)
Income (loss) before
income taxes (benefit)
(4,776,19
5)
(13,035,5
12)
6,255,753
Provision for income
taxes (benefit) (Note I ):
Current tax
(benefit)
(199,868)
(2,145,02
0)
2,020,000
Deferred tax
_________
__
_________
__
____344,00
0
Total
(199,868)
(2,145,02
0)
2,364,000
Net income (loss)
$(4,576,3
27)
$
(10,890,4
92)
$3,891,753
Net income (loss) per
basic share
$
(.40)
$ (0.97)
$
.36
Net income (loss) per
diluted share
$
(.40)
$ (0.97)
$
0.33
Basic shares
11,376,08
2
11,254,55
7
10,825,043
Diluted shares
11,376,08
2
11,254,55
7
11,960,546
The accompanying notes are an integral part of the financial
statements.
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDERS= EQUITY
Common Stock
Additio
nal
Retaine
d
Par
Paid-In
Earning
s
Shares
Value
Capital
(Defici
t)
Balance - December 31,
1996
10,701,
341
$
10,701
$12,290
,245
$1,612,
008
Exercise of stock
options
447,675
448
655,163
Tax benefit from stock
options (Note K)
439,832
Net income
_______
____
______
____
_______
___
3,891,7
53
Balance - December 31,
1997
11,149,
016
11,149
13,385,
240
5,503,7
61
Exercise of stock
options
174,800
175 655,163
141,980
Stock issued to 401(k)
plan (Note K)
24,007
24
73,801
Tax benefit from stock
options (Note K)
120,000
Net loss
_______
___
______
____
_______
____
(10,890
,492)
Balance - December 31,
1998
11,347,
823
11,348
13,721,
021
(5,386,
731)
Warrants issued in
connection with bank
financing (Note E)
111,387
Exercise of stock
options
50,000
50
76,950
Stock issued to 401(k)
plan (Note K)
37,040
37
58,905
Net loss
_______
____
______
____
_______
____
(4,576,
327)
Balance - December 31,
1999
11,434,
863
$
11,435
$13,968
,263
$(9,963
,058)
The accompanying notes are an integral part of the financial statements.
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Note K)
Year
Ended December 31,
1999
1998
1997
Cash flows from operating
activities:
Net income (loss)
$(4,576
,327)
$(10,890
,492)
$3,891,7
53
Reconciliation to operating
cash flows:
Depreciation and
amortization
488,883
620,552
382,836
Warrants issued for
services
111,387
Stock issued to 401(k) plan
58,942
73,825
Write down of investment
2,
094,134
Foreign currency
transaction loss
29,423
Deferred tax provision
344,000
Changes in operating assets
and liabilities:
Accounts receivable
4,436,2
74
8,722,65
0
(4,885,1
60)
Income tax refund
receivable
2,151,6
77
(2,160,2
11)
Inventories
1,942,8
50
(383,556
)
(1,605,2
41)
Other assets
(26,864
)
(152,496
)
(
451,008)
Accounts payable and
accrued expenses
(1,996,
304)
(138,570
)
(
536,998)
Net cash provided (used)
in operating activities
2,590,5
18
(2,214,1
64)
(2,830,3
95)
Cash flows from investing
activities:
Capital expenditures
(4,882)
(842,030
)
(1,823,6
08)
Other assets
_______
__
(175,113
)
(2,583,9
60)
Net cash used in
investing activities
(4,882
(1,
017,143)
(4,407,5
68)
Cash flows from financing
activities:
Net proceeds from (payments
on) credit line
(2,695,
932)
2,870,70
6
5,866,28
0
Reduction of other long-
term liabilities
350,000
22,970
Net proceeds from issuance
of common stock
77,000
142,155
655,611
Net cash provided
(used) in financing activities
(2,268,
932)
3,035,831
6,521,89
1
Effect of exchange rate changes
on cash
(59,769
)
7,356
(23,311)
Net increase (decrease) in cash
and cash equivalents
256,935
(188,120
)
(739,383
)
Cash and cash equivalents -
beginning of year
925,259
1,113,37
9
1,852,76
2
Cash and cash equivalents - end
of year
1,182,1
94
$
925,259
$1,113,3
79
The accompanying notes are an integral part of the financial statements.
STORAGE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Significant Acounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of
the Company and its wholly-owned and majority owned subsidiaries,
Storage Computer Europe Gmbh, Vermont Research Products, Inc., Storage
Computer UK Ltd., and Open Storage Solutions, S.A. The percentage
ownership of Open Storage Solutions increased from 20% to 51% in 1998.
All significant intercompany accounts and transactions have been
eliminated. The Company also has 20% ownership of Storage Computer
(Asia) Ltd. which is accounted for by the equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a
maturity of three months or less, when acquired, to be cash equivalents.
Inventories
Inventories are stated at the lower of average cost (first-in,
first-out method) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation of
property and equipment is computed utilizing the same accelerated
methods for both financial and tax reporting over a period not to exceed
5 years.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, other current
assets, accounts payable and accrued expenses approximate fair value
because of the short maturity of those instruments. Financial
liabilities with carrying values that approximate fair value include
accounts payable, other accrued expenses, and short term and long term
debt.
Revenue Recognition
The Company recognizes revenue from product sales at the time of
shipment. Service revenue, which is not material in relation to total
revenue, is recognized over the contracted period or as the services are
provided.
Research and Development
Research and development costs are expensed as incurred.
Foreign Currency Translations
The functional currency for the Company=s foreign operations is the
U.S. dollar. The translation from the applicable foreign currencies to
U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the
period. The resulting translation adjustments and gains or losses
resulting from foreign currency transactions are included in the
Company=s statement of operations.
Income Taxes
The Company follows Statement of Financial Accounting Standards No.
109 ("SFAS 109") AAccounting for Income Taxes.@ Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Earnings (Loss) per Share
The Company calculates earnings or loss per share in accordance
with Financial Accounting Standard No. 128 (ASFAS 128"), "Earnings per
Share". Basic earnings per share is determined utilizing only the
weighted average of outstanding common shares. The effect of potentially
dilutive options, warrants and convertible securities is included in the
calculation of diluted earnings per share. There is no difference in the
numerator between the basic and diluted calculation and the only
difference in the denominator is the effect of dilutive stock options,
warrants and convertible securities.
Stock-Based Compensation
The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards No. 123, (ASFAS 123@), AAccounting for
Stock Based Compensation@ which requires disclosure of pro forma effects
as if SFAS 123 had been adopted. The Company has adopted the disclosure
only requirements of SFAS 123 and accounts for its employee stock option
plans under Accounting Principles Board Opinion No. 25, AAccounting for
Stock Issued to Employees@.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133. SFAS No. 133
requires companies to recognize all derivative contracts at their fair
value as either assets or liabilities on the balance sheet. If certain
conditions are met a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (1) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (2) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect the adoption of the new
standard to affect its financial statements.
Note B - Inventories
At December 31, 1999 and 1998 inventories consisted of raw
materials of $2,170,518 and $2,306,290; work in process of $1,729,396
and $2,065,647, and finished goods of $2,895,563 and $3,891,103.
Note C - Property and Equipment
Property and equipment are summarized as follows:
December
31,
1999
1998
Machinery and equipment
$2,523,
511
$2,165,27
9
Office furniture and
fixtures
465,462
463,298
Research and development
equipment
1,281,3
41
2,091,344
Other property
189,212
150,241
Total
4,459,5
26
4,870,162
Less accumulated
depreciation
2,616,7
93
2,127,910
Net property and
equipment
$
1,842,7
33
$
2,742,252
Note D - Other Assets
In August 1998, the Company and another organization formed a limited
liability company named HVVR, LLC (AHVVR@). The purpose of HVVR was to hold
ownership of a new product technology developed by a former customer of the
Company. The Company=s investment in HVVR amounted to approximately
$2,300,000.
Neither HVVR nor the Company had available the resources to pursue the
research, production, and marketing of the product. In view of the potential
for a long delay in recovering the Company=s investment in HVVR through
royalty payments and the associated risks of that delay, the Company decided
to write its investment down to $100,000 at December 31, 1998. During 1999,
the Company sold its share in the net assets of HVVR for $100,000.
Other assets also includes long-term receivables from an affiliate and
customer for a five-year software license.
Note E - Borrowing Arrangements
At December 31, 1999 the Company had a demand bank line of credit with
maximum borrowings of $6,900,000 secured by all assets of the Company. In
connection with an amendment to the note in 1999, the Company issued a warrant
to purchase 25,000 shares of the Company's common stock to the bank at an
exercise price of $3.00 per share to expire October 25, 2009. The warrants
were valued using the Black Scholes option-pricing model. The resulting value
of $111,387 was accounted for as additional interest on the debt. The loan
agreement provides for interest at the bank=s prime rate plus .25%. The
agreement contains certain covenants including, but not limited to,
restrictions related to net worth and certain financial ratios. At December
31, 1999 the remaining balance available under the credit facility was
approximately $312,000.
At December 31, 1999, the Company was in violation of certain covenants
of the bank line of credit. In April 2000 the Company reached agreement with
the bank on new terms extending the Company's line of credit until May 5, 2000
and waiving violation of all covenants through that date. The Company intends
to reduce its bank borrowings with proceeds of an equity financing to be
consummated in 2000 (Note N).
Long term debt in the amount of $250,000 at December 31, 1999 is payable
to the president of one of the Company's major customers who is also a member
of the Board of Directors. The note bears interest at 6% and is convertible
into the Company's common stock at $1.88 per share. Interest amounted to
$4,033 at December 31, 1999. This debt was converted into shares of common
stock of the Company subsequent to December 31, 1999.
Long-term debt in the amount of $810,000 and $710,000 at December 31,
1999 and 1998 is payable to an officer and stockholder of the Company. The
debt is unsecured, and $710,000 bears interest at prime plus 1%, and $100,000
bears interest at 6% and is convertible into the Company=s common stock at
$4.00 per share. The debt is subordinated to the demand line of credit.
Interest expense related to the obligation amounted to $68,632, $67,450, and
$66,100 for 1999, 1998 and 1997. This debt is due subsequent to December 31,
2000.
The balance of long term debt represents accounts payable not due until
after December 31, 2000.
Note F - Related Party Transactions
The Company leases plant and office facilities from an affiliated entity
as a tenant-at-will, under a triple-net operating lease agreement. Rent
expense under this lease for 1999, 1998 and 1997 amounted to $224,800,
$200,400 and 195,600, respectively.
The president of one of the Company=s major customers is a member of the
board of directors of the Company (see Note M).
Note G - Commitments
The Company leases certain property and equipment under noncancellable
leases which expire at various dates through 2003. Future minimum lease
payments are $179,012, $135,920, $2,388 and $2,189 for the years 2000 through
2003, respectively.
Amounts charged to operations for operating leases were $232,000,
$275,000 and $286,000, for the years ended December 31, 1999, 1998 and 1997,
respectively.
Note H - Stock Option Plans
The Company=s 1994 and 1999 Stock Incentive Plans provide for the
granting of options to purchase up to 3,500,000 shares of common stock. Option
activity during 1999, 1998 and 1997 is summarized as follows:
Number of
Shares
Weighted
Average
Option
Price
Per
Share
Balance - December 31,1996
1,663,500
3.41
Granted
814,500
6.36
Exercised
(447,675)
1.46
Canceled
(201,425)
10.50
Balance - December 31, 1997
1,828,900
6.47
Granted
1,038,150
2.23
Exercised
(174,800)
.79
Canceled
(1,219,85
0)
4.51
Balance - December 31, 1998
1,472,400
$1.64
Granted
1,576,650
1.22
Exercised
(50,000)
1.54
Canceled
(1,209,80
0)
1.30
Balance - December 31, 1999
1,789,250
1.51
Options granted generally vest over a period not to exceed four years.
Options for 704,149 shares are exercisable at December 31, 1999 at exercise
prices ranging from $.88 to $3.60 and a weighted average price of
approximately $1.73 per share, with a weighted average remaining contractual
life of approximately nine years. At December 31, 1999, options to purchase
803,275 shares were available for grant under the plan.
On August 25, 1998 the Company extended an offer to option holders to
reprice their options. Almost all of the option holders opted to reprice their
options pursuant to the offer.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
AAccounting for Stock-Based Compensation,@ and applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
There was no compensation expense recognized in 1999, 1998 or 1997. If the
Company had elected to recognize compensation cost for the plans based on the
fair value at the grant date for awards under the plans, consistent with the
method prescribed by SFAS No. 123, pro forma net income (loss) would have been
($6,431,002) in 1999, ($11,003,981) in 1998, and $3,539,297 in 1997.
Proforma net income (loss) per diluted share would have been ($.57) in 1999,
($.98) in 1998, and $.30 in 1997.
The fair value of the Company=s stock options used to compute pro forma
net income and net income per diluted share disclosures is the estimated
present value at grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions for 1997 through 1999: dividend
yield of 0%; expected volatility of 80%; a risk free interest rate ranging
from 4.58% to 6.11%, and an expected holding period of six years.
All options outstanding at December 31, 1999 are categorized by the
ranges shown in the table below:
Range
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Contractu
al
Life in
Years
Number of
Shares
$ .88 B
1.75
$ 1.16
8.80
1,321,900
2.50
B2.94
2.50
8.67
464,850
3.60
3.60
4.94
2,500
1,789,250
All options exercisable at December 31, 1999 are categorized by the ranges
shown in the table below:
Range
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Contractu
al
Life in
Years
Number of
Shares
$ .88
B1.25
$ 1.13
9.64
398,150
2.50
B2.56
2.50
8.67
303,499
3.60
3.60
4.94
2,500
704,149
Note I - Income Taxes
At December 31, 1999 and December 31, 1998, the Company has net deferred
tax assets as follows:
December 31,
1999
1998
Accounts receivable
reserve
$
201,000
$
66,000
Inventory costs
204,000
186,000
Reserve on other assets
102,000
102,000
Write down of investment
0
712,000
Deferred revenue
196,000
257,000
Accrued expenses
543,000
2,000
General business tax
credits
523,000
508,000
Domestic operating loss
carryover
3,204,000
2,098,000
Foreign operating loss
carryover
1,820,000
1,238,000
Total deferred tax
assets
6,793,000
5,169,000
Valuation allowance
(4,599,00
0)
(2,975,00
0)
Net deferred tax assets,
noncurrent
$
2,194,000
$
2,194,000
The domestic operating loss carryovers, amounting to approximately
$9,400,000 expire at various dates through 2019 and the foreign operating loss
carryovers amounting to approximately $5,300,000 can be carried forward
indefinitely. The Company is subject to Internal Revenue Code provisions which
limit the domestic net operating loss carryovers available annually. The
general business tax credits expire at various dates through 2019.
The United States, foreign, and state components of the tax provision
(benefit) are as follows:
December 31,
1999
1998
1997
Current:
United States, net of
business tax credits of
$197,000
In 1997.
Foreign
$(199,8
68)
0
$(2,150
,020)
0
$1,580,
000
0
State
______0_
5,000
440,000
(199,868
)
$(2,145
,020)
2,020,0
00
Deferred:
United States
0
0
180,000
Foreign
0
0
164,000
0
0
344,000
Provision (benefit) for income
taxes
$(199,86
8)
$(2,145
,020)
$
2,364,0
00
The tax benefit of $199,868 included in the accompanying statement of
operations for 1999 represents tax refunds received in 1999 in excess of
amounts estimated at December 31, 1998.
At December 31, 1999, the Company's foreign entities have accumulated
deficits. The Company intends its investments in these entities to be
permanent.
The following table reconciles the provision for taxes with the expected
income tax obligation obtained by applying the United States federal statutory
rate to pretax income.
1999
1998
1997
Income (loss) before income taxes
$
(4,776,1
95)
$
(13,035,
512)
$
6,255,7
53
Expected tax (benefit) at statutory
rate of 34%
(1,624,0
00)
(4,432,0
00)
2,127,0
00
Adjustments due to:
Difference between foreign rate
and U.S. statutory rate
196,000
40,000
State taxes, net of federal
benefit
5,000
291,000
Increase (decrease) in
valuation reserve
1,624,00
0
2,075,00
0
5,000
Adjustment of prior year tax
refunds
(199,868
)
Tax credits
(130,00
0)
Other
________
___
10,980
31,000
Provision (benefit) for income taxes
$
(199,868
)
$
(2,145,0
20)
$
2,364,0
00
Of the above income or (loss) before income taxes, approximately ($4,200,000),
($10,500,000) and $5,900,000 was due to domestic operations and the balance
due through foreign operations in 1999, 1998 and 1997, respectively.
Note J - Legal Proceedings
The Company is involved in several non-material judicial proceedings as a
result of its ordinary course of business. The Company believes that any
outcome as a result of its involvement in these proceedings will not have a
material effect on its operating results or financial condition.
Note K - Supplemental Cash Flow Information
Cash payments for interest for the years 1999, 1998 and 1997 were $836,000,
$580,000, and $486,000. For the same periods cash payments for income taxes
were $0, $200,000, and $718,000. In 1998 and 1997 the Company reduced
federal taxes payable and increased additional paid-in capital by $120,000 and
$439,832, respectively for the tax benefits associated with the exercise of
stock options. In 1999 and 1998, the Company contributed 37,040 and 24,007
shares of its common stock valued at $58,942 and $73,825 to its 401(k) plan.
Note L - Allowance for Doubtful Accounts
The Company established an allowance for doubtful accounts for the first
time in 1998 resulting in an allowance at December 31, 1998 of which $583,623
was charged to expense during the year. The allowance at December 31, 1999 was
$607,599.
Note M - Business Segment Information
The Company=s operations are conducted in one business segment: the design,
manufacture and sale of high-performance scalable data storage. Operations by
geographic area are summarized as follows:
United
States
Europe
Elimina
tions
Consolid
ated
1999:
Domestic sales
$4,541,
522
$3,384,
013
$7,925,5
35
Export sales
2,460,6
64
63,281
2,523,94
5
Export sales to
affiliates
1,360,4
18
_______
__
(1,284,
240)
76,178
Total revenue
$8,362,
604
$3,447,
294
$(1,284
,240)
$10,525,
658
Long-lived assets
$12,730
,889
$116,08
9
$(10,74
3,832)
$2,103,1
46
1998:
Domestic sales
$
9,222,1
24
$
2,704,1
86
$11,926,
310
Export sales
4,308,5
26
490,098
4,798,62
4
Export sales to
affiliates
909,402
706
(583,29
3)
326,815
Total revenue
$14,440
,052
$3,194,
990
$(
583,293
)
$17,051,
749
Long-lived assets
$13,920
,700
$244,76
8
$(10,70
2,727)
$3,462,7
41
1997:
Domestic sales
$18,598
,928
$7,825,
213
$26,424,
141
Export sales
9,078,7
19
9,078,71
9
Export sales to
affiliates
1,643,2
43
_______
___
_______
____
1,643,24
3
Total revenue
$29,320
,890
$7,825,
213
_______
____
$37,146,
103
Long-lived assets
$14,606
,309
$372,13
2
$(7,974
,157)
$7,004,2
84
Export sales from the United States are summarized as follows:
1999
1998
1997
Far East
$2,331,
076
$3,810
,000
$
8,631,0
00
Europe
1,442,3
36
1,059,
000
1,855,0
00
Other
47,670
349,00
0
236,000
$
3,821,0
82
$
5,218,
000
$10,722
,000
For the years ended December 31, 1999, December 31, 1998 and December 31,
1997 sales to one customer were in excess of 10% of revenues and amounted to
$2,246,000, $3,430,000 and, $7,009,000, respectively (See Note F).
Note N - Subsequent Event
Subsequent to December 31, 1999, the Company received offers from
several investors to purchase $7,000,000 of convertible preferred stock of the
Company, of which $1,000,000 was to be received from an executive officer of
the Company. The Company also received a commitment letter from its bank to
extend the due date of up to $3,550,000 of the balance due under its line of
credit to January 2001.
Exhibit 10.9
THIRD AMENDMENT TO SECOND AMENDED AND
RESTATED LOAN AGREEMENT
THIS THIRD AMENDMENT TO LOAN AGREEMENT is made as of this __ day of
October, 1999, by and between STORAGE COMPUTER CORPORATION, a Delaware
corporation (the "Borrower") and CITIZENS BANK OF MASSACHUSETTS (successor
in interest to State Street Bank and Trust Company), a Massachusetts chartered
trust company (hereinafter referred to as the "Bank").
WHEREAS, the Borrower and the Bank are parties to a Second Amended and
Restated Loan Agreement dated as of November 16, 1998 as amended by the First
Amendment to Second Amended and Restated Loan Agreement dated as of April 30,
1998 and Second Amendment to Second Amended and Restated Loan Agreement dated
as of July 1, 1999 (collectively, the "Loan Agreement"). Capitalized terms
used herein and not otherwise defined shall have the meanings set forth in the
Loan Agreement.
NOW, THEREFORE, in consideration of these premises and for other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereby amend the Loan Agreement as follows:
Section 1.0
Amendment of Section 1.01. Section 1.01 of the Loan Agreement is hereby
amended as follows:
(a) the definition of "Line of Credit"
contained in Section 1.01 of the Loan
Agreement is amended by deleting the
reference to "Eight Million Seven Hundred
Thousand Dollars ($8,700,000)" and
replacing it with "Seven Million Four
Hundred Thousand Dollars ($7,400,000)".
(b) the definition of "Maturity Date"
contained in Section 1.01 of the Loan
Agreement is hereby amended by deleting
the reference to "January 4, 2000" and
replacing it with the following: "the
following, whichever is applicable: (i)
January 4, 2000, (ii) Sixth Month
Extension Date, to the extent the Borrower
has complied with Section 2.11(A), or
(iii) One Year Extension Date, to the
extent the Borrower has complied with
Section 2.11(B)"
(c) the definition of "Maximum Line
Availability" contained in Section 1.01
of the Loan Agreement is deleted in its
entirety and replaced with the following:
"Maximum Line Availability" shall mean
the line of credit made available to the
Borrower under this Agreement (subject to
the proviso at the end of this definition)
in the maximum principal amounts during
the following periods indicated:
Period Maximum Line
Availability
October 1, 1999 through January 2, 2000 $7,400,000
January 3, 2000 up to the Maturity Date $6,800,000
Maturity Date 0
provided, however, (i) the Maximum Line Availability shall
be permanently reduced to $5,995,000 or $4,250,000
respectively, to the extent the Borrower has complied with
Sections 2.11(A) or 2.11(B) hereof and (ii) the Maximum Line
Availability shall be permanently reduced by any proceeds
received by the Borrower or Bank pursuant to Sections
2.01(g) or 5.16 hereof.
(d) the definition of "Loan Documents" contained in
Section 1.01 of the Loan Agreement is hereby amended
by adding "Warrants", after the term "Pledge
Agreement" in the fifth line.
(e) the definition of "Note" contained in Section 1.01
of the Loan Agreement is deleted in its entirety and
replaced with the following:
"Note" shall mean the secured Fourth Amended and
Restated Line of Credit Note in the maximum principal
amount of $7,400,000 dated October __, 1999 issued by
the Borrower to the Bank in form of Exhibit A hereto,
and all extensions, renewals, modifications,
substitutions, replacements and restatements thereof.
(f) the following definitions shall be added to Section
1.01 of the Loan Agreement in the appropriate
alphabetical order:
"Extension Warrant" shall mean the Warrant attached
hereto as Exhibit H.
"Initial Warrant" shall mean the Warrant attached
hereto as Exhibit G.
"One Year Extension Date" shall have the meaning set
forth in Section 2.11(B).
"Sixth Month Extension Date" shall have the meaning
set forth in Section 2.11(A).
"Warrants" shall mean the Initial Warrant and
Extension Warrant.
"Working Capital" shall mean current assets
(excluding accounts or notes receivable from
affiliates) of the Borrower and its Subsidiaries less
current liabilities of the Borrower and its
Subsidiaries, all as determined on a consolidated
basis in accordance with generally accepted accounting
principles in the United States of America in effect
from time to time.
Section Amendment of Article II. Article II of the
Loan Agreement is hereby amended as follows:
(a) The last sentence of Section 2.01(g)(iii) of the Loan
Agreement is deleted in its entirety and replaced with
the following:
Within one Business Day after the receipt of Net
Equity Proceeds by the Borrower or any of its
Subsidiaries, the Borrower shall make a
prepayment of the Loan (to be applied as a
permanent reduction of the Maximum Line
Availability) in an amount equal to the sum of
(i) 100% of all Net Equity Proceeds that are
received by the Borrower or any of its
Subsidiaries after the date hereof and that are
in excess of $1,405,000 but less than
$4,500,000, plus (ii) 50% of all Net Equity
Proceeds that are received by the Borrower or
any of its Subsidiaries after the date hereof
and that are in excess of $4,499,999. It is
understood by the parties hereto that all Net
Equity Proceeds that are received by the
Borrower or any of its Subsidiaries after the
date hereof, and that the Borrower is not
required to prepay to the Bank, as provided in
the immediately preceding sentence of this
Section 2.01(g)(iii), may be retained and used
by the Borrower and/or its Subsidiaries as
working capital.
(b) Section 2.10 of the Loan Agreement is deleted in its
entirety and replaced with the following Sections
2.10, 2.11 and 2.12.
Section 2.10. Waiver and Restructure Fee. The Borrower shall
pay the Bank a $170,000 Waiver and Restructure Fee. Such fee has been
earned as of this date and shall be payable as follows: (i) $20,000 to
be paid on July 1, 1999 and (ii) the balance of $150,000 (the "Deferred
Fee") shall be payable on the Maturity Date as the same may be extended
from time to time, as provided in Section 2.11, provided, however, that
$25,000 of the Deferred Fee shall be waived if the Bank is paid $125,000
of such Deferred Fee prior to December 1, 1999. Notwithstanding the
foregoing, the entire Deferred Fee (i.e., $150,000) shall be immediately
due and payable without notice upon the occurrence of an Event of
Default.
Section 2.11. Maturity Date Extension.
(A) To the extent that on or before December 15, 1999, (i) the
Borrower delivers a written request to the Bank to extend the Maturity
Date, (ii) the Borrower is in compliance with all terms and conditions
of the Loan Documents on the date of such request, (iii) the Borrower
delivers to the Bank a certificate satisfactory to the Bank certifying
such compliance and (iv) the Maximum Line of Availability has been
permanently paid down and reduced to less than $5,995,000, the Maturity
Date shall be extended to June 30, 2000 (the "Sixth Month Extension
Date"), as provided for in the definition of "Maturity Date".
(B) To the extent that on or before December 15, 1999, (i) the Borrower
delivers a written request to the Bank to extend the Maturity Date, (ii)
the Borrower is in compliance with all terms and conditions of the Loan
Documents on the date of such request, (iii) the Borrower delivers to
the Bank a certificate satisfactory to the Bank certifying such
compliance and (iv) the Maximum Line of Availability has been
permanently paid down and reduced to less than $4,250,000, the Maturity
Date shall be extended to January 5, 2001 (the "One Year Extension
Date"), as provided for in the definition of "Maturity Date".
Section 2.12. Warrants. On or before October __, 1999, the
Borrower agrees to execute and deliver to the Bank, or its nominee, the
Warrants.
Section 3. Affirmative Covenants. Article V of the Loan Agreement is
hereby amended by deleting Sections 5.15 and 5.16 in their
entirety and replacing them with the following:
Section 5.15 [ INTENTIONALLY LEFT BLANK ]
Section 5.16. Additional Capital or Company Sale. In the event the
Maturity Date is not extended pursuant to Sections 2.11(A) or 2.11(B),
on or before December 16, 1999, the Borrower will provide evidence
satisfactory to the Bank that the Borrower (either through an asset sale
or stock sale) will be sold on or before January 4, 2004, and that such
sale will generate sufficient net proceeds to pay off the Obligations in
full. (i) On or before March 31, 2000 (in the event the Maturity Date
is extended to June 30, 2000 (i.e. the Sixth Month Maturity Date),
pursuant to Section 2.11(A)), or (ii) on or before August 31, 2000 (in
the event the Maturity Date is extended to January 5, 2001 (i.e. the One
Year Extension Date) pursuant to Section 2.11(B)), the Borrower will
provide the Bank evidence satisfactory to the Bank that the Borrower
(either through an asset sale or stock sale) will be sold on or before
the applicable Maturity Date, and that such sale will generate
sufficient net proceeds to pay off the Obligations in full.
Section 4. Financial Covenants. Sections 7.01 and 7.02 of the Loan
Agreement are deleted in their entirety and replaced with
the following:
Section 7.01. Minimum Working Capital Ratio.
(A) Until the Maturity Date has been extended pursuant to
Sections 2.11(A) or 2.11(B) hereof, the Borrower will not permit the
Working Capital Ratio, for any of the fiscal months set forth below, to
be less than the respective ratio indicated for such fiscal months:
Fiscal Month: Working Capital Ratio:
September 1999 1 to 0.92
October 1999 1 to 0.86
November 1999 1 to 0.78
December 1999 1 to 0.82
(B) Upon extension of the Maturity Date pursuant to Sections 2.11(A)
or 2.11(B) hereof, the Borrower will not permit the Working Capital to
be less than the respective amounts indicated for such fiscal months:
Fiscal Month: Amount:
December, 1999 $5,400,000
January, 2000 $4,700,000
February, 2000 $3,900,000
March, 2000 $3,200,000
April, 2000 and Thereafter $3,000,000
(C) Upon extension of the Maturity Date pursuant to Sections
2.11(A) or 2.11(B) hereof, the Borrower shall maintain at all times (a)
cash and cash equivalents of at least $1,500,000 or (b) $1,500,000 of
the unused availability of the Maximum Line Availability.
Section 7.02. Maximum Net Operating Loss. Until the Maturity
Date has been extended pursuant to Sections 2.11(A) or 2.11(B) hereof,
the Borrower will not permit its Net Operating Loss, for any of the
fiscal periods set forth below, to be more than the respective amounts
indicated for such fiscal periods:
Fiscal Period: Maximum Net Operating Loss:
January 1, 1999 through
the end of September 1999 $4,200,000
January 1, 1999 through
the end of October 1999 $4,965,000
January 1, 1999 through
the end of November 1999 $5,930,000
January 1, 1999 through
the end of December 1999 $5,370,000
Section 5. Effectiveness; Conditions to Effectiveness. This Amendment
to Loan Agreement shall become effective upon execution
hereof by the Borrower and the Bank and satisfaction of the
following conditions:
(a) Copies of Resolutions of the Board of Directors of the
Borrower authorizing the execution, delivery and
performance of the Borrower under this Amendment to
Loan Agreement (as well as ratifying the authorization
of execution, delivery and performance of the Security
Documents) certified by a Secretary or an Assistant
Secretary of the Borrower which certificate shall
state that the resolutions are in full force and
effect.
(b) Certificate of the Secretary or Assistant Secretary of
the Borrower certifying the name and signatures of the
officers of the Borrower authorized to sign this
Amendment and other documents to be delivered in
connection therewith as well as certifying and
delivering certified articles of incorporation and by-
laws.
(c) Delivery to the Bank of Amended and Restated Revolving
Credit Note, this Amendment and Warrants (and any
related amendments to any stockholders agreement as
the Bank deems necessary).
(d) Confirmation of the existing guarantees of the
Borrower's Subsidiaries and Theodore Goodlander and the other
Security Documents.
(e) Opinions of Borrower's counsel in form and substance
satisfactory to the Bank.
(f) Long Form Good Standing Certificates for Borrower.
Section 6. Miscellaneous.
(a) The Borrower hereby confirms to the Bank that the
representations and warranties of the Borrower set
forth in Article III of the Loan Agreement (as amended
and supplemented hereby) are true and correct as of
the date hereof, as if set forth herein in full.
(b) The Borrower has reviewed the provisions of this
Amendment and all documents executed in connection
therewith or pursuant thereto or incident or
collateral hereto or thereto from time to time and
except otherwise set forth in Section 6(i) below,
there is no Event of Default thereunder, and no
condition which, with the passage of time or giving of
notice or both, would constitute an Event of Default
thereunder.
(c) The Borrower agrees that each of the Loan Documents
shall remain in full force and effect after giving
effect to this Amendment. The granting of the liens
and security interests under the Security Documents
secure all the Obligations as may be amended by this
Amendment. The guarantees of the Borrower's
Subsidiaries guarantee all of the Obligations as may
be amended by this Amendment.
(d) This Amendment represents the entire agreement among
the parties hereto relating to this Amendment, and
supersedes all prior understandings and agreements
among the parties relating to the subject matter of
this Amendment. The Borrower waives and releases any
claims it may have against, and forever discharges,
the Bank and its officers, directors, agents,
attorneys, employees, successors and assigns (the
"Releases") from any claims and causes of action
arising out of the transactions referred to or
contemplated in any way by the Loan Documents, and
this Amendment or otherwise, including without
limitation, claims or defenses it may have to the
effect that the Releases may have in any way acted or
failed to act in any manner as to cause injury to the
Borrower or anyone claiming by or through them.
(e) The Borrower represents and warrants that neither the
execution, delivery or performance by the Borrower of
any of the obligations contained in this Amendment or
in any Bank Document requires the consent, approval or
authorization of any person or governmental authority
or any action by or on account of with respect to any
person or governmental authority.
(f) The Borrower agrees to pay on demand all of the Bank's
reasonable expenses in preparing, executing and
delivering this Amendment, and all related instruments
and documents, including, without limitation, the
reasonable fees and out-of-pocket expenses of the
Bank's special counsel and all travel related expenses
of the Bank in connection with any field audits or
otherwise. This Amendment shall be a Loan Document
and shall be governed by and construed and enforced
under the laws of the Commonwealth of Massachusetts.
(g) The Bank agrees that upon satisfaction in full, in
cash of the Obligations as determined by the Bank, the
Bank shall return to the Borrower any collateral or
other property of the Borrower, at the Borrower's
expense.
(h) The Borrower and Bank agree that Exhibits G and H
attached to this Amendment shall be Exhibits to the
Loan Agreement.
(i) The parties hereto acknowledge and agree that the
Borrower has failed to deliver to the Bank certain
documents and items set forth in that post-closing
letter, dated April 30, 1999 (as the same may have
been amended, restated, modified or modified from time
to time, the "Post-Closing Letter Agreement"), by
and between the Borrower and the Lender. The Bank
hereby (a) acknowledges and agrees that all of the
obligations and liabilities of the Borrower under the
Post-Closing Agreement are terminated, and
notwithstanding any provision contained in any of the
Loan Documents to the contrary, neither the Borrower
nor any of its Subsidiaries shall have any further
obligation to deliver to the Bank those items set
forth in the Post-Closing Letter which as of the date
hereof, have not been so delivered to the Bank; and
(b) waives any default or Event of Default under the
Loan Documents which has occurred or may have occurred
as a result of the failure of the Borrower or any of
its Subsidiaries to deliver such items to the Bank.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Loan Agreement under seal as of the date first written above.
STORAGE COMPUTER CORPORATION
By:
Name: Theodore J. Goodlander
Title: President
CITIZENS BANK OF MASSACHUSETTS
(as successor in interest to State Street
Bank
and Trust Company)
By:
Name:
Kenneth Mooney
Title: Vice President
Exhibi
t 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
statements of Storage Computer Corporation (the "Company") on Form S-8
of our report dated March 17, 2000 (April 14, 2000 as to Notes E and N)
on the consolidated financial statements of the Company as at December
31, 1999 and for the year then ended appearing in this annual report on
Form 10-K of the Company.
BDO Seidman, LLP
Boston, Massachusetts
April 14, 2000
Exhibi
t 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements of Storage Computer Corporation and subsidiaries (the
"Company") on Form S-8 of our report dated February 25, 1998 on the
consolidated statements of operations, stockholders' equity and cash
flows of the Company for the year ended December 31, 1997 appearing in
this annual report on Form 10-K of the Company.
Richard A. Eisner & Company, LLP
New York, New York
April 13, 2000
5
66
75
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