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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 1-13616
STORAGE COMPUTER CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0450593
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11 RIVERSIDE DRIVE NASHUA, NH 03062
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(603) 880-3005
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
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 [_]
Number of shares outstanding of the registrant's class of common stock, as
of the latest practicable date.
OUTSTANDING AT
CLASS APRIL 30, 2001
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Common Stock............. 15,746,181
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited). Page
Consolidated Balance Sheets -- March 31, 2001 3
and December 31, 2000.
Statements of Consolidated Operations - Three months 4
ended March 31, 2001 and 2000.
Statements of Consolidated Cash Flows - Three months 5
ended March 31, 2001 and 2000.
Notes to Consolidated Financial Statements - March 31, 2001. 6
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities and Use of Proceeds. 16
Item 3. Defaults Upon Senior Securities. 16
Item 4. Other Information. 16
Item 5. Exhibits and Reports on Form 8-K. 16
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Storage Computer Corporation
Consolidated Balance Sheets
MARCH 31, DECEMBER 31,
2001 2000
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 12,238,133 $ 14,852,259
Accounts receivable, net 1,718,335 847,829
Inventories 4,232,375 4,316,104
Other current assets 285,803 399,302
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Total current assets 18,474,646 20,415,494
Property and equipment, net 1,041,915 1,141,299
Goodwill and other intangibles, net 22,604,498 23,317,443
Other assets 121,382 244,040
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Total assets $ 42,242,441 $ 45,118,276
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,101,487 $ 896,049
Accrued expenses 1,878,005 2,436,291
Deferred revenue 522,950 492,028
Current maturities of long-term debt 267,364 263,863
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Total current liabilities 3,769,806 4,088,231
Long-term debt, less current maturities 1,420,575 1,489,299
Commitments and contingencies
Redeemable convertible preferred stock 12,812,938 12,556,661
Shareholders' equity:
Preferred stock -- --
Common stock 15,714 15,042
Additional paid-in capital 59,054,999 57,792,635
Accumulated deficit (34,831,591) (30,823,592)
------------ ------------
Total shareholders' equity 24,239,122 26,984,085
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Total liabilities and shareholders' equity $ 42,242,441 $ 45,118,276
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See Notes to Consolidated Financial Statements.
Storage Computer Corporation
Statements of Consolidated Operations (Unaudited)
Three Months Ended
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MARCH 31, MARCH 31,
2001 2000
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Revenue $ 2,059,362 $ 2,094,998
Product Cost 1,362,564 902,882
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Gross margin 696,798 1,192,116
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Operating expenses:
Research and development 1,267,129 384,371
Sales and marketing 657,884 529,570
General and administrative 699,772 363,673
Amortization of intangibles 713,930 --
----------- -----------
Total operating expenses 3,338,715 1,277,614
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Operating loss (2,641,917) (85,498)
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Other income (expense):
Interest income (expense), net 111,078 (168,920)
Other income 115,310 103,390
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Total 226,388 (65,530)
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Loss before income taxes (2,415,529) (151,028)
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Provision for income taxes:
Current taxes 3,103 --
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Total 3,103 --
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Net loss (2,418,632) (151,028)
Dividends on preferred stock including
amortization of the beneficial conversion (1,589,367) --
features ----------- -----------
Net loss applicable to common shareholders $(4,007,999) $ (151,028)
=========== ===========
Net loss applicable to common shareholders per
basic and dilutive share $(0.26) $(0.01)
=========== ===========
Basic and dilutive shares 15,427,876 11,589,176
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See Notes to Consolidated Financial Statements.
Storage Computer Corporation
Statements of Consolidated Cash Flows (Unaudited)
Three Months Ended
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MARCH 31, MARCH 31,
2001 2000
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Cash flows from operating activities:
Net loss $(2,418,632) $ (151,028)
Reconciliation to operating cash flows:
Depreciation and amortization of property
and equipment 127,290 172,624
Amortization of goodwill and other intangibles 713,930 --
Stock issued to 401(k) plan 6,561 9,717
Changes in operating assets and liabilities:
Accounts receivable (870,506) (423,804)
Inventories 109,630 204,822
Other assets 113,499 396,950
Accounts payable and accrued expenses (404,260) (301,327)
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Net cash used in operations (2,622,488) (92,046)
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Cash flows from investing activities:
Capital expenditures (27,911) --
Other assets 122,658 --
CyberStorage acquisition costs (985) --
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Net cash provided by investing activities 93,762 --
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Cash flows from financing activities:
Net payments on credit line -- (261,840)
Reduction of long-term debt (65,223) --
Net proceeds from issuance of common stock
for stock options 5,724 711,338
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Net cash provided by (used in) financing activities (59,499) 449,498
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Effect of exchange rate changes on cash (25,901) 23,415
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Net increase (decrease) in cash and cash equivalents (2,614,126) 380,867
Cash and cash equivalents-beginning of period 14,852,259 1,182,194
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Cash and cash equivalents-end of period 12,238,133 1,563,061
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Supplemental cash flow information:
Cash payments of interest $ 38,538 $ 157,469
Cash payments of income taxes -- --
See Notes to Consolidated Financial Statements.
Storage Computer Corporation
Notes to Consolidated Financial Statements
March 31, 2001
Note A - The Company and Basis of Presentation
Storage Computer Corporation ("Company", "we" and "us") and our subsidiaries are
engaged in the development, manufacture, and sale of computer disk arrays and
computer equipment worldwide. The consolidated financial statements include the
accounts of the Company and those of our wholly-owned subsidiaries CyberStorage
Systems Corporation, Storage Computer Europe GmbH, Vermont Research Products,
Inc., Storage Computer UK, Ltd., and Storage Computer France S.A. All
significant intercompany accounts and transactions have been eliminated in
consolidation. We have a 20% investment in Storage Computer (Asia) Ltd. which
is accounted for by the equity method.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements and related notes included in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission, containing our financial statements
for the fiscal year ended December 31, 2000. In our opinion, the accompanying
financial statements reflect all adjustments, all of which are of a normal,
recurring nature, to fairly present our consolidated financial position, results
of operations and cash flows. The results of operations for the three months
ended March 31, 2001 are not necessarily indicative of the results to be
expected for the full year.
Certain 2000 amounts have been reclassified to conform with the current period
presentation.
Note B - Stockholders' Equity
A summary of changes in stockholders' equity in the quarters ended March 31,
2001 and 2000 follows:
Common Stock
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Additional Retained
Par Paid-In Earnings
Shares Value Capital (Deficit)
----------- -------- ----------- -----------
Balance--December 31, 1999 11,434,880 $ 11,435 $13,968,263 $ (9,963,058)
Exercise of stock options 405,880 406 710,932
Stock issued to 401 (k) plan 2,355 2 9,715
Net loss (151,028)
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Balance--March 31, 2000 11,843,115 $ 11,843 $14,688,910 $(10,114,086)
=========== ======== =========== ============
Balance--December 31, 2000 15,041,882 $ 15,042 $57,792,635 $(30,823,592)
Exercise of stock options 1,933 2 5,731
Stock issued to 401(k) plan 986 1 6,560
Conversion of redeemable
convertible preferred
shares into common shares
and related accrued dividends
paid in common shares 611,023 611 1,011,797
Amortization of beneficial
conversion feature of
preferred stock (1,256,276)
Dividends on preferred stock 58,077 58 238,276 (333,091)
Net loss (2,418,632)
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Balance-March 31, 2001 15,713,901 $ 15,714 $59,054,999 $(34,831,591)
=========== ======== =========== ============
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
CAUTIONARY STATEMENT
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 US 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 factors affecting the liquidity,
capital resources and result of all operations for the periods ended March 31,
2001 and 2000. The discussion should be read in connection with the Consolidated
Financial Statements and other financial information included in our 2000 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Operations used $2,623,000 of cash during the first quarter of 2001 compared to
$92,000 in the first quarter 2000.
The use of cash by operations in the first quarter 2001 resulted from the net
loss for the quarter and net cash from changes in operating assets and
liabilities, which were offset in part by non cash charges relating to
depreciation and amortization of $841,000. The cash used by operations in the
first quarter of 2000 resulted primarily from the net loss for the quarter and
net cash use from changes in operating assets and liabilities offset in part by
non cash changes relating to depreciation and amortization of $173,000.
Investing activities generated positive cash flow of $94,000 in the first
quarter of 2001 from other assets partially offset by capital expenditures.
Financing activities used $59,000 of cash in the first quarter 2001; and
generated $449,000 in the first quarter 2000. Cash flows in both quarters
related primarily to borrowing activity and the proceeds of the sale of common
stock through the exercise of options and warrants.
BORROWING ARRANGEMENTS
We currently have no outstanding bank loans, lines of credit, or credit
facilities. We previously had a revolving credit facility that we terminated and
repaid in August 2000.
WORKING CAPITAL
Our working capital at March 31, 2001 was $14,705,000 compared with $16,327,000
at December 31, 2000. In management's opinion, our current working capital
position and cash from operations, will be sufficient to accommodate working
capital requirements through the fiscal year ending December 31, 2001.
EQUITY FINANCING
During 2000, we successfully raised over $22 million from several investors
through the sale of 112,000 shares of Series A, Series B and Series C Preferred
Stock and related warrants. These sales to investors have significantly
improved our cash liquidity and working capital position.
RESULTS OF OPERATIONS
Our operating results have fluctuated in the past and may in the future
fluctuate significantly, depending upon a variety of factors. During 2000 we
undertook the following actions to facilitate our focus towards revenue growth:
appointed a new President, a new Chief Financial Officer and a new Chief
Operating Officer who is responsible for sales and marketing and, after the
acquisition of CyberStorage Systems Corporation, commenced a restructuring,
including the expansion of North America territories from three designated
regions to five regions, the initiation of the plan to re-establish the re-
seller sales channel, and consolidation of the European sales, marketing and
service organizations; implemented strategic marketing programs and product
development and repositioning. We believe these actions and the recruitment of
sales and marketing management, and staff, which was substantially completed in
the first quarter of 2001, will provide revenue growth that will enable us to
return to profitability. Additional factors that may contribute to variability
of operating results include: the pricing and mix of products offered by us;
changes in pricing of our products and services due to competitive pressures;
our ability to obtain sufficient supplies of sole or limited source components;
the ability to manage future growth and expansion; the continual development of
new products; the ability to successfully identify, target, acquire and
integrate suitable acquisition candidates; and charges related to financing and
acquisitions.
REVENUE
Revenue for the three-month period ended March 31, 2001 was $2,059,362 compared
to revenue of $2,094,998 in the corresponding period of 2000. First quarter
revenue was impacted by both lower international and domestic sales due to the
factors described above. For the three-month period ended March 31, 2001, U.S.
domestic product sales and international product sales were 73% and 27%
respectively of total revenue. In the 2000 period such percentages were 54% and
46% respectively.
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 which occur through our
subsidiaries located in England, Germany and France are conducted in the local
currency.
PRODUCT COST
Product cost for the three month periods ended March 31, 2001 and 2000 were
$1,362,564 and $902,882, respectively, or 66% and 43% of revenue. The increase
in product cost percentage between 2000 and 2001 of approximately 23% was the
result of increased factory overheads, higher technical service expenditures on
lower sales volume, lower revenue product mix and less orders for enterprise
type storage software that have a lower product cost as compared to products
which have a higher cost for component parts.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three month periods ended March 31,
2001 and 2000 were $1,267,129 and $384,371, respectively, or approximately 62%
and 18% of revenue in each period. The $882,758 increase in expenditures between
the three month periods ended March 31, 2000 and 2001 was a direct result of
increased research and product development personnel and an increase in the
utilization of independent software engineers for short term assignments.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the three month periods ended March 31, 2001
and 2000 were $657,884 and $529,570, respectively, or 32% versus 25% of revenue
in the prior period. The increase in expenses between the three month periods
ended March 31, 2001 and the comparable period of 2000 of $128,314, was
principally due to the increased head count in corporate marketing and field
sales organizations.
GENERAL AND ADMINSTRATIVE EXPENSES
General and administrative expenses for the three month periods ended March 31,
2001 and 2000 were $699,772 and $363,673, respectively, or 34% and 17% of
revenue. The increase in general and administrative expenses between the three
month periods ended March 31, 2000 and 2001 of $336,099 resulted primarily from
increases in personnel due to the CyberStorage acquisition.
INTEREST EXPENSE
The interest income (expense), net was $111,078 and $(168,920) for the three
month periods ended March 31, 2001 and March 31, 2000, respectively. The change
is directly related to reduced borrowing by us as compared to the previous
year's similar period and the dramatic increase in cash and cash equivalents.
NET LOSS
We incurred a net loss for the three month period ended March 31, 2001 of
$2,418,632 compared to $151,028 for the three month period ended March 31, 2000.
The $2,267,604 increase in the net loss was directly attributable to our
increased headcount in sales, marketing, and research and development personnel
and costs relative to the lower revenues while we re-establish our sales
channels. We also incurred non-cash charges for amortization of intangibles of
$714,000 during the three months ended March 31, 2001, in connection with the
acquisition of CyberStorage Systems Corporation in 2000. We are heavily
committed in the near term to rebuilding our sales force and increasing our
revenue base, which will require near term expenses for marketing costs. This
will negatively affect our short term operating results.
FOREIGN CURRENCY TRANSACTIONS
We do not currently utilize any derivative products to hedge our minimal foreign
currency risk. Our foreign subsidiaries' obligations to us are denominated in
U.S. dollars. There is a potential for a foreign currency gain or loss based
upon fluctuations between the U.S. dollar and its subsidiaries' functional
currencies, currently German, British, and French. This exposure is limited to
the period between the time of accrual of such liability to us in our
subsidiaries' functional currency and the time of their payment to us in U.S.
dollars.
Other than the intercompany balances noted above, we do not believe we have
material unhedged monetary assets, liabilities or commitments that are
denominated in a currency other than the operations' functional currencies. We
expect such exposure to continue until our 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.
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
In addition, our stock price may be affected by general market conditions and
domestic and international economic factors unrelated to our performance.
Further, until recently, our common
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, there
can be no assurance 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, there can be no assurance 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, there can
be no assurance that we will be able to obtain licenses to any technology that
it may require to conduct its business or that, if obtainable, such technology
can be licensed at a reasonable cost.
We are aggressively pursuing the enforcement of our intellectual property rights
after an extensive patent review conducted in 1999. During the first quarter in
2000, we retained a major law firm to enforce these rights against infringing
parties, which we believe to be extensive. During the first quarter in 2001, we
filed lawsuits against Hitachi Data Systems Ltd. in the United Kingdom and
Seagate Technologies, Inc. in Federal District Court in Texas, regarding their
alleged infringement of our patents. Despite our efforts and those of our legal
representatives, 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 our
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. There can be no assurance 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 us. 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.
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), network attached storage (NAS) 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 and StorageSuite products are
advanced when compared to competitive products, and compliment many other
products utilized in total customer solutions, there can be no assurance that
this will continue in the future. The failure to remain consistently ahead of
competitive technologies would have a negative impact on our operating results
and financial condition.
BUSINESS ALLIANCES
Many companies have formed 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 their 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. There can be no assurance 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, there can be no
assurance that key employees will not leave our employment in the future. The
failure to maintain key employees could adversely affect our operating and
financial results in the future.
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,
there can be no assurances that additional investors' capital 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 their 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 its 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, there can be no assurance 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 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial instruments relates primarily in
fluctuations in the prime rate of interest to be charged to us under the terms
of a promissory note to one of our senior executive officers. We do not use
derivative products or have any material unhedged monetary assets, except for
the inter-company balances outstanding, which are detailed above in Item 2
"Foreign Currency Transactions."
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During March 2001 we filed legal actions against Hitachi Data Systems Ltd. in
the United Kingdom for infringement of one of the patents in our intellectual
property rights portfolio. Additionally, we filed an action against XIOTech
Corporation and its parent company, Seagate Technology Inc., in the Federal
District Court for the Northern District of Texas claiming that one of their
products infringe one of our patents. Our involvement in both of these
proceedings can not possibly be predicted as to any recovery or length of time
required to recover our damages, but we intend to vigorously pursue our claims
against manufacturers whose products we believe infringe on our patents.
We are involved in several other minor legal claims in our ordinary course of
business. While we believe that our involvement in these claims will have no
material effect our operations or financial condition, we cannot predict what
our continuing involvement in, any judicial decision rendered, or the resolution
of the set of claims will have upon our business, operating results, or
financial condition.
Item 2. Changes in Securities and Use of Proceeds.
During the quarter ended March 31, 2001, Series A Preferred Stockholders
converted 15,000 shares of Series A Preferred stock and accrued dividends into
375,717 shares of our common stock and Series B Preferred Stockholders converted
10,000 shares of Series B Preferred stock and accrued dividends into 235,306
shares of our common stock. No cash was received as a result of these
conversions.
Item 3. Defaults Upon Senior Securities.
There has not been any material default in the payment of principal, interest,
or any other material default not cured within 30 days with respect to any of
our indebtedness and our subsidiaries during the three month period ended March
31, 2001.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the three
month period ended March 31, 2001.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
None
B. Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
STORAGE COMPUTER CORPORATION
----------------------------
Registrant
/s/ PETER N. HOOD
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Peter N. Hood
Chief Financial Officer
Date: May 3, 2001