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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13616
STORAGE COMPUTER CORPORATION
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(Exact name of Registrant as specified in its charter)
DELAWARE 02-0450593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 RIVERSIDE STREET, NASHUA, NEW HAMPSHIRE 03062-1373
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (603) 880-3005
Securities registered pursuant to section 12(b) of the act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ---------------------
Common Stock $0.001 par value American Stock Exchange
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 12 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
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Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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 $62,672,000 as of April 8, 2002. On April 8,
2002 there were issued and outstanding 19,201,667 shares of the registrant's
common stock, with a par value of $0.001.
Because 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 of $5.70 as reported by the American
Stock Exchange for trading on April 8, 2002. 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.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the Proxy Statement for
the Annual Meeting of Shareholders to be held on June 7, 2002.
2
STORAGE COMPUTER CORPORATION
Securities and Exchange Commission
Item Numbers and Description
PART I PAGE
ITEM 1 Business 4
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 Selected Financial Data 12
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
ITEM 7A Quantitative and Qualitative Disclosure About Market 22
Risk
ITEM 8 Financial Statements and Supplementary Data 23
ITEM 9 Changes in and Disagreements with Accountants
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
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports 25
on Form 8-K
3
PART I
ITEM 1. Business
The Company
Storage Computer Corporation (the "Company", "SCC" or "we") develops and
manufactures advanced storage architectures to address the emerging needs of
high-bandwidth and other "performance-impaired" applications.
Storage Computer's technology supports a variety of applications including
advanced database activities, wide area networked storage and sophisticated
business continuity topologies.
o Networked Attached Storage
o Storage Area Networks
o Direct Attached Storage
o Storage Wide Area Networking
Based on advanced architectures, parallel processing hardware, and
embedded, real-time operating system, we have the industry's most versatile
collection of connectivity options. A single storage system can simultaneously
support multiple heterogeneous hosts through any combination of connectivity
interfaces, including NAS, SAN, FibreChannel, SCSI and IP. These high-end
solutions also entail peer-to-peer connectivity, allowing high-speed volume
connectivity and date transfer or replication over Fiber and OC12/48.
Through our Cyber product lines, and patented storage software, these
solutions support multiple open systems servers and are modular and scalable for
future growth.
Based on our performance-optimized Virtual Storage Architecture(TM) , the
product line 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
Initial work began in late 1984 with the development of RAID ("Redundant
Array of Independent Disks") technologies within a predecessor company Cab-Tek,
Inc. 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 resulting
patented technology was transferred to the newly established Storage Computer
Corporation in August 1991.
Products based upon the Company's unique RAID technology began shipping to
customer production sites in the second half of 1992. The Company pioneered the
RAID 7 (patented) technology incorporated in our Virtual Storage Architecture,
which formed the basis for our StorageSuite product family and is found in our
OmniRaid products. Based upon this performance-optimized architecture, the
product line combines high-end controller technology, disk drives, scalable
centralized and distributed memory mechanisms, proprietary memory mapping
techniques, and a real-time operating system to deliver high-performance,
fault-tolerant storage solutions.
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"), our wholly-
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owned subsidiary, acquired the entire business and substantially all the
property and assets of Vermont Research Corporation ("VRC") in exchange for
shares of our common stock (the "Reorganization"). The Reorganization became
effective on March 6, 1995 and was accounted for as a pooling of interests.
In September 2000, Storage Computer Corporation acquired CyberStorage
Systems Corporation. This acquisition enabled us to expand the development of
our advanced storage and server solutions to migrate into the Optical Networking
world and brought us extensive technical expertise in the area of networking,
optical interfaces, and advanced media delivery architectures. Founded in 1998,
Cyber Storage Systems emerged as a strong provider of innovative Information
Management Solutions for the Digital Communications marketplace and
Hardware/Software, IP based, Multimedia (IVOD, Multicast, Telemedicine, Distance
Learning, Training, Video Conferencing) solutions.
In 2001, we began integrating the Virtual Storage Architecture onto the
next-generation, advanced storage and server platforms. We are now in a position
to rapidly advance into the next dimension of networked storage and server
solutions. With product lines addressing the NAS (network attached storage), SAN
(storage area networks), and DAS (direct attached storage) market spaces as well
as solutions based on those product lines targeted to reduce the stress
associated with "performance-impaired" applications.
Industry Overview
Although Internet usage and demand continues to grow at unprecedented
rates, the last year has been one of turmoil for the technology sector markets.
Generally, telecommunications companies had a weak year with large companies
declaring losses and even bankruptcy in a few cases. Technology companies have
terminated tens of thousands of employees and have taken huge restructuring
charges. Despite this, demand for data storage and manageability of that data
continues to be on the forefront of corporate needs. Over the past 5+ years all
markets have undergone 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 application modes are
continuing to increase demand for data storage that is scalable in terms of
capacity, performance, connectivity and manageability.
The data storage market has itself gone through turmoil this past year.
September 11th events have created a strong focus on Business Continuance
practices while the economy in general has forced companies to become more cost
conscious within their IT data centers. Host computing platforms that continue
to make quantum leaps in processing performance drive the market for high
performance storage. We believe 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.
Significant market shifts have occurred over the last year with increase
focus on networking elements. Momentum has been gained in the deployment of
Storage Area Networks (SAN) and Network Attached Storage (NAS). Momentum in
these areas is based on the implementation of advanced high speed networking
technologies. With the increased deployment of Gigabit Ethernet as well as
Optical networks, storage methods based on IP (Internet Protocol) networks is
gaining strength. International Data Corporation (IDC) predicts that although
the entire disk market was down 18% in 2001, Networked storage will account for
67% of disk storage systems by 2005. Overall disk storage systems market is
expected to rebound in 2002.
Market Positioning
Storage Computer is directly focused on the networked storage market. Our
NAS (Network Attached Storage) appliance was in Beta trials in November and
December 2001 and is now generally available. Last year we introduced the
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CyberBorg storage system, which is a high speed, high performance SAN (Storage
Area Network) component with various connectivity options. Yankee Group recently
visited Storage Computer facilities analyzing our market space and product
positioning. Their view is over the next several years market adoption will
increasingly focus on converged storage systems, those which combine the best
elements of NAS and SAN topologies.
Storage Computer is committed to building converged storage product
offerings. By integrating our Virtual Storage Architecture into integrated NAS
and SAN hardware platforms we will achieve an extremely high level of
flexibility and functionality for our customer base. Our storage platforms
entail a diverse set of interconnectivity options including OC12 and OC48
(Optical Carrier) which yields a position in Storage Wide Area Networking
(SWAN). Although the telecommunications industry was in turmoil over the last
few years, the Internet and optical backbones are stronger than ever. With
increased demand for streamlining the efficiency of corporate wide area networks
as well as an increase in metro optical area build outs, Storage Computer's
product and market positioning associated with SWAN is positioned for not only
addressing near term customer needs, but for the future.
Product Line
CYBERBORG:
The CyberBorg is an advanced information storage and delivery system
capable of simultaneously delivering large blocks of information, including
digital images and financial data in record time. It has scalability to over 100
Terabytes and sustained data rates of 450MB per second. It can be integrated
into existing networks and servers and adapted for either direct attached, SAN
or NAS. The system's flexibility results in significant savings in cost and time
by eliminating the need to invest in totally new networks and storage
architectures.
CYBERNAS:
The CyberNAS is a Network Attached Storage appliance, which is targeted to
mid to large corporations. The product combines a disk storage subsystem, RAID
implementation and file server all in one. The file system supports Microsoft
Windows environment (CIFS), Unix (NFS) and AppleShare. The CyberNAS also has a
diverse set of connectivity options including Ethernet, Gigabit Ethernet (wire
speed) and OC12/48 (optical carrier).
CYBERFIBRE:
The CyberFibre is a SAN ready storage system with truly large systems
(18TeraBytes+) of optimized storage management power on a single controller and
is configurable up to 120 disk drives per loop pair. With multiple host
connections, its flexibility and scalability to adapt to expanding storage
needs, the CyberFibre supports dynamic addition of disk capacity to existing
RAID sets.
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 our goal to continue to market to existing
customers to leverage our multiple product offerings and to continue to expand
our customer base for high-performance storage solutions.
Customer Service And Support
We offer our 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
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into the customer's business model. Our technical services organization
comprises a group of skilled support personnel, located at our corporate
headquarters in Nashua, New Hampshire and in field locations in the United
States, Europe and Asia.
In addition to our own support engineers and technicians, our strategic
service alliances with third-party service providers enable us to offer
comprehensive, high-quality programs to support customers on a worldwide basis.
Our strategic service alliances formed with third-party providers who are some
of the most respected organizations in the service industry. All in-house and
third-party service technicians supporting our customers are trained by our
personnel, and service parts are generally stocked in local service offices.
Service technicians are backed by a technical support hotline staffed by support
analysts at our facilities. Our personnel always take the initial service call,
determine the logistics of the support plan, and manage the process. Onsite
services may be tailored to customer requirements in terms of hours covered,
response times and onsite hardware service providers.
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. It is interesting to note that over the second half of
2001 a number of these large organizations have had difficulty maintaining
profitable quarters. EMC had two consecutive loss quarters. Storage industry
analysts contribute some of this to the larger corporations inability to quickly
react to increasing pressure from smaller, more cost and performance competitive
companies. Although we are currently unaware of any other vendor offering
identical product offerings, we cannot assure you that we will be able to
compete successfully against existing companies or future entrants to the
marketplace. While we believe that the price-performance characteristics of our
products are currently competitive, increased competition including the
introduction of new products by our competitors, could result in price
reductions, reduced gross margin and loss of market share, any of which could
materially adversely affect our business, operating results and financial
condition. Many of our current and potential competitors have significantly
greater financial, technical, marketing and other resources than us. 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 us. 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. Our products are sold domestically through a combination of
direct sales personnel, value-added resellers and other distributors. Our direct
sales organization coordinates the activities of our resellers and distributors
and seeks to actively participate with them in selling efforts in order to
enable us to establish strong direct ties with our customers and end users.
International. We have established several different operational methods in
order to penetrate and develop international markets. We use 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 our marketing and sales efforts.
Storage Computer Europe, GmbH, our wholly-owned subsidiary located in
Kelkheim, Germany, provides sales and product support throughout Central and
Eastern Europe. In September 1992, we entered into a joint venture agreement as
a minority shareholder and formed Storage Computer (Asia) Ltd. for the purpose
of selling and servicing our products in Hong Kong and China. Similarly, in
December 1995, we 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.
7
manufactures products and supports the sales and service of the Company's
products in the UK and certain countries in Western Europe. In October of 1998
the Company made an additional investment in Open Storage Solutions, SA,
acquiring a majority interest and in January 2001, we acquired the remaining
interest and changed our name to Storage Computer France SAS.
The remaining international markets served by us are coordinated and
supported from the United States through the use of our independent distributor
network. Our 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 our products to
final end users. (See our Financial Statements included elsewhere herein for
more detailed information regarding revenues.)
Manufacturing
Our 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. Our
manufacturing strategy has been to develop close relationships with our
suppliers and subcontractors and to exchange critical information, in order to
minimize capital investment and overhead expenditures and to control
inventories.
We rely upon a limited number of suppliers of several key components
utilized in the assembly of our products. We purchase disk drives and enclosures
from a number of major disk drive suppliers. Our reliance on our 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, we 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 we have been able to purchase our requirements of such components,
we cannot assure you that we will be able to obtain our full requirements of
such components in the future or that prices of such components will not
increase. In addition, we cannot assure you 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 our products and could have a material adverse effect on our
business, operating results and financial condition.
Research And Development
Since our inception, we have made substantial investments in research and
development. We believe that our future performance will depend in large part on
our ability to maintain and enhance our current products, develop new products
that achieve market acceptance, maintain technological competitiveness and meet
an expanding range of customer requirements. Our future growth depends
substantially upon the success of our current product line and related products
as well as new products that may be developed; however, we cannot assure you
that our 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. We cannot assure you that new products will be
introduced on a timely basis or at all. If new products are delayed or do not
achieve market acceptance, our business, operating results and financial
condition will be materially adversely affected. In addition, we cannot assure
you that customers will not defer orders in anticipation of new product
introductions by our competitors or us.
Our product may contain undetected software errors or failures when first
introduced or as new versions are released. We cannot assure you that, despite
testing by us and by current and potential customers, errors will not be found
in new products until after commencement of commercial shipments, resulting in
loss of or delay in market acceptance, which could have a material adverse
effect upon our business, operating results and financial condition.
8
Our total expenses for research and development for fiscal years 2001, 2000
and 1999 were $4,335,000, $1,496,000 and, $1,981,000, 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 our installed base with greater
functionality, as well as to attempt to expand that installed base.
Proprietary Rights
Our policy is to protect our technology by, among other things, filing
patent applications with respect to technology considered important to the
development of our business. We have been awarded certain U.S. patents and have
additional U.S. patent applications pending. Foreign counterparts of certain of
these applications have been filed or may be filed at the appropriate time. We
decide on a case-by-case basis whether and in what countries we will file
foreign counterparts of a U.S. patent application.
We believe that our products, trademarks and service marks do not infringe
on the proprietary rights of third parties. We cannot assure you, however, third
parties will not assert infringement claims against us in the future. If such a
claim is made, we will evaluate the claim as it relates to its products and, if
appropriate, may seek a license to use the protected technology. We cannot
assure you that we 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 us. If we, or our suppliers, are unable to
license any such protected technology, we could be prohibited from incorporating
or marketing such products. We could also incur substantial costs to redesign
our products or to defend any legal action taken against them. In the event our
products are found to infringe protected technology, we could be required to pay
damages to the infringed party or be enjoined from manufacturing and selling
such products.
We require all employees, and technical and other consultants and advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with us. These agreements generally provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with us is to be kept confidential and
not disclosed to third parties except in specific circumstances. All of our key
technical employees have also entered into agreements providing for the
assignment of rights to inventions made by them while in our employment.
Although we continue to take protective measures to protect our proprietary
technology, we cannot assure you that these measures will be successful. In
addition, the laws of certain foreign countries may not protect our rights to
the same extent as U.S. law.
During 1999, we completed a thorough evaluation of our patents, claims and
other intellectual property rights. Upon completion of such evaluation,
management firmly believes that several manufacturers in the computer storage
marketplace have infringed several of our patents. In 2000, we began
aggressively pursuing the enforcement of our intellectual property rights
secured by the patents and have retained a major law firm, on a contingency
basis, to enforce our rights. In 2001, we commenced litigation against several
alleged infringing companies, including Hitachi Data Systems, Ltd. in the United
Kingdom and Veritas Inc. in the Federal District Court for the Northern District
of Texas. In addition, we commenced an action against XIOtech Corporation, a
wholly owned subsidiary of Seagate Technologies LLC and later settled this
action through mediation.
We believe that there are more products being sold that infringe our
patents and we will continue to vigorously enforce our intellectual patent
property right .We will be seeking royalties for the past infringement, in
addition to licensing agreements for the future production and sale of such
infringing products.
Employees
As of December 31, 2001, we had 75 full time employees. Of the total, 64
were based in North America, and 11 in the United Kingdom and Western Europe.
Our ability to develop, manufacture and market our products and to establish and
maintain a competitive position in our industry will depend, in large part, upon
our ability to attract and retain qualified technical,
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marketing and managerial personnel, of which there can be no assurance. We
consider our relations with our employees to be good. None of our employees are
covered by a collective bargaining agreement.
ITEM 2. Properties
We currently lease, from an affiliate, a 35,000 sq. ft. facility that is
occupied by our light manufacturing, research and development and administrative
operations in Nashua, New Hampshire. In 2001, we paid annual rental of $300,000
to lease this facility. In December 2000, we executed a five-year operating
lease for these facilities, which provides for annual adjustments to the monthly
rental payment based upon the previous year's consumer price index. The lease
has a five year renewal option, exercisable at our election, and does not
provide us with a purchase option for the property. The current monthly rental
is $25,000, which we believe is comparable to rentals of similar properties in
the area and indicative of the fair market rental that could be obtained from an
unrelated third party in an arm's-length transaction. See "Item 13 - Certain
Relationships and Related Transactions." We lease all of our domestic and
international outside sales offices. All our properties and premises are
adequately protected by insurance coverage. We believe that our existing
facilities are adequate for our current needs and that additional space will be
available as needed.
ITEM 3. Legal Proceedings
In December 2001, Marketlink Technologies, LLC filed a civil action against
us in the Circuit Court for Oakland County, Michigan, alleging that we owed them
a $156,000 termination payment under the terms of a manufacturers representative
agreement that we terminated for cause in April 2001 because of Marketlink's
inability to sell our products and perform the services required by the
agreement. In January 2002, we filed counterclaims against Marketlink in this
matter, including Marketlink's breach of contract. We believe the claims of
Marketlink are without merit and deny all allegations. Further, we intend to
vigorously defend this action. We are unable to predict any outcome but we do
not believe that our involvement in final settlement of or litigation costs
defending this claim will have a material effect on our business, operating
results or financial condition.
In March 2001, we filed an action against XIOTech Corporation ("XIOTECH")
and its parent company, Seagate Technology Inc. ("SEAGATE INC"), in the United
States District Court for the Northern District of Texas claiming that its
products infringe one of our patents. In December, 2001, we settled all matters
in controversy that were pending in that action against XIOTECH, SEAGATE INC.,
and a related company, Seagate Technology LLC ("SEAGATE LLC"). Specifically,
such matters included the alleged infringement of one of our patents, namely our
U.S. Patent No. 5,893,919, by XIOTECH. The settlement between XIOTECH and us
includes a one-time $2,500,000 royalty payment to us by XIOTECH for a fully paid
up, royalty-free, worldwide, perpetual, license covering the `919 Patent, with
no right to sublicense, and a royalty free cross license agreement between
XIOTECH and us for all of our respective patents. Additionally, we entered into
a cross license with SEAGATE, LLC providing a royalty-free, worldwide,
perpetual, cross license, with no right to sublicense, between SEAGATE LLC and
us for all of our patents and for all of SEAGATE LLC's storage system patents.
All cross license agreements entered into to include all patents of Storage
Computer Corporation and XIOTECH, and all storage system patents of SEAGATE LLC,
including current and later acquired patents, domestic as well as foreign.
Further, the parties agreed to dismiss all claims against each other and entered
into certain mutual releases covering the subject matter, from any other action
that may be brought as a result of these issues.
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Additionally, SEAGATE LLC has agreed to withdraw its oppositions in the European
Patent Office to our `287 and `494 patents.
During March 2001 we filed legal actions against Hitachi Data Systems
Limited in the United Kingdom for infringement of two of the European patents in
our intellectual property portfolio. The trial date is set for June 17, 2002.
In October 2001 we filed a patent infringement action in the United States
District Court for the Northern District of Texas, against Veritas Software
Corporation and Veritas Software Global Corporation, alleging that certain
Veritas Software Corporation storage products infringe Storage Computer's
intellectual property patent number U.S. 5,893,919 entitled "Apparatus and
Method for Storing Data with Selectable Data Protection Using Mirroring and
Selectable Parity Inhibition." In February 2002, we filed an additional patent
infringement action in the United States District Court for the Northern
District of Texas, against Veritas Software Corporation and Veritas Software
Global Corporation alleging that certain Veritas Software Corporation storage
products infringe Storage Computer's intellectual property, specifically U.S.
5,257,367 entitled "Data Storage system with Asynchronous Host Operating System
Communication Link". These actions have been referred to a court appointed
mediator with a mediation date set for late April 2002. In March 2002, we filed
a third patent infringement action against Veritas Software Corporation and
Veritas Software Global Corporation alleging certain Veritas Software
Corporation storage products infringe Storage Computer's intellectual property
patent number U.S. 6,098,128 entitled "Universal Storage Management System." The
Storage Computer claim is for injunctive relief, damages and legal costs arising
from the alleged infringement.
The outcome in the Hitachi and Veritas unresolved patent proceedings cannot
possibly be predicted, but we intend to vigorously pursue the enforcement of our
intellectual property rights and our claims in these actions and against other
manufacturers whose products we believe infringe on our patents and intellectual
property rights. Our failure to successfully enforce our patent rights could
have a material adverse effect on our business, operating results and financial
condition.
We are involved from time to time in various other minor legal actions in
the ordinary course of our business, which we believe do not have a material
adverse effect on our business, operating results or financial condition.
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
the fourth quarter of the fiscal year ended December 31, 2001.
11
PART II
ITEM 5. Market For Registrants Common Equity And Related Stockholder Matters
Our 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 our Common Stock for the fiscal years ended December 31, 2001 and
2000, as reported by the American Stock Exchange.
FISCAL 2001
-----------
High Low
---- ---
First Quarter 9.80 6.50
Second Quarter 9.62 5.00
Third Quarter 8.85 3.72
Fourth Quarter 9.40 3.75
FISCAL 2000
-----------
High Low
---- ---
First Quarter 15.44 3.31
Second Quarter 14.00 6.00
Third Quarter 14.63 8.75
Fourth Quarter 24.01 4.80
On April 8, 2002, there were 347 record holders of our Common Stock. We
believe the actual number of beneficial owners of the Common Stock is in excess
of 5,400 holders because many of the shares of our Common Stock are held in
custodial or nominee accounts for the benefit of persons other than the record
holder.
We have never paid any cash dividends and do not anticipate paying any cash
dividends in the foreseeable future. We are also restricted from paying cash
dividends under the terms of our Series A, B, C and E Preferred Stock.
During the first quarter of our fiscal year 2002, our common stock traded
at prices ranging from a low closing price of $5.88 to a high closing price of
$7.99.
On August 15, 2001, we completed a $5,000,000 private placement of a new
Series E Convertible Preferred Stock to the holder of our Series C Preferred
Stock, RGC International Investors, LDC. Because the sale was made to a single
accredited investor, the sale was exempt from the registration provisions of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The shares
of Series E Convertible Preferred Stock are convertible into 771,605 shares of
common stock at a fixed conversion price of $6.48 and may be converted at any
time until October 31, 2003 when conversion is automatic. In connection with the
investment we issued a warrant to purchase 771,605 shares of common stock at
$10.80 per share.
ITEM 6. Selected Financial Data
The following data, insofar as it relates to the three fiscal years 1999
through 2001 has been derived from the consolidated financial statements
appearing elsewhere herein, including the Consolidated Balance Sheets as of
December 31, 2001 and December 31, 2000, and the related Consolidated Statements
of Operations for each of the three years in the period ended December 31, 2001,
and notes thereto. The data, insofar as it relates to the Balance Sheet Data as
of December 31, 1999, December 31, 1998 and December 31, 1997, and the
Statements of Operations Data for the fiscal years 1998 and 1997, has been
derived from our historical financial statements for such periods.
12
Year ended December 31
------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except for per share data)
STATEMENT OF OPERATIONS DATA
Revenues:
Products and services.................................... $ 6,548 $ 6,506 $ 10,526 $ 17,052 $ 37,146
License fees............................................. 2,500 0 0 0 0
-------- -------- -------- -------- --------
Total revenues........................................ 9,048 6,506 10,526 17,052 37,146
-------- -------- -------- -------- --------
Costs and expenses:
Cost of products and services............................ 5,546 6,525 6,303 11,839 18,153
Costs of license fees, primarily legal costs............. 2,311 0 0 0 0
Research and development................................. 4,335 1,497 1,981 4,258 2,852
Selling and marketing.................................... 4,408 2,262 4,099 8,872 7,960
General and administrative............................... 3,110 2,316 2,357 2,388 1,526
Amortization of intangibles.............................. 2,832 836 0 0 0
Restructuring costs...................................... 0 800 0 0 0
Write down of investment................................. 0 0 0 2,094 0
-------- -------- -------- -------- --------
Total costs and expenses.............................. 22,542 14,236 14,740 29,451 30,491
-------- -------- -------- -------- --------
Operating income (loss)..................................... (13,494) (7,730) (4,214) (12,399) 6,655
Other income (expense)...................................... 277 (430) (562) (636) (399)
-------- -------- -------- -------- --------
Income (loss) before income taxes........................... (13,217) (8,160) (4,776) (13,035) 6,256
Provision (benefit) for income taxes ....................... 0 1,816 (200) (2,145) 2,364
-------- -------- -------- -------- --------
Net income (loss)........................................... (13,217) (9,976) (4,576) (10,890) 3,892
Dividends on preferred stock including amortization
of the beneficial conversion features.................... (7,709) (10,075) 0 0 0
-------- -------- -------- -------- --------
Income (loss) applicable to common stockholders before
cumulative effect of change in accounting principle...... (20,926) (20,051) (4,576) (10,890) 3,892
Cumulative effect of change in accounting principle......... 0 (810) 0 0 0
-------- -------- -------- -------- --------
Net income (loss) applicable to common stockholders......... ($20,926) ($20,861) ($4,576) ($10,890) $3,892
======== ======== ======== ======== ========
Income (loss) available to common stockholders before
cumulative effect of change in accounting principal
per basic and dilutive share............................. ($1.32) ($1.57) ($0.40) ($0.97) $0.33
Net income (loss) available to common stockholders
per basic and dilutive share............................. ($1.32) ($1.64) ($0.40) ($0.97) $0.33
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 5,628 $ 14,852 $ 1,182 $ 925 $ 1,113
Working capital............................................. 9,126 16,327 429 3,399 12,606
Total assets................................................ 33,710 45,118 14,229 22,900 30,812
Long-term obligations....................................... 328 1,489 1,060 710 710
Redeemable preferred stock.................................. 3,725 12,557 0 0 0
Stockholders' equity........................................ 26,543 26,984 4,017 8,346 18,901
13
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 OUR 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 OUR MARKETS AND
CUSTOMERS, OUR OBJECTIVES AND PLANS FOR FUTURE OPERATIONS AND PRODUCTS AND OUR
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 OUR PRODUCTS; THE RATE OF GROWTH IN THE INDUSTRIES OF
OUR PRODUCTS; THE PRESENCE OF COMPETITORS WITH GREATER TECHNICAL, MARKETING AND
FINANCIAL RESOURCES; OUR ABILITY TO PROMPTLY AND EFFECTIVELY RESPOND TO
TECHNOLOGICAL CHANGE TO MEET EVOLVING CUSTOMER NEEDS; RISKS ASSOCIATED WITH
SALES IN FOREIGN COUNTRIES; AND OUR ABILITY TO SUCCESSFULLY EXPAND OUR
OPERATIONS.
INTRODUCTION
This discussion summarizes the significant accounting policies, accounting
estimates and other significant factors affecting the liquidity, capital
resources and result of operations of the Company for the three-year period
ended December 31, 2001. This discussion should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in Item 14 of this annual report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our financial statements in conformity with accounting
principles generally accepted in the United States of America. These accounting
principles require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements. Our management
is also required to make certain judgments that affect the reported amounts of
revenues and expenses during the reporting period. We periodically evaluate our
estimates including those relating to the allowance for doubtful accounts;
inventory reserves for lower of cost or market adjustments, excess quantities
and discontinued products; estimated lives and impairment of tangible and
intangible long-life assets; restructuring costs; litigation and other
contingencies. We base our estimates on historical experience and various other
assumptions that we believe to be reasonable based on the specific
circumstances, the results of which form the basis for making judgments about
the carrying value of certain assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates.
We believe the following critical accounting policies impact the most
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue Recognition
We recognize revenue from product sales at the time of shipment. Revenue
from services is recognized over the contract period or as services are
provided. Revenue from license fees is recognized over the contract period or
when received for fully-paid license agreements. These revenue accounting
policies do not require significant estimates by management.
Impairment of Goodwill and Intangible Assets
Goodwill and other intangible assets that resulted from our acquisition of
CyberStorage Systems in 2000 which was accounted for as a purchase, are recorded
at amortized cost. We periodically review the carrying amounts of these
intangible assets for indications of impairment based on the integration of the
acquired technology into our product lines and market conditions for the sale of
these products. If indications of impairment are present, we assess the value of
the intangible assets. During 2001 and continuing into the first quarter of
2002, considerable turmoil existed in storage technology markets and the impact
of overall economic conditions on introduction of our new products, signaled an
indication of the potential for impairment. On the other hand, the events of
September 11th created a strong focus on business continuance practices and
information storage and redundancy. We have analyzed the positioning of our
existing and new product technologies in our market place and concluded that
there was no impairment in the value of our various intangible assets. Future
events could cause us to conclude that impairment indicators exist and that
intangible assets associated with acquired businesses are impaired.
Beginning in 2002, the method for assessing potential impairments of
intangibles will change based on new accounting rules issued by the Financial
Accounting Standards Board (FASB). The Company has not yet determined how the
pronouncements will affect its future financial position and results of
operations. The new accounting rules will result in the elimination of the
non-cash charge to our operations for amortization of goodwill.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reflect the expected
non-collection of accounts receivable based on past collection history and
specific risks identified in our portfolio of receivables. If the financial
condition of our customers deteriorates resulting in an impairment of their
ability to make payments, or if payments from customers are significantly
delayed, additional allowances might be required.
Restructuring Costs
During 2000, we recorded significant restructuring accruals in connection
with the integration of our acquisition of CyberStorage Systems into our
existing business. These accruals included estimated costs to settle certain
contractual obligations, personnel related costs for benefit programs and
redundancy, and charges related to excess inventory quantities and parts for
discontinued products. The majority of our estimates were based on reasonably
determinable facts and circumstances and our actual costs incurred were
consistent with our estimates. During 2001 additional reserves were provided for
inventories related to discontinued products.
Intellectual Property Rights, Contingencies and Litigation
We have a substantial portfolio of patents, claims and other intellectual
property rights. Costs and expenses in connection with the development of and
the enforcement of our rights are expensed when incurred. Certain contingent
fees for legal services are due upon the receipt of license fees over contract
periods or upon receipt of payment for paid-up license arrangements. We
currently are in legal proceedings in connection with the enforcement of our
intellectual property rights the results of which cannot be predicted. Our
failure to successfully enforce our patent rights could have a material adverse
effect on our business, operating results and financial condition.
In the normal course of our business, we are subject to various other
proceedings, lawsuits and claims relating to product, technology, labor and
other matters as further described in Item 3. Legal Proceedings. We are required
to assess the likelihood of any adverse outcomes and the potential range of
probable losses in these matters. The amount of loss accrual, if any, is
determined after careful analysis of each matter, and is subject to adjustment
if warranted by new developments or revised strategies. We believe that none of
the existing matters will result in a material adverse effect on our business,
operating results and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Our future success depends on maintaining adequate liquidity and working
capital to meet our operational requirements. Given the recent volatility in the
securities markets and, in particular, the securities of technology companies,
we cannot assure that continuing investors' investments will be available to us
or that we will receive additional equity financing. Our failure to maintain
adequate liquidity and working capital could have a material adverse impact on
us.
We have continued to incur operating losses in 2002. While development and
introduction of our new products continues and our marketing and sales
activities have increased, we have implemented cost reductions programs where
possible, primarily in employee headcount and the use of independent software
contractors. Management believes that available working capital coupled with the
ability for raising additional equity financing will support the Company's
operating plan. We continue to evaluate opportunities for raising additional
financing and believe that such will be available on reasonable terms to the
Company.
Cash flows
Our cash flows, cash and cash equivalents, and working capital for the
three years ended December 31, 2001 are summarized as follows:
2001 Change 2000 Change 1999
---- ------ ---- ------ ----
(In thousands)
--------------
Net cash provided (used) in operations ($11,503) ($9,062) ($2,441) ($5,032) $2,591
Net cash provided (used) in investing activities (144) (191) 47 52 (5)
Net cash provided (used) in financing activities 2,446 (13,474) 15,920 18,189 (2,269)
Cash and cash equivalents 5,628 (9,224) 14,852 13,670 1,182
Working capital 9,126 (7,201) 16,327 15,898 429
Cash flow used in operations increased in 2000 due to increased operating
losses and an increase in working capital accounts, excluding cash, that was
partially offset by amortization of intangible assets, a provision for
restructuring costs and a deferred tax provision. Cash flows used in operations
continued to increase in 2001 due to increased operating losses and continued
increases in working capital accounts, excluding cash, that were partially
offset by the net effect of an increase in amortization of intangible assets,
non-cash compensation for services, a reduced provision for restructuring cost
and a reduction in the provision for deferred taxes.
Cash flows from investing activities have not been material. The Company
does not have or anticipate any significant capital equipment requirements at
this time.
Cash flow from financing activities increased dramatically in 2000. We
issued redeemable convertible preferred stock (Series A, B and C) and warrants
to private investors for $20.8 million, warrants to purchase common stock were
exercised for $1.1 million and employee stock options were exercised for $1.1
million. $7 million of the proceeds from the financings were used to pay-off our
bank credit facility that was then terminated. Cash flow from financing
activities in 2001 consisted of a convertible preferred stock financing at a
fixed conversion rate (Series E) for $4.8 million which was partially offset by
the redemption of the remaining Series A and B convertible preferred stock
outstanding and held by outside investors for $2.1 million. The terms of the
financings are described in the Notes to the Consolidated Financial Statements
in Item 14 of this annual report. We believe that the terms were the best
available to the Company at that time of each financing.
Credit facilities, debt and lease payment commitments
We currently have no outstanding secured debt or amounts due on credit
facilities and we due not have a line of credit at the present time. We
previously had a revolving credit facility with a bank that was repaid and
terminated in 2000.
Our annual debt maturities and lease payment under noncancellable operating
leases are as follows:
Debt maturities Lease payments
--------------- --------------
2002 $285,254 $399,005
2003 234,434 341,408
2004 93,750 307,958
2005 281,264
2006 2,322
Related party transactions
In August 2001 our Board of Directors approved a plan to make demand loans
with interest at prime plus 1% to directors and executive officers of the
Company up to an aggregate of $500,000 to purchase common stock of the Company
in the public market and $126,178 including accrued interest was outstanding at
December 31, 2001. The Board of Directors also approved a temporary advance to
the Chief Executive Officer of the Company of up to $1,750,000 of which
$1,314,620 including accrued interest at prime plus 1% was outstanding at
December 31, 2001. In January 2002, $1,000,000 of the advance was repaid and the
balance was offset against a note payable and accrued interest due to the
officer.
The Company has a notes payable to the Chief Executive Officer of the
Company of $710,000 with interest at prime plus 1% and $100,000 with interest at
6% which is convertible into common stock of the Company at $4.00 per share. The
notes and related accrued interest are due in April of 2002. They were offset
against the temporary advance to this officer at December 31, 2001. In January
2002, the balance of the temporary advance remaining unpaid of $314,620 was
offset against the accrued interest and the notes payable leaving a balance due
on the notes of approximately $770,000 which will be due on demand in April
2002.
14
Foreign currency transactions
We do not currently utilize any derivative products to hedge its foreign
currency risk. Our 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 our subsidiaries' functional currencies, currently the German mark and the
British pound and the French franc. 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, we do not believe we have
any material unhedged monetary assets, liabilities or commitments that 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. We currently have no plans to utilize
any derivative products to hedge our foreign currency risk.
RECENT ACCOUNTING PRONOUNCEMENTS
During the fourth quarter of 2000, the FASB issued Emerging Issues Task
Force (EITF) 00-27 "Application of EITF issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingency
Adjustable Conversion Ratios, to certain Convertible Instruments". EITF No.
00-27 requires the remeasurement of the original issue discount on preferred
stock with characteristics similar to the convertible preferred stock issued by
the Company, during fiscal year 2000. This accounting change required the value
of the warrants issued with the preferred stock to be included in the
calculating the beneficial conversion value. This resulted in a cumulative
charge of $809,364 to loss applicable to common stockholders in the fourth
quarter of 2000.
In June 2001, the FASB finalized FASB Statements NO. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if they meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after
July 1, 2001. The FASB also requires, upon adoption of SFAS 142, that the
Company classify the carrying amounts of intangible assets and goodwill based
on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and ceases
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized.
The Company's acquisition of CyberStorage Systems in 2000 was accounted
for using the purchase method. All future business combinations will be
accounted for under the purchase method, which may result in the recognition of
goodwill and other intangible assets, some of which may subsequently be charged
to operations, either by amortization or impairment charges. For purchase
business combinations completed prior to June 30, 2001, the net carrying amount
of goodwill was $16,287,911 and other intangible assets were $3,958,906 as of
Decemeber 31, 2001. Amortization expense during the year ended December 31, 2001
was $2,831,736. The Company is assessing but has not yet determined how the
adoption of SFAS No. 141 and SFAS No. 142 will affect its future financial
position and results of operations.
The Company did not acquire any goodwill or other intangible assets between
the period June 30, 2001 and December 31, 2001. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions for the Disposal of a Segment of a Business."
SFAS No. 144 became effective for fiscal years beginning after December 15,
2001. The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. Any long-lived assets held for disposal are reported at the lower
of their carrying amounts or fair values less costs to sell. The Company expects
to adopt SFSAS No. 144 in the first quarter of fiscal year 2002 and is currently
reviewing the effects of adopting SFSAS No. 144 on its financial position and
results of operations.
15
RESULTS OF OPERATIONS
The following table presents our consolidated statement of operations stated
as a percentage of revenue for the years ended December 31, 2001, 2000, 1999,
1998 and 1997.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenue
Products and services 72.37% 100.00% 100.00% 100.00% 100.00%
License fees 27.63 0 0 0 0
------- ------- ------ ------ ------
Total revenues 100.00 100.00 100.00 100.00 100.00
------- ------- ------ ------ ------
Costs and expenses:
Cost of products and services 61.30 100.30 59.88 69.43 48.87
Cost of license fees 25.53 0 0 0 0
Research and development 47.91 23.00 18.82 24.97 7.68
Selling and marketing 48.71 34.77 38.94 52.03 21.43
General and administrative 34.37 35.59 22.40 14.00 4.11
Amortization of intangibles 31.30 12.85 0 0 0
Restructuring costs 0 12.30 0 0 0
Write Down of Investment 0 0 0 12.28 0
------- ------- ------ ------ ------
Total 249.12 218.81 140.04 172.71 82.09
------- ------- ------ ------ ------
Operating income (loss) (149.12) (118.81) (40.04) (72.71) 17.91
Other income (loss)(expense) 3.06 (6.61) (5.34) (3.73) (1.08)
------- ------- ------ ------ ------
Income (loss) before income taxes (146.06) (125.42) (45.38) (76.44) 16.83
Provision (benefit) for income taxes 0 27.92 (1.90) (12.58) 6.37
------- ------- ------ ------ ------
Net income (loss) (146.06)% (153.34)% (43.48)% (63.86)% 10.46%
======= ======= ====== ====== ======
Revenue
Revenues from sales of products and services decreased $4,020,000 in 2000
due to the continuing contraction of our customer base due to customers
concerns about our financial condition, delays in delivery of upgrade features,
reduced sales and marketing staff and unsuccessful attempts to reestablish our
re-seller sales and marketing channel. Revenues from sales of products and
services increased only slightly in 2001 and consisted primarily of legacy RAID
products and the Cyber products existing at the time that CyberStorage Systems
was acquired. Introduction of our new product lines of CyberBorg, CyberNAS and
CyberFibre did not begin until late in 2001 and will continue in 2002. We expect
future sales to come primarily from our new product lines described elsewhere in
this annual report.
Revenues from license fees with respect to our patents and other
intellectual properties began in 2001 with our settlement of our claims against
XIOTech Corporation and its parent company, Seagate Technology, Inc. We
currently are in legal proceedings, in connection with the enforcement of our
patents and other intellectual property rights, the results of which cannot be
predicted. Our failure to successfully enforce our patent rights and receive
revenue from license fees could have a material adverse effect on our business,
operating results and financial condition.
Revenues by geographic region expressed as a percentage of total revenues
is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
----------- ------------ ------------
North America 79% 55% 44%
Asia 10% 22% 22%
European Sales 9% 21% 33%
Other Regions 2% 2% 1%
The shift in revenue from 1999 through 2001 resulted from a reduction in
the European direct sales force and revenues from license fees in North America
in 2001.
For the years ended December 31, 2001 and 1999, sales to one customer were
in excess of 10% 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 occuring through our
subsidiaries located in England and Germany are conducted in the local
functional currency.
16
Cost of products and services
Cost of products and services increased $222,000 in 2000 due to additional
direct and indirect manufacturing personnel associated with the CyberStorage
Systems acquisition in September 2000 and decreased $979,000 in 2001 due to
lower level of manufacturing activity, the shift to our new product lines and
staffing reductions in our factory. Included in costs of products and services
were writedowns of inventory in the amount of $2.9 million and $1.0 million in
2000 and 2001, respectively in connection with the restructuring.
Gross profit
Gross profit on the sale of products and services is summarized as follows:
2001 2000 1999
---- ---- ----
(In thousands except for % of sales amounts)
Gross profit $1,002 15.3% ($19) (.3%) $4,223 40.1%
Restructuring costs
included in the
cost of products
and services......... $1,000 15.2% $2,900 44.6% - -
Gross profits were reduced in 2000 and 2001 primarily due to provisions for
restructuring costs associated with excess inventory quantities and inventories
related to discontinued products discussed above.
Cost of license fees
Costs associated with to the enforcement of our patent and other
intellectual property rights totaling $2,311,000 in 2001 were for legal and
consulting fees and expenses incurred.
Research and development expenses
Research and development expenses, relating primarily to personnel costs,
expenses for independent contractors, purchase of software and supplies, were
reduced by $484,000 in 2000 due to working capital reductions partially offset
by increases in costs for personnel that joined the Company with the
CyberStorage Systems acquisition. Research and development expenses to develop
our new product lines increased by $2,838,000 in 2001 with the availability of
equity financing funds.
The Company expects to expend approximately $4,500,000 on research and
development, during fiscal 2002, relating to improvements in existing products
and new product offerings, subject to the availability of working capital.
Selling and marketing expenses
Selling and marketing expenses relating to personnel staffing, expenses for
public relations, trade shows, trade publications, sales commissions and travel
were reduced by $1,837,000 in 2000 due to working capital reductions. Selling
and marketing expenses increased by $2,146,000 in 2001 with the rebuilding of
the sales and marking organization and expenses associated with the introduction
on existing CyberStorage Systems products and our new product lines.
General and administrative expenses
General and administrative expenses remained virtually unchanged in 2000
since the reductions in executive and administrative support personnel earlier
in the year were offset by the hiring of new senior management personnel and the
addition of CyberStorage Systems employees. General and administrative expenses
increased by $794,000 in 2001 due primarily to continued increases in support
personnel ($647,000), travel expenses ($64,000), legal and auditing services
($83,000).
Amortization of intangibles
Amortization of goodwill and other intangible assets relate to the
acquisition of CyberStorage Systems in September 2000. Four months of
amortization were recorded in 2000 and a full year of amortization was recorded
in 2001. Amortization of goodwill of approximately $1,900,000 annually will be
eliminated in 2002 with the adoption of SFAB 142 described elsewhere in the
annual report.
17
Other income (expense), net
Other income (expense), net was reduced by $132,000 in 2000 due to the
reduction in interest cost on our bank credit facility partially offset by
decreases in other expenses primarily translation losses. Other income
(expense), net income increased by $707,000 in 2001 due primarily to increased
interest income on invested cash and cash equivalents.
Provision for income taxes
Our provision for income taxes increased in 2000 due primarily to the
reduction of our deferred tax assets to zero by increasing the valuation reserve
by $2,194,000.
Inflation
Inflation has not had a material impact on our operations.
18
Acquisitions
On September 14, 2000, we acquired CyberStorage Systems Corporation
("CyberStorage") as a wholly owned subsidiary in a stock for stock acquisition
and merged the two operating companies. Although on a short-term basis the
acquisition of CyberStorage is expected to be dilutive to our earnings, on a
long term basis we expect that the CyberStorage acquisition will add to our
earnings per share on a fully diluted basis.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our Stock Price is Volatile
Our 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 us or our competitors
- quarterly variations in our operating results
- changes in revenue or earnings estimates by the investment community
- speculation in the press or investment community
- failure to meet earning expectations
19
In addition, our stock price may be affected by general market conditions
and domestic and international economic factors unrelated to the Company's
performance such as the dramatic decreases suffered by almost every public
company in the high technology sector in 2000. Further, until recently, our
stock was thinly traded. Because of these factors, recent trends should not be
considered reliable indicators of future stock prices or financial results.
Our Business May Suffer If We Cannot Protect Our Intellectual Property
We generally rely upon patent, copyright, trademark and trade secret laws
and contract rights in the United States and in other countries to establish and
maintain our proprietary rights in our technology and products. However, we
cannot assure you that any of our proprietary rights will not be challenged,
invalidated or circumvented. In addition, the laws of certain countries do not
protect our proprietary rights to the same extent, as do the laws of the United
States. Therefore, we cannot assure you that we will be able to adequately
protect our proprietary technology against unauthorized third-party copying or
use, which could adversely affect our competitive position. Further, we cannot
assure you that we will be able to obtain licenses to any technology that it may
require to conduct our business or that, if obtainable, such technology can be
licensed at a reasonable cost.
Intellectual Property Rights
We are aggressively pursuing the enforcement of our intellectual property
rights after an extensive patent review conducted in 1999. In 2000, we retained
a major law firm to enforce these rights against infringing parties, the number
of which management believes to be extensive. In 2001, we began bringing legal
actions against companies whose products we believed infringed on our
intellectual property rights and patent portfolio. We intend to vigorously
pursue these actions. Despite ours and our legal representatives' efforts, there
can be no assurance or predictability as to any amount of recovery or the length
of time it will take us to recover any royalties or license fees which may be
recoverable. Despite our efforts to protect these intellectual property rights,
unauthorized use may still occur, particularly in foreign countries.
Development of New Products and Solutions
We must make continuous investment in research and development to maintain
our ongoing effort to continually improve our products and provide innovative
solutions to our customers. The development of software products is a difficult
and costly process and subject to many other products' requirements. Our
inability to timely deliver new products in the past has had an adverse effect
on our operating and financial results. We cannot assure you that we will be
able to effectively develop new products in the future.
Competition
We compete 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 we do. Our business
may be adversely affected by the announcement or introduction of new products by
our competitors, including hardware, software and services, price reductions of
our competitors' equipment or services and the implementation of effective
marketing strategies by our 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 our
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 we cannot foresee. We currently believe 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 our earnings.
20
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 we believe that our Virtual
Storage Architecture, StorageSuite and CyberBORG products are advanced when
compared to competitive products, and complement many other products utilized in
total customer solutions, we cannot assure that this will continue in the
future. The failure to remain consistently ahead of competitive technologies
would have a negative impact on our 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 customers. Many of the relationships are exclusive and our
failure to develop similar relationships will effectively reduce the number of
qualified sales opportunities we will have for our products in the future. We
believe that we address this issue by our return to the reseller channel sales
model and having the integrator/solution providers/value added-resellers perform
the solution selling required. Our failure to open these sales channels will
have a negative effect on our operating results and financial condition.
Operations
Our 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 us or our suppliers, we
could experience a rate of failure in our products that would result in
substantial repair or replacement costs and potential damage to our reputation.
Continued improvement in manufacturing capabilities and control of material and
manufacturing quality and costs are critical factors in our future growth. We
frequently revise and update manufacturing and test processes to address
engineering and component changes to our products and evaluate the reallocation
of manufacturing resources among our facilities. We cannot assure that our
efforts to monitor, develop and implement appropriate test and manufacturing
processes for our products will be sufficient to permit us to avoid a rate of
failure in our products that results in substantial delays in shipment,
significant repair or replacement costs and potential damage to our reputation,
any of which could have a material adverse effect on our 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. We have had a decline in revenue in each of the three previous years
and comparable reduction in our work force. While we believe that we have the
required core personnel to effectively manage and grow, we cannot assure that
key employees will not leave the company in the future. The failure to maintain
key employees could adversely affect our future operating and financial results
in the future.
21
Liquidity and Working Capital
Our future success depends on maintaining adequate liquidity and working
capital to meet our operational requirements. Given the recent volatility in the
securities markets and, in particular, the securities of technology companies,
we cannot assure you that continuing investors' investments will be available to
us and that we will receive additional equity financing. Our failure to maintain
adequate liquidity and working capital could have a material adverse impact on
us.
Failure of Suppliers to Provide Quality Products
We purchase 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. We have
experienced delivery delays from time to time because of high industry demand or
the inability of some vendors to consistently meet our quality and delivery
requirements. If any of our suppliers were to fail to meet the quality or
delivery requirements needed to satisfy customer orders for our products, we
could lose time-sensitive customer orders and have significantly decreased
quarterly revenues and earnings, which would have a material adverse effect on
our business, results of operations or financial condition. Additionally, we
periodically transition our product line to incorporate new technologies. The
importance of transitioning our customers smoothly to new technologies, along
with our historically uneven pattern of quarterly sales, intensifies the risk
that a supplier who fails to meet our delivery or quality requirements will have
an adverse impact on our revenues and earnings.
Changes in Laws, Regulations Or Other Conditions That Could Adversely Impair Our
Condition
Our business, results of operations and financial condition could be
adversely affected if any laws, regulations or standards, both foreign and
domestic, relating to us or our products were newly implemented or changed.
Litigation That We May Become Involved In May Adversely Affect Us
In the ordinary course of business, we may become involved in litigation,
administrative proceedings and governmental proceedings. Such matters can be
time-consuming, divert management's attention and resources and cause us to
incur significant expenses. Furthermore, we cannot assure you that the results
of any of these actions will not have a material adverse effect on our business,
results of operations or financial condition.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We have only the market risk inherent in financial instruments that relate
primarily in fluctuations in the prime rate of interest to be charged under the
terms of the several promissory notes due from and to certain of our executive
officers and directors because we terminated the credit facility tied to the
prime rate of interest in August 2000. We do not use derivative products and do
not have any material unhedged monetary assets, except for the inter-company
balances outstanding, which are detailed above in ITEM 7 "Foreign Currency
Transactions".
22
ITEM 8. Financial Statements and Supplementary Data
The financial statement data listed in the Index to Consolidated Financial
Statements at Item 14 of this Form 10-K are incorporated by reference into this
Item 8 of Part II of this Form 10-K.
The following supplementary data is incorporated by reference:
Quarterly Financial Results (unaudited) for the two years ended December
31, 2001 (see Note M of the "Notes to the Consolidated Financial Statements"
contained in this Form 10-K).
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
23
PART III
The information required by Part III, Items 10, 11 12, and 13, are
incorporated herein by reference to our Proxy Statement for our 2002 Annual
Meeting of Shareholders (the "2002 Proxy Statement") as follows:
ITEM 10. Directors and Executive Officers of the Company
Incorporated by reference to sections entitled "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the 2002 Proxy
Statement.
ITEM 11. Executive Compensation
Incorporated by reference to sections entitled "Executive Compensation" and
"Performance Graph" of the 2001 Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to sections entitled "Who are the largest owners
of the Company's Stock?" and "How much stock do the Company's directors and
executive officers own?" of the 2002 Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
Incorporated by reference to section entitled "Certain Relationships and
Related Transactions" of the 2002 Proxy Statement.
24
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
Our following financial statements and the report of the independent
auditors are filed as part of this report:
(1) Index to Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of 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 below.
3.1 Certificate of Incorporation (Incorporated by reference to 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 to Exhibit 3.2 to
the Company's Form S-4, Registration No. 33-87028, as filed on December 2,
1994).
3.3 Amended Certificate of Designation establishing Series A 8% Convertible
Preferred 3.2 Stock (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K as filed on October 6, 2000).
3.4 Certificate of Designation establishing Series B 8% Convertible Preferred
Stock 3.3 (Incorporated by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K as filed on October 6, 2000).
3.5 Certificate of Designation establishing Series C Convertible Preferred
Stock. (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarter period ended September 30, 2000).
3.6 Certificate of Designation establishing Series E Preferred Stock
(Incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed
on August 22, 2001).
4.1 Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1
to the Company's Form S-4, Registration No. 33-87028, as filed on December
2, 1994).
25
4.2 Restated and Amended Stock Incentive Plan (Incorporated by reference as
Exhibit 4.1 to the Company's Form S-8, Registration No. 333-31207, as
filed on July 14, 1997).
4.3 Form of Restated and Amended Stock Incentive Plan, Stock Award
(Incorporated by reference to Exhibit 4.2 to the Company's Form S-8,
Registration No. 333-31207, as filed on July 14, 1997).
4.4 The Company's 401(k) Savings Plan (Incorporated by reference to Exhibit
4.1 to the Company's Form S-8, Registration No. 333-48987, as filed on
March 31, 1998).
4.5 1999 Amended Stock Incentive Plan (Incorporated by reference to Exhibit
4.1 to the Company's Form S-8, as filed on August 16, 2000).
4.6 The 2000 Stock Option Plan of CyberStorage Systems Corporation
(Incorporated by reference to Exhibit 4.2 to the Company's Form S-8,
Registration No. 333-69536, as filed on September 18, 2001).
4.7 Form of Common Stock Warrant associated with Series A Preferred Stock,
together with Schedule of Warrants (Incorporated by reference to Exhibit
4.6 to the Company's 2000 Form 10-K, as filed on April 16, 2001).
4.8 Common Stock Warrant associated with Series B Preferred Stock
(Incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q for
the period ended September 30, 2000).
4.9 Common Stock Warrant associated with Series C Preferred Stock
(Incorporated by reference to Exhibit 4.2 to the Company's Form 10-Q for
the period ended September 30, 2000).
4.10 Form of Common Stock Warrant issued to Citizens Financial Group, Inc.,
together with Schedule of Warrants (Incorporated by reference to Exhibit
4.9 of the Company's 2000 Form 10-K, as filed on April 16, 2001).
4.11 Common Stock Warrant associated with Series E Preferred Stock
(Incorporated by reference to Exhibit 4.2 to our Report on Form 8-K filed
August 22, 2001).
10.1 Promissory Note in the principal amount of $710,000 dated December 6, 1997
made Payable to Theodore J. Goodlander (Incorporated by reference to
Exhibit 10.2 of the Company's 1999 Form 10-K, as filed on April 14, 2000).
10.2 Lease Agreement between Kristiania Corporation and Storage Computer
Corporation dated December 1, 2000 (Incorporated by reference to Exhibit
10.10 of the Company's 2000 Form 10-K, as filed on April 13, 2001).
10.3 Executive Employment Agreement effective September 16, 2000 between John
Thonet and the Company (Incorporated by reference to Exhibit 10.13 of the
Company's 2000 Form 10-K, as filed on April 13, 2001).
21 Subsidiaries of the Company.
23 Consent of BDO Seidman, LLP.
24 Power of Attorney (Included in Signature page hereto).
26
(b) Reports on Form 8-K
1. December 18, 2001 - Other Events. The Company reported the
settlement of its litigation with XIOtech Corporation for a payment of
$2,500,000 and cross-license agreements between the parties.
27
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 12th day of April, 2002.
STORAGE COMPUTER CORPORATION
BY: /s/Theodore J. Goodlander
---------------------------------
Theodore J. Goodlander
Chairman of the Board of Directors, CEO
(Principal Executive Officer)
28
The undersigned directors and officers of Storage Computer Corporation
hereby severally constitute and appoint Theodore J. Goodlander and Peter N. Hood
as our true and lawful attorneys-in-fact and agent with full power of
substitution, and each of them acting alone to execute in our name and behalf
in the capacities indicated below any and all amendments to this annual report
to be filed with the Securities and Exchange Commission and hereby ratify and
confirm all that such attorney-in-fact and agent shall lawfully do or cause to
be done by virtue thereof.
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 12, 2002
- -------------------------- CEO (Principal Executive Officer)
Theodore J. Goodlander
/s/ Edward A. Gardner President and Director April 12, 2002
- --------------------------
Edward A. Gardner
/s/ John L. Thonet Chief Operating Officer and April 12, 2002
- -------------------------- Director
John L. Thonet
/s/ Peter N. Hood Treasurer and CFO (Principal April 12, 2002
- -------------------------- Accounting Officer)
Peter N. Hood
Director
- --------------------------
Steven Chen
/s/ Roger E. Gauld Director April 12, 2002
- --------------------------
Roger E. Gauld
/s/ Thomas A. Wooters Director April 12, 2002
- --------------------------
Thomas A. Wooters
29
STORAGE COMPUTER CORPORATION
- I N D E X -
Page
Number
------
Report of Independent Auditors F-1
Consolidated Balance Sheets at
December 31, 2001 and December 31, 2000 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2001, December 31, 2000 and December 31, 1999 F-3
Consolidated Statements of Stockholders'
Equity for the Years Ended December 31,
2001, December 31, 2000 and December 31, 1999 F-4
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2001,
December 31, 2000 and December 31, 1999 F-5
Notes to Consolidated Financial Statements F-6 to F-20
30
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Storage Computer Corporation
Nashua, New Hampshire 03062
We have audited the accompanying consolidated balance sheets of Storage
Computer Corporation and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
BDO Seidman, LLP
Boston, Massachusetts
February 27, 2002
F-1
STORAGE COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 5,627,855 $ 14,852,259
Accounts receivable, net (Note B)............................................ 1,644,366 847,829
Inventories (Note B)......................................................... 3,811,658 4,316,104
Due from officers and directors (Note D)..................................... 356,269 --
Other current assets......................................................... 799,530 399,302
------------ ------------
Total current assets..................................................... 12,239,678 20,415,494
Property and equipment, net (Note B)............................................ 828,817 1,141,299
Goodwill and other intangibles, net of accumulated amortization of $3,668,000 in
2001 and $836,000 in 2000 (Notes B and C)..................................... 20,246,817 23,317,443
Other assets.................................................................... 394,902 244,040
------------ ------------
Total assets............................................................. $ 33,710,214 $ 45,118,276
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 802,015 $ 896,049
Accrued expenses (Note B).................................................... 1,533,689 2,436,291
Deferred revenue............................................................. 492,987 492,028
Current maturities of long-term debt (Note E)................................ 285,254 263,863
------------ ------------
Total current liabilities................................................ 3,113,945 4,088,231
------------ ------------
Long-term debt, less current maturities (Note E)................................ 328,184 1,489,299
------------ ------------
Commitments and contingencies (Notes F, G and J)................................
Redeemable convertible preferred stock (Note K)................................. 3,725,015 12,556,661
------------ ------------
Stockholders' equity (Notes E, H and K):
Preferred stock, $.001 par value,
1,000,000 shares authorized; shares
outstanding: 15,600 in 2001 and 76,000 in 2000;
13,100 in 2001 and 76,000 in 2000 included
in redeemable convertible preferred stock.................................. 1,178,319 --
Common stock, $.001 par value,
25,000,000 shares authorized; shares
outstanding: 19,134,773 in 2001 and
15,041,882 in 2000......................................................... 19,135 15,042
Additional paid-in capital................................................... 76,001,699 57,792,635
Accumulated deficit.......................................................... (50,656,083) (30,823,592)
------------ ------------
Total stockholders' equity................................................... 26,543,070 26,984,085
------------ ------------
Total liabilities and stockholders' equity................................... $ 33,710,214 $ 45,118,276
============ ============
The accompanying notes are an integral part of the financial statements.
F-2
STORAGE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------
2001 2000 1999
------------ ------------ -----------
Revenues:
Products and services................................. $ 6,547,627 $ 6,505,628 $10,525,658
License fees (Note A)................................. 2,500,000 -- --
------------ ------------ -----------
Total revenues....................................... 9,047,627 6,505,628 10,525,658
------------ ------------ -----------
Costs and expenses:
Cost of products and services......................... 5,546,119 6,525,316 6,303,125
Cost of license fees, primarily legal fees (Note A)... 2,310,650 -- --
Research and development.............................. 4,335,237 1,496,382 1,980,988
Selling and marketing................................. 4,407,735 2,262,136 4,098,347
General and administrative............................ 3,110,418 2,315,463 2,357,254
Amortization of intangibles........................... 2,831,736 835,937 --
Restructuring costs (Note C).......................... -- 800,140 --
------------ ------------ -----------
Total costs and expenses............................. 22,541,895 14,235,374 14,739,714
------------ ------------ -----------
Operating loss.......................................... (13,494,268) (7,729,746) (4,214,056)
------------ ------------ -----------
Other income (expense):
Interest income (expense), net (Note E)............... 296,051 (283,167) (840,253)
Other income (expense)................................ (18,596) (147,000) 278,114
------------ ------------ -----------
Total other income (expense)......................... 277,455 (430,167) (562,139)
------------ ------------ -----------
Loss before income taxes (benefit)...................... (13,216,813) (8,159,913) (4,776,195)
------------ ------------ -----------
Provision (benefit) for income taxes (Note I):
Current taxes (benefit)............................... -- 34,852 (199,868)
Deferred taxes........................................ -- 1,781,331 --
------------ ------------ -----------
Total provision (benefit) for income taxes........... -- 1,816,183 (199,868)
------------ ------------ -----------
Net loss................................................ (13,216,813) (9,976,096) (4,576,327)
Dividends on preferred stock including
amortization of the beneficial conversion features.... (7,709,661) (10,075,074) --
------------ ------------ -----------
Loss applicable to common stockholders before cumulative
effect of change in accounting principle.............. (20,926,474) (20,051,170) (4,576,327)
Cumulative effect of change in accounting principle..... -- (809,364) --
------------ ------------ -----------
Net loss applicable to common stockholders.............. $(20,926,474) $(20,860,534) $(4,576,327)
============ ============ ===========
Loss applicable to common stockholders before cumulative
effect of change in accounting principle per basic and
dilutive share........................................ $ (1.32) $ (1.57) $ (0.40)
Net loss available to common stockholders
per basic and dilutive share.......................... $ (1.32) $ (1.64) $ (0.40)
Basic and dilutive shares............................... 15,891,223 12,756,088 11,376,082
The accompanying notes are an integral part of the financial statements.
F-3
STORAGE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
------------------- ------------------ Additional
Carrying Par Paid-In Accumulated
Shares Value Shares Value Capital Deficit
------ ----------- ---------- ------- ----------- ------------
Balance--December 31, 1998............. 11,347,840 $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............ 37,040 37 58,905
Net loss............................... (4,576,327)
---------- ------- ----------- ------------
Balance--December 31, 1999............. 11,434,880 11,435 13,968,263 (9,963,058)
Exercise of stock -options............. 632,019 632 1,071,851
Stock issued to 401(k) plan............ 4,619 5 38,686
Warrants issued in connection with
bank financing (Note E).............. 114,434
Warrants exercised (Note K)............ 132,000 132 1,143,316
Stock issued in note conversion
(Note E)............................... 132,500 132 264,868
Stock issued to acquire CyberStorage
Systems (Note C)....................... 2,200,000 2,200 22,437,800
Issuance of redeemable convertible
preferred stock with a beneficial
conversion feature of $12,253,900
and related warrants, net of issuance
costs of $1,175,500 (Note K)......... 17,514,774 (6,314,923)
Conversion of redeemable convertible
preferred shares into common
shares and related accrued
dividends paid in common shares
(Note K)............................. 505,864 506 1,238,643 (118,388)
Amortization of beneficial conversion
feature of preferred stock (Note K).. (4,052,794)
Dividends on preferred stock (Note K).. (398,333)
Net loss............................... (9,976,096)
---------- ------- ----------- ------------
Balance--December 31, 2000............. 15,041,882 15,042 57,792,635 (30,823,592)
Exercise of stock options.............. 63,611 64 89,400
Stock issued to 401(k) plan............ 11,768 12 63,297
Stock options issued in lieu of
compensation for services............ 1,086,973
Issuance of Series E convertible
preferred stock with a beneficial
conversion feature of $3,112,672
and related warrants, net of issuance
costs of $169,783 (Note K)........... 5,000 $ 2,026,217 5,916,672 (3,112,672)
Redemption of redeemable convertible
preferred stock...................... (1,093,983)
Conversion of convertible preferred
shares into common shares and
related accrued dividends paid in
common shares (Note K)............... (2,500) (1,095,714) 3,736,240 3,736 8,891,796
Amortization of beneficial conversion
feature of preferred stock (Note K).. 247,816 2,113,711 (2,361,527)
Dividends on preferred stock (Note K).. 281,272 281 1,141,198 (1,141,479)
Net loss............................... (13,216,813)
------ ----------- ---------- ------- ----------- ------------
Balance--December 31, 2001............. 2,500 $ 1,178,319 19,134,773 $19,135 $76,001,699 $(50,656,083)
====== =========== ========== ======= =========== ============
The accompanying notes are an integral part of the financial statements.
F-4
STORAGE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE K)
Year Ended December 31,
2001 2000 1999
------------ ------------ -----------
Cash flows from operating activities:
Net loss....................................................... $(13,216,813) $ (9,976,096) $(4,576,327)
Reconciliation to operating cash flows:
Depreciation and amortization of property and
equipment.................................................. 544,856 460,129 488,883
Amortization of goodwill and other intangibles............... 2,831,736 835,937 --
Warrants issued for banking fees............................. -- 114,434 111,387
Stock issued to 401(k) plan.................................. 63,309 38,691 58,942
Provision for restructuring costs............................ 1,000,000 3,744,727 --
Deferred tax provision....................................... -- 1,781,331 --
Non-cash compensation for services........................... 1,086,973 -- --
Changes in operating assets and liabilities, net of effects of
CyberStorage Systems acquisition:
Accounts receivable.......................................... (796,537) 435,958 4,436,274
Income tax refund receivable................................. -- -- 2,151,677
Inventories.................................................. (473,231) 246,237 1,942,850
Due from officers and directors.............................. (1,126,178) -- --
Other assets................................................. (400,228) 462,061 (26,864)
Accounts payable and accrued expenses........................ (1,017,576) (585,306) (1,996,304)
------------ ------------ -----------
Net cash provided by (used in) operations.................... (11,503,689) (2,441,897) 2,590,518
------------ ------------ -----------
Cash flows from investing activities:
Capital expenditures........................................... (232,375) (125,757) (4,882)
Other assets....