CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 0-21600
STORAGE ENGINE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2288911
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Sheila Drive, Tinton Falls, New Jersey 07724
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(Address of Principal Executive Offices) (Zip Code)
(732) 747-6995
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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:
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of July 31, 2002.
Class Number of Shares
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Common Stock, $0.01 par value 2,581,377
STORAGE ENGINE, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION 1
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Item 1. Financial Statements........................................1
Consolidated Balance Sheets as of December 31, 2001
and June 30, 2002 (unaudited)........................................2
Consolidated Statements of Operations (unaudited) for the three
months ended June 30, 2001 and June 30, 2002 and for
the six months ended June 30, 2001 and June 30, 2002.................3
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 2001 and June 30, 2002.....................4
Notes to Consolidated Financial Statements (unaudited)...............5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...........10
Overview............................................................10
Results of Operations...............................................11
Liquidity and Capital Resources.....................................15
PART II. OTHER INFORMATION...................................................18
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Item 1. Legal Proceedings..........................................18
Item 2. Changes in Securities and Use of Proceeds..................18
Item 4. Submission of Matters to a Vote of Security Holders........19
Item 6. Exhibits and Reports on Form 8-K...........................20
SIGNATURES...................................................................21
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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STORAGE ENGINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except Per Share Amount)
December 31, June 30,
2001 2002
------------ ------------
(unaudited)
Assets
Current Assets:
Cash and cash equivalents............................................ $ 3,146 $ 1,905
Accounts receivable, less allowance for doubtful accounts of
$20 and $144 at December 31, 2001 and June 30, 2002,
respectively........................................................ 961 1,269
Inventories.......................................................... 2,896 2,732
Prepaid expenses and other receivables............................... 111 174
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7,114 6,080
Property, plant and equipment (net)..................................... 922 671
Other assets............................................................ 41 41
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Total Assets.................................................. $ 8,077 $ 6,792
========== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Loan payable......................................................... $ 66 $ 261
Current portion of capital lease obligations......................... 58 29
Accounts payable..................................................... 245 594
Accrued expenses and other........................................... 683 844
Warranty............................................................. 387 197
Customer deposits, advances and other credits........................ 142 134
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1,581 2,059
Capital lease obligations, net of current portions...................... 30 23
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1,611 2,082
6% cumulative convertible redeemable preferred stock Series
A, $0.01 par value per share, issued and outstanding, 1,823,125
shares and 1,878,262 shares at December 31, 2001 and June 30,
2002, respectively, and 96,367 issuable at December 31, 2001........... 3,839 3,756
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Shareholders' Equity:
Common stock, $0.01 par value per share, authorized,
8,333,333 shares; issued and outstanding, 2,488,637 shares
and 2,581,377 shares at December 31, 2001 and June 30,
2002, respectively................................................... 25 26
Capital in excess of par value....................................... 31,287 31,429
Accumulated deficit.................................................. (28,685) (30,501)
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Total shareholders' equity.......................................... 2,627 954
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Total Liabilities and Shareholders' Equity....................... $ 8,077 $ 6,792
========== ========
See notes to consolidated financial statements.
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STORAGE ENGINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
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2001 2002 2001 2002
---- ---- ---- ----
Product sales.......................... $ 2,301 $1,165 $ 6,270 $ 2,086
Service sales.......................... 275 254 513 490
------- ------ ------- ------
Net sales.............................. 2,576 1,419 6,783 2,576
------- ------ ------- ------
Cost of sales:
Product.............................. 1,428 764 3,720 1,400
Service.............................. 125 123 247 213
------- ------ ------- ------
Total cost of sales.................... 1,553 887 3,967 1,613
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Gross profit......................... 1,023 532 2,816 963
------- ------ ------- ------
Operating expenses:
Selling, general & administrative.... 1,444 1,159 2,953 2,362
Research & development............... 305 170 839 381
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1,749 1,329 3,792 2,743
------- ------ ------- ------
Operating loss......................... (726) (797) (976) (1,780)
Net gain on sale of SANStar.......... - - - - 284 - -
Net interest, income (expense)....... 23 (5) 31 (1)
------- ------ ------- ------
Loss before income tax benefit......... (703) (802) (661) (1,781)
Income tax benefit................... - - 23 - - 23
------- ------ ------- ------
Net loss............................... (703) (779) (661) (1,758)
Preferred stock dividends (including
beneficial conversion feature of $1,728
and $4,209 for the three months and six
months ended June 30, 2001)........... 1,789 57 4,281 112
------- ------ ------- ------
Net loss applicable to common shares... $ (2,492) $ (836) $ (4,942) $ (1,870)
======== ========== ========= =========
Loss per common share:
Net loss per common share -
basic and diluted.................... $ (1.29) $ (0.33) $ (2.56) $ (0.74)
======== ========== ========= =========
Weighted average number of common
shares outstanding basic and
diluted............................... 1,927 2,559 1,927 2,536
======== ========= ========= =========
See notes to consolidated financial statements.
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STORAGE ENGINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Six Months Ended June 30,
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2001 2002
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Cash flows from operating activities:
Net loss................................................................ $ (661) $ (1,758)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization......................................... 623 308
Net gain on sale of SANStar........................................... (284) - -
Increase in accounts receivable....................................... (1,228) (308)
Decrease in inventories............................................... 927 164
Decrease (increase) in prepaid expenses and other receivables
and other assets................................................. 29 (63)
(Decrease) increase in accounts payable, accrued expenses, and other
liabilities...................................................... (2,230) 320
Decrease in unearned revenue.......................................... (22) (8)
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Net cash used in operating activities...................................... (2,846) (1,345)
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Cash flows from investing activities:
Additions to property, plant and equipment.............................. (78) (57)
Gross proceeds from the sale of SANStar................................. 580 - -
-------- -------
Net cash provided by (used in) investing activities........................ 502 (57)
-------- -------
Cash flows from financing activities:
Borrowings under revolving credit agreement............................. 3,699 2,364
Repayments under revolving credit agreement............................. (3,860) (2,169)
Repayment to Finova Capital............................................. (115) - -
Repayment of long term debt, capital lease obligations.................. (68) (36)
Net proceeds from exercise of employee stock options and issuance of
common stock......................................................... 25 2
Net proceeds from sale of Series A preferred stock......................... 3,760 - -
-------- -------
Net cash provided by financing activities.................................. 3,441 161
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Net increase (decrease) in cash and cash equivalents....................... 1,097 (1,241)
Cash and cash equivalents at beginning of period........................... 2,221 3,146
-------- -------
Cash and cash equivalents at end of period................................. $ 3,318 $ 1,905
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.............................................................. $ 26 $ 5
======== =======
See notes to consolidated financial statements.
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STORAGE ENGINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 2001 and June 30, 2002 is unaudited)
(Dollars in Thousands except Per Share Information)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements at June 30, 2002, and
for the three month and six month periods ended June 30, 2001 and 2002, are
unaudited, but, in the opinion of the management of Storage Engine, Inc. ("SEI"
or the "Company"), contain all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for a fair presentation. The
consolidated financial statements included herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the Company's audited financial statements for the
year ended December 31, 2001 which were included as part of the Company's Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission.
Results for the interim period ended June 30, 2002 are not necessarily
indicative of results that may be expected for the year ending December 31,
2002.
Note 2 - Summary of Significant Accounting Policies
(a) Business
Storage Engine, Inc. is an innovative supplier of fault-tolerant solutions
that store, protect and manage and replicate data in complex networks with
greater ease and superior cost savings. The Company's Synchronism(TM) product
line, as well as its Synchronix(TM) product line and Raven(TM) systems, are all
modular units that can be configured and stacked to meet customers' specific and
expanding data storage requirements. SEI also provides document imaging
solutions and services. SEI is ISO-9001 certified and sells its products through
its direct sales force and a network of qualified systems integrators.
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STORAGE ENGINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 2001 and June 30, 2002 is unaudited)
(Dollars in Thousands except Per Share Information)
(b) Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Inventories consist of the following:
December 31, June 30,
2001 2002
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(unaudited)
Purchased parts............................... $ 1,380 $ 258
Finished goods................................ 3,439 3,638
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$ 4,819 $ 3,896
Less: inventory valuation reserve.... 1,923 1,164
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$ 2,896 $ 2,732
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(c) Revenue Recognition
In general, revenue is recognized upon shipment or installation of the
product or system or as services are provided. Revenues related to maintenance
contracts are recognized over the respective terms of the maintenance contracts.
Revenue for certain major product enhancements and major new product offerings,
for which the Company believes that significant product development risks may
exist which can realistically only be addressed during live beta testing at
end-user sites, is not recognized until successful completion of such end-user
beta testing.
(d) Per Share Information
Basic per share data is computed by dividing net income or loss adjusted
for preferred stock dividends by the weighted average number of common shares
outstanding. For the three and six month periods ended June 30, 2001 and June
30, 2002, diluted loss per share does not include the effects of options,
warrants and 6% cumulative convertible redeemable preferred stock as they are
anti-dilutive. For the six months ended June 30, 2001 and 2002, the weighted
average number of common shares would have increased by an aggregate of
3,331,450 shares and 4,074,014 shares, respectively.
Note 3 - Legal Proceedings
The Company is from time to time, subject to claims and suits arising in
the ordinary course of business. In the opinion of management of the Company,
the ultimate resolution of these matters will not have a materially adverse
effect on the Company's financial position.
Note 4 - Preferred Stock
The Company has an authorized class of 3,000,000 shares of Preferred Stock
which may be issued by the Board of Directors on such terms and with such
rights, preferences and
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STORAGE ENGINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 2001 and June 30, 2002 is unaudited)
(Dollars in Thousands except Per Share Information)
designations as the Board may determine. During 2001, the Company designated
2,231,250 shares of its Preferred Stock as 6% Cumulative Convertible Redeemable
Preferred Stock, Series A, $.01 par value per share (the "Series A Preferred
Stock"), of which 1,878,262 shares are outstanding at June 30, 2002. On April
26, 2002, the Board declared a dividend covering the period of December 15, 2001
through March 15, 2002 on the Series A Preferred Stock of approximately $57
which was paid by issuance of approximately 28,561 shares of Series A Preferred
Stock. During the six months ended June 30, 2002, $139 of Series A Preferred
Stock, or 69,791 shares were converted into 91,564 shares of the Company's
Common Stock.
Each share of Series A Preferred Stock was initially convertible, at the
option of its holder, at any time after issuance, into eight shares of Common
Stock. As a result of the one-for-six reverse stock split of the Company's
Common Stock, effective July 20, 2001, each share of Series A Preferred Stock is
currently convertible into one and one-third (1 1/3) shares of the Company's
Common Stock. The conversion ratio is subject to adjustments under certain
conditions. The Series A Preferred Stock is automatically convertible upon the
consummation of the Company's sale of Common Stock in a public offering that
meets certain terms. The holders of Series A Preferred Stock are entitled to
vote on all matters that the holders of the Company's Common Stock are entitled
to vote upon, on an as-converted to Common Stock basis. In addition, the vote of
66 2/3% of the holders of Series A Preferred Stock is required in certain
circumstances. The Series A Preferred Stock ranks senior to the Common Stock
with respect to dividends and upon liquidation, dissolution, winding up or
otherwise. The holders of the outstanding shares of Series A Preferred Stock are
entitled to receive, out of funds legally available for the payment of
dividends, quarter-annual dividends. Each quarter-annual dividend is computed by
dividing the annual dividend rate of $0.12 per share by four and is payable in
cash or, at the option of the Company, in shares of Series A Preferred Stock.
Series A Preferred Stock dividends are cumulative, whether or not declared, and
are compounded at an annual rate of 6% on the unpaid cumulative balance. No
dividends may be paid or declared upon junior securities, including Common
Stock, unless full cumulative dividends on all outstanding shares of Series A
Preferred Stock are paid or have been set apart. Dividends may be declared on
parity securities, only if dividends are also declared on the Series A Preferred
Stock ratably in proportion to accumulated and unpaid dividends.
The Series A Preferred Stock is subject to mandatory redemption by the
Company four years after its issuance. The Series A Preferred Stock may also be
redeemed at the option of the Company or the holder under certain conditions.
Subject to certain conditions, holders of Series A Preferred Stock have a right
of first offer with respect to the issuance of any new securities which would
reduce such holder's holdings by 10% or more. In addition, the Company granted
certain shelf registration rights with respect to the shares of the Company's
Common Stock underlying the Series A Preferred Stock. Subject to certain
conditions, the Company is obligated to pay certain damages if there is a
default in its obligation to register the securities.
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STORAGE ENGINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 2001 and June 30, 2002 is unaudited)
(Dollars in Thousands except Per Share Information)
Note 5 - Transaction With Significant Customers
Sales to the Company's commercial customers of $216 decreased by
approximately $1,621, or 88.2%, in the three months ended June 30, 2002 as
compared to net sales in the three months ended June 30, 2001. Such sales
accounted for approximately 71.3% and 15.2% of net sales for the three-month
period ended June 30, 2001 and June 30, 2002, respectively. One customer
accounted for 44.0% of total net sales in the three months ended June 30, 2001.
Sales to the Company's commercial customers of $1,230 decreased by
approximately $2,017, or 62.1%, in the six months ended June 30, 2002 as
compared to total net sales in the six months ended June 30, 2001. Such sales
accounted for approximately 47.9% and 47.7% of total net sales in the six months
ended June 30, 2001 and June 30, 2002, respectively. One customer accounted for
20.9% and 12.4% of total net sales in the six months ended June 30, 2001 and
June 30, 2002, respectively.
Prior to the three months ended June 30, 2002, the Company's SEISYS Group
had no sales. Sales relating to the Company's SEISYS Group products and services
were $421 in the three months ended June 30, 2002. One customer accounted for
all of such revenue for the three and six months ended June 30, 2002. Such
revenue represented 29.7% and 16.3% of the total net sales in the quarter and
six months ended June 30, 2002, respectively.
Sales to the U.S. Air Force through Federal integrators increased by
approximately $9, or 1.0%, in the three months ended June 30, 2002 as compared
to net sales in the three months ended June 30, 2001. Such sales accounted for
approximately 26.5% and 48.7% of total net sales in the quarters ended June 30,
2001 and 2002, respectively.
Sales to the U.S. Air Force through Federal integrators decreased by
approximately $2,649, or 76.9%, in the six months ended June 30, 2002 as
compared to net sales in the six months ended June 30, 2001. Such sales
accounted for approximately 50.8% and 30.9% of total net sales in the six months
ended June 30, 2001 and June 30, 2002, respectively.
Note 6 - Factoring Facility
The Company entered into a full recourse factoring facility with Bank of
America ("BOA") which provides for aggregate advances not to exceed the lesser
of $7 million or up to 85.0% of Eligible Receivables (as defined). Interest on
such advances is payable monthly in arrears at the prime lending rate and the
Company is obligated to pay certain annual fees. The factoring facility has been
extended for a period of three years (unless terminated by BOA by providing the
Company sixty days prior written notice) beginning on July 30, 2000, and from
year to year thereafter until terminated. On January 1, 2001, GMAC Commercial
Credit LLC ("GMAC") purchased substantially all of the factoring assets of Bank
of America Commercial Corporation. The obligations of the Company under such
facility are collateralized by substantially all of the assets of the Company.
The Company's facility with GMAC restricts the
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STORAGE ENGINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 2001 and June 30, 2002 is unaudited)
(Dollars in Thousands except Per Share Information)
Company's ability to pay certain dividends without GMAC's prior written consent.
In December 2001, GMAC modified the agreement to allow the Company to pay
dividends with respect to the Series A Preferred Stock in the form of shares of
Series A Preferred Stock. The Company has certain covenants with GMAC, all of
which are in compliance as of June 30, 2002. As of June 30, 2002, the Company
had an outstanding balance of $261 under this full recourse factoring facility.
Note 7 - Nasdaq Notifications
On March 1, 2002, the Company received notification from Nasdaq that the
Company's Common Stock had closed below the minimum $1.00 per share requirement
for the previous 30 consecutive trading days as required under Marketplace Rule
4310(c)(4). The Company was provided with 180 calendar days, or until August 28,
2002, to regain compliance by having the bid price for its Common Stock close at
$1.00 or greater for a minimum period of 10 consecutive trading days. On April
17, 2002, the Company was notified by Nasdaq that it had regained compliance
with Marketplace Rule 4310(c)(4).
On May 23, 2002, the Company received notification from Nasdaq that due to
the Company's tangible net assets and stockholders' equity, market
capitalization, and net losses reported December 31, 2001, 2000 and 1999, the
Company did not comply with Marketplace Rule 4310(c)(2)(B). The Nasdaq SmallCap
Staff requested specific documentation for their review. The Company complied
with the request with the first of several submissions made on June 6, 2002. The
Company has requested additional time to remedy the failure to meet Nasdaq
tangible net assets and stockholders' equity qualifications.
Note 8 - Subsequent Events
On July 12, 2002, the Company entered into an agreement with a third party
to sell certain patent and intellectual property rights for the sum of one
million dollars. The original cost of obtaining such patents and intellectual
property were appropriately expensed when incurred. In addition, we were granted
a non-exclusive, royalty free, fully-paid, perpetual worldwide license to the
use of such patents and intellectual property.
On July 25, 2002, the Board of Directors declared a dividend covering the
period of March 16, 2002 through June 15, 2002 on the Series A Preferred Stock
of approximately $57 which was paid by issuance of 28,416 shares of Series A
Preferred Stock. In addition, approximately $10 in dividends remained in arrears
as of June 30, 2002.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
Storage Engine, Inc. is a provider of innovative, high-availability and
fault-tolerant solutions for the enterprise-storage marketplace. We design,
develop, manufacture, sell and support a complete line of integrated products,
software and services that enable us to meet a wide range of customer
applications for Open Systems-based networks such as Microsoft, Unix and Linux
Operating Systems. Our customizable storage solutions address the three storage
markets: Direct Attached Storage (DAS), Network Attached Storage (NAS) and
Storage Area Networks (SAN), in which the storage devices are used in a
dedicated network. These connectivity options provide our customers the
flexibility to choose and deploy a particular storage solution to meet their
needs. As data requirements change, customers can migrate their existing storage
investments to different connectivity options to meet their changing needs.
Our sales and marketing objectives are to further establish and solidify
our position in the rapidly growing open systems storage market. Our strategic
focus targets commercial customers with growing storage requirements. Our
technical resources assist our sales team in designing and implementing specific
data storage solutions required by our customers. During 2001, we began
implementing storage solutions for document imaging needs, which has led us to
pursue a vertical market for our products in this area. Through our Storage
Engine Imaging Systems ("SEISYS") Group, we now provide a complete enterprise
document imaging and management solution that can quickly and precisely archive,
retrieve and distribute business critical files, images and information on a
dedicated private network or through web enabled access. We offer various
services with these document imaging and management solutions enabling us to
provide a complete, end-to-end solution which allows us, in a short period of
time and in a cost-effective way, to convert paper or microfilm documents to an
electronic format which can be viewed via a web-based browser.
Sales to the U.S. Air Force accounted for approximately 47.2% of net sales
for the year ended December 31, 2001. Although we do not anticipate that the
U.S. Air Force will continue to purchase from us at historical levels, either in
absolute dollars or as a percentage of net sales, we believe that sales to the
U.S. Air Force will continue to comprise a significant portion of our net sales.
Quarterly fluctuations in sales to the U.S. Air Force are the result of several
factors over which we have no control, including funding appropriations and
departmental approvals.
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995). Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
These forward-looking statements, such as statements regarding anticipated
future revenues, capital
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expenditures, selling, general and administrative expenditures, research and
development expenditures and other statements regarding matters that are not
historical facts, involve predictions. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements contained in this Quarterly Report on Form
10-Q. Factors that could cause actual results, performance or achievements to
vary materially include, but are not limited to: our liquidity and capital
resources, component quality and availability, changes in business conditions,
changes in our sales strategy and product development plans, changes in the data
storage or network marketplace, competition between us and other companies that
may be entering the data storage host/network attached markets, competitive
pricing pressures, continued market acceptance of our open systems products,
delays in the development of new technology, changes in customer buying
patterns.
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ materially from these estimates. For a more detailed
explanation of judgments made in these areas, refer to our Annual Report on Form
10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
Three Months Ended June 30, 2001 and 2002
-----------------------------------------
NET SALES
Net sales decreased by approximately $1,157, or 44.9%, in the three months
ended June 30, 2002 as compared to net sales in the three months ended June 30,
2001. The decrease in net sales in the 2002 period as compared to the same
period in 2001 resulted primarily from lower sales to commercial customers
offset in part by new sales in the imaging vertical market. Sales of our fault
tolerant enterprise storage solutions integrated with third party products
accounted for 89.3% and 82.1% of net sales in the quarters ended June 30, 2001
and June 30, 2002, respectively. Service revenues accounted for 10.7% and 17.9%
of net sales in the quarters ended June 30, 2001 and June 30, 2002,
respectively.
Sales to our commercial customers of $216 decreased by approximately
$1,621, or 88.2%, in the three months ended June 30, 2002 as compared to net
sales in the three months ended June 30, 2001. Such sales accounted for
approximately 71.3% and 15.2% of net sales for the three-month period ended June
30, 2001 and June 30, 2002, respectively. One customer accounted for 44.0% of
total net sales in the three months ended June 30, 2001.
Prior to the three months ended June 30, 2002, the Company's SEISYS Group
had no sales. Sales relating to our SEISYS Group products and services were $421
in the three months
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ended June 30, 2002. One customer accounted for all of such revenue for the
three months ended June 30, 2002. Such revenue represented 29.7% of the total
net sales in the quarter.
Sales to the U.S. Air Force through Federal integrators increased by
approximately $9, or 1.0%, in the three months ended June 30, 2002 as compared
to net sales in the three months ended June 30, 2001. Such sales accounted for
approximately 26.5% and 48.7% of total net sales in the quarters ended June 30,
2001 and 2002, respectively. Although we do not anticipate that the U.S. Air
Force will continue to purchase from us at historical levels, either in absolute
dollars or as a percentage of net sales, we believe that sales to the U.S. Air
Force will continue to comprise a significant portion of our net sales.
Quarterly fluctuations in sales to the U.S. Air Force are the result of several
factors over which we have no control, including funding appropriations and
departmental approvals.
Sales to alternate channel partners increased by approximately $33, or 58%,
in the three months ended June 30, 2002 as compared to total net sales in the
three months ended June 30, 2001. Such sales accounted for approximately 2.2%
and 6.3% of net sales in the quarters ended June 30, 2001 and 2002,
respectively.
GROSS PROFIT
Our cost of sales includes primarily the cost of purchased material, direct
labor and related overhead expenses. Our gross profit decreased by approximately
$491, or 48.0%, in the three months ended June 30, 2002 to approximately $532
from $1,023 in the three months ended June 30, 2001. Such decrease in the gross
margin percentage is primarily the result of lower net sales. In the three
months ended June 30, 2001, the gross margin percentage was 39.7% as compared to
37.5% in the same period in 2002.
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries, commissions, and travel costs for sales and marketing personnel,
including trade shows, and expenses associated with our management, accounting,
contract and administrative functions. SG&A expenses decreased by $285, or
19.7%, to $1,159 in the three months ended June 30, 2002 from $1,444 in the
three months ended June 30, 2001. On February 11, 2002, we reduced our workforce
by 17 employees. These reductions did not affect the sales and marketing
departments. Salaries, commissions, bonuses, employee benefits and payroll taxes
were the largest components of SG&A expenses, accounting for 76% and 63% of such
expenses for the three months ended June 30, 2001 and June 30, 2002,
respectively. SG&A expenses increased as a percentage of net sales representing
56.1% and 81.7% for the three months ended June 30, 2001 and 2002, respectively.
Such percentage increase resulted from decreased net sales offset in part by a
decrease in SG&A expenses that had occurred during the same period in 2001.
Research and development expenses consist primarily of salaries and
benefits paid to engineers and programmers and other related overhead expenses.
These expenses decreased in the three months ended June 30, 2002 by $135, or
44.3%, to $170 from $305 in the
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corresponding 2001 period. This decrease is due primarily to a decrease in
engineering staff. Research and development expenses for the second quarter of
2002 represented approximately 12.0% of our net sales.
Research and development products for which we expect to devote resources
in the near future relate to: (i) a next generation of the Synchronix family of
products; (ii) new interface connectivities; and (iii) customized products and
solutions for the imaging vertical market.
NET INTEREST INCOME (EXPENSE)
Net interest income was $23 for the three months ended June 30, 2001. Net
interest expense was $5 for the three months ended June 30, 2002. The reduction
in interest income was due primarily to lower cash balances coupled with lower
return on investments in 2002 compared to the same period in 2001.
Six Months Ended June 30, 2001 and 2002
---------------------------------------
NET SALES
Net sales decreased by approximately $4,207, or 62.0%, in the six months
ended June 30, 2002 as compared to net sales in the six months ended June 30,
2001. The decrease in net sales in the 2002 period resulted primarily from
decreased sales to the U.S. Air Force through Federal integrators, and a
decrease in sales to our commercial customers offset in part by new sales in the
imaging vertical market. Sales of our fault tolerant enterprise storage
solutions integrated with third party products accounted for 92.4% and 81.0% of
net sales in the six months ended June 30, 2001 and June 30, 2002, respectively.
Service revenues accounted for 7.6% and 19.0% of total net sales in the six
months ended June 30, 2001 and June 30, 2002, respectively.
Sales to our commercial customers of $1,230 decreased by approximately
$2,017, or 62.1%, in the six months ended June 30, 2002 as compared to total net
sales in the six months ended June 30, 2001. Such sales accounted for
approximately 47.9% and 47.7% of total net sales in the six months ended June
30, 2001 and June 30, 2002, respectively. One customer accounted for 20.9% and
12.4% of total net sales in the six months ended June 30, 2001 and June 30,
2002, respectively.
Prior to the six months ended June 30, 2002, the Company's SEISYS Group had
no sales. Sales related to our SEISYS Group products and services were $421 in
the six months ended June 30, 2002. One customer accounted for all of such
revenue for the six months ended June 30, 2002. Such revenue represented 16.3%
of the total net sales for the six months ended June 30, 2002.
Sales to the U.S. Air Force through Federal integrators decreased by
approximately $2,649, or 76.9%, in the six months ended June 30, 2002 as
compared to net sales in the six months ended June 30, 2001. Such sales
accounted for approximately 50.8% and 30.9% of total net sales in the six months
ended June 30, 2001 and June 30, 2002, respectively. Although we
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do not anticipate that the U.S. Air Force will continue to purchase from us at
historical levels, either in absolute dollars or as a percentage of net sales,
we believe that sales to the U.S. Air Force will continue to comprise a
significant portion of our net sales. Quarterly fluctuations in sales to the U.
S. Air Force are the result of several factors over which we have no control,
including funding appropriations and departmental approvals.
Sales to alternate channel partners increased by approximately $39, or
43.3%, in the six months ended June 30, 2002 as compared to total net sales in
the six months ended June 30, 2001. Such sales accounted for approximately 1.3%
and 5.0% of total net sales in the six months ended June 30, 2001 and 2002,
respectively.
GROSS PROFIT
Our gross profit decreased by approximately $1,853, or 65.8%, in the six
months ended June 30, 2002 to approximately $963 from $2,816 in the six months
ended June 30, 2001. Such decrease in gross profit is primarily the result of
lower net sales. In the six months ended June 30, 2001, the gross margin
percentage was 41.5% as compared to 37.4% in the same period in 2002.
OPERATING EXPENSES
SG&A expenses decreased in the six months ended June 30, 2002 by
approximately $591, or 20.0%, from $2,953 in the corresponding 2001 period. On
February 11, 2002, we reduced our workforce by 17 employees. These reductions
did not affect the sales and marketing departments. As a result, we took a
charge for severance pay of approximately $100, none of which remains unpaid at
June 30, 2002. Salaries, commissions, bonuses, employee benefits and payroll
taxes were the largest components of SG&A expenses, accounting for 93% and 66%
of such expenses for the six months ended June 30, 2001 and June 30, 2002,
respectively. SG&A expenses increased as a percentage of net sales representing
43.5% and 91.7% for the six months ended June 30, 2001 and 2002, respectively.
Such percentage increase resulted from decreased net sales offset in part by a
decrease in SG&A expenses that had occurred over the same period in 2001.
Research and development expenses decreased in the six months ended June
30, 2002 by $458, or 54.6%, to $381 from $839 in the corresponding 2001 period.
This decrease is due primarily to a decrease in engineering staff. Research and
development expenses for the six months of 2002 represented approximately 14.8%
of our net sales.
Research and development products for which we expect to devote resources
in the near future related to: (i) a next generation of the Synchronix family of
products; (ii) new interface connectivities; and (iii) customized products and
solutions for the imaging vertical market.
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NET INTEREST INCOME (EXPENSE)
Net interest income was $31 for the six months ended June 30, 2001. Net
interest expense was $1 for the six months ended June 30, 2002. The reduction in
interest income was due primarily to lower cash balances coupled with lower
return on investments in 2002 compared to the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)
We fund our operations primarily from cash generated by operations
augmented with funds from borrowings under a line of credit and inventory
financing and through private and public sales of equity securities. On June 30,
2002, our cash balance was approximately $1,905.
Net cash used in operating activities was $2,846 and $1,345 for the six
months ended June 30, 2001 and June 30, 2002, respectively. Such use of cash in
2002 resulted primarily from the net loss from operations, coupled with an
increase in accounts receivable which was partially offset by a reduction in
inventories, and depreciation and amortization.
We used $78 and $57 for the acquisition of equipment by direct purchase
during the six months ended June 30, 2001 and June 30, 2002, respectively. Total
capital expenditures for 2002 are expected to be approximately $200, although
such amounts are not subject to formal commitments. We anticipate that such
expenditures will include the purchase of capital equipment for research and
development, imaging vertical market, and general corporate use. There are no
other material commitments for capital expenditures currently outstanding.
Net cash provided by financing activities was $3,441 and $161 for the six
months ended June 30, 2001 and June 30, 2002, respectively. Such source of cash
in 2001 resulted primarily from the net proceeds from the issuance of Series A
Preferred Stock, offset by net payments made to financial institutions for
working capital borrowings.
Our working capital was $5,533 and $4,021 at December 31, 2001 and June 30,
2002, respectively.
We entered into a full recourse factoring facility with Bank of America
("BOA"), which provides for aggregate advances not to exceed the lesser of
$7,000 or up to 85% of Eligible Receivables (as defined). Interest on such
advances is payable monthly in arrears at the prime lending rate and we are
obligated to pay certain annual fees. The factoring facility is for a period of
three years (unless terminated by BOA by providing us sixty days prior written
notice) beginning on July 30, 2000, and from year to year thereafter until
terminated. On January 1, 2001, GMAC Commercial Credit LLC ("GMAC") purchased
substantially all of the factoring assets of Bank of America Commercial
Corporation. Our obligations under such agreement are collateralized by
substantially all of our assets. Our agreement with GMAC restricts our ability
to pay certain dividends without GMAC's prior written consent. In December 2001,
GMAC modified the agreement to allow us to pay dividends with respect to the
Series A Preferred Stock
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in the form of shares of Series A Preferred Stock. We have certain covenants
with GMAC, all of which are in compliance as of June 30, 2002. As of June 30,
2002, we had a balance outstanding of $261 under this full recourse factoring
facility.
As of December 31, 2001, we have NOL carryovers for Federal income tax
purposes of approximately $23,000, which will begin to expire in 2009. We also
have research and development tax credit carryovers for Federal income tax
purposes of approximately $632, which will begin to expire in 2009. In addition,
we have alternative minimum tax credits of approximately $53, which can be
carried forward indefinitely. We experienced a change in ownership in 1996 as
defined by Section 382 of the Internal Revenue Code. Accordingly, future use of
these NOLs and income tax credits will be limited. If, subsequent to 1996, a
change of the ownership of the Company as defined by Section 382 occurred or may
occur, future use of NOLs and income tax credits generated subsequent to the
1996 ownership change may be limited.
As of December 31, 2001, we have approximately $4,886 of state NOL
carryforwards which will begin to expire in 2006 and state research and
development tax credit carryforwards of $342.
Under SFAS No. 109, a valuation allowance is established, if based on the
weight of available evidence, it is more likely than not that a portion of the
deferred tax asset will not be realized. Accordingly, a full valuation allowance
has been provided to offset our net deferred tax assets. We will periodically
reassess the valuation allowance.
In June 2000, we introduced SANStar, a file aware storage architecture
intended to unify disparate data, including NAS and SAN. In the fourth quarter
of 2000, we discontinued our SANStar development effort due to EMC's purchase of
CrosStor, the supplier of the Real Time Operating System (RTOS) used in SANStar.
In February 2001, we sold assets relating to the SANStar technology including
certain patent applications and capital equipment to Ciprico, Inc. In addition,
we received placement fees for certain employees transferred to Ciprico. The
total aggregate proceeds were $580, including $250 of SANStar capitalization and
approximately $46 of capital equipment.
On February 11, 2002, we reduced our workforce by 17 employees. These
reductions did not affect the sales and marketing departments. As a result, we
took a charge for severance pay of approximately $100, none of which remains
unpaid at June 30, 2002. We believe that our restructured workforce will help
reduce operating expenses in 2002.
As of June 30, 2002, there were 1,878,262 shares of Series A Preferred
Stock outstanding. As of June 30, 2002, the holders of the outstanding Series A
Preferred Stock represented approximately 49% of the Common Stock of the Company
on an as converted to Common Stock basis. The potential dilutive effect of the
Series A Preferred Stock may have an adverse effect on our stock price and our
ability to raise capital through the issuance of additional equity.
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On March 1, 2002, we received notification from Nasdaq that our Common
Stock had closed below the minimum $1.00 per share requirement for the previous
30 consecutive trading days as required under Marketplace Rule 4310(c)(4). We
were provided with 180 calendar days, or until August 28, 2002, to regain
compliance by having the bid price for our Common Stock close at $1.00 or
greater for a minimum period of 10 consecutive trading days. On April 17, 2002,
we were notified by Nasdaq that we have regained compliance with Marketplace
Rule 4310(c)(4).
On May 23, 2002, the Company received notification from Nasdaq that due to
the Company's tangible net assets and stockholders' equity, market
capitalization, and net losses reported December 31, 2001, 2000 and 1999, the
Company did not comply with Marketplace Rule 4310(c)(2)(B). The Nasdaq SmallCap
Staff requested specific documentation for their review. The Company complied
with the request with the first of several submissions made on June 6, 2002. The
Company has requested additional time to remedy the failure to meet Nasdaq
tangible net assets and stockholders' equity qualifications.
Our operating results are affected by seasonal factors, particularly the
spending fluctuations of our largest customers, including the U.S. Air Force
through Federal integrators. Due to the relatively fixed nature of certain of
our costs, a decline in net sales in any fiscal quarter will have a material
adverse effect on that quarter's results of operations. We do not expect such
spending fluctuations to be altered in the future. A significant reduction in
orders from any of our largest customers could have a material adverse effect on
our results of operations. There can be no assurance that our largest customers
will continue to place orders with us or that orders of our customers will
continue at their previous levels.
Subject to the risks discussed in this Quarterly Report on Form 10-Q, we
believe that our existing available cash, credit facilities, and the cash flow
expected to be generated from operations will be adequate to satisfy our current
and planned operations for at least the next 12 months. There can be no
assurance, however, that our operating results will achieve profitability or
adequate cash flow in the next 12 months. Our operating plan contains
assumptions regarding revenue and expenses. The achievement of the operating
plan depends heavily on the timing of sales and our ability to gain new
customers and make additional sales to current customers. The continuation of
operating losses, together with the risks associated with our business, and
other changes in our operating assets and liabilities, may have a material
adverse affect on the our future liquidity. Inability to improve operating
results may require us to seek equity financing, which, if required, would cause
dilution to our current shareholders. If we are unable to raise additional
financing, we could be required to reduce our capital expenditures, scale back
our research and product development plans, reduce our workforce, license to
others products or technologies we would otherwise seek to commercialize
ourselves and sell certain assets. If needed, there can be no assurance that we
can obtain equity financing, if at all, on terms acceptable to us.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are, from time to time, subject to claims and suits arising in the
ordinary course of business. In the opinion of our management, the ultimate
resolution of these matters will not have a materially adverse effect on our
financial position.
Item 2. Changes in Securities and Use of Proceeds.
On March 1, 2002, we received notification from Nasdaq that our Common
Stock had closed below the minimum $1.00 per share requirement for the previous
30 consecutive trading days as required under Marketplace Rule 4310(c)(4). We
were provided with 180 calendar days, or until August 28, 2002, to regain
compliance by having the bid price for our Common Stock close at $1.00 or
greater for a minimum period of 10 consecutive trading days. On April 17, 2002,
we were notified by Nasdaq that we have regained compliance with Marketplace
Rule 4310(c)(4).
On April 26, 2002, the Board of Directors declared a dividend covering the
period of December 15, 2001 through March 15, 2002 on the Series A Preferred
Stock of approximately $57 which was paid by issuance of approximately 28,561
shares of Series A Preferred Stock.
On May 23, 2002, we received notification from Nasdaq that due to the
Company's tangible net assets and stockholders' equity, market capitalization,
and net losses reported December 31, 2001, 2000 and 1999, the Company did not
comply with Marketplace Rule 4310(c)(2)(B). The Nasdaq SmallCap Staff requested
specific documentation for their review. The Company complied with the request
with the first of several submissions made on June 6, 2002. The Company has
requested additional time to remedy the failure to meet Nasdaq tangible net
assets and stockholders' equity qualifications.
On July 25, 2002, the Board of Directors declared a dividend covering the
period of March 16, 2002 through June 15, 2002 on the Series A Preferred Stock
of approximately $57 which was paid by issuance of 28,416 shares of Series A
Preferred Stock. In addition, approximately $10 in dividends were in arrears as
of June 30, 2002. During the six months ended June 30, 2002, $139 of Series A
Preferred Stock, or 69,791 shares were converted into 91,564 shares of the
Company's Common Stock.
On July 25, 2002, we filed a Certificate of Amendment to the Restated and
Amended Certificate of Incorporation of the Company with the State of New Jersey
Department of Treasury. Such Certificate of Amendment provided for an increase
in the number of authorized shares of the Series A Preferred Stock from
2,356,179 shares to 2,384,595 shares.
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Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company (the "Meeting") was held
on June 20, 2002. The number of shares of Common Stock present and voted at the
Meeting reflect the Reverse Split.
There was represented at the Meeting, either in person or by Proxy,
1,962,548 shares of Common Stock out of a total number of 2,557,405 shares of
Common Stock issued and outstanding and entitled to vote at the Meeting; and
625,582 shares of Series A Preferred Stock out of a total number of 1,867,123
shares of Series A Preferred Stock issued and outstanding and entitled to vote
at the Meeting. Each share of Common Stock was entitled to one vote and each
share of Series A Preferred Stock was entitled to eight votes on any matter
presented to the all shareholders. Accordingly, there were an aggregate of
4,984,665 votes entitled to be cast at the Meeting on matters presented to all
shareholders, of which an aggregate of 2,775,021 were present in person or
represented by proxy. Each share of Series A Preferred Stock was entitled to one
vote on any matter presented at the Meeting to Series A Preferred Stockholders
voting as a separate class.
The following is a complete list of the Directors of the Company, each of
whom were elected at the meeting:
Michael E. Faherty
Gale R. Aguilar
Gregg M. Azcuy
James K. Dutton
Donald E. Fowler
Frank R. Triolo
Thomas I. Unterberg
The proposals and results of the vote of the shareholders taken at the
Meeting by ballot and proxy were as follows:
(A) Election of the nominees for the Board of Directors of the Company:
For Withheld
--- --------
Michael E. Faherty 2,698,761 Votes 76,260 Votes
Gale R. Aguilar 2,698,761 Votes 76,260 Votes
Gregg M. Azcuy 2,698,741 Votes 76,280 Votes
James K. Dutton 2,698,761 Votes 76,260 Votes
Donald E. Fowler 2,698,761 Votes 76,260 Votes
Frank R. Triolo 2,698,761 Votes 76,260 Votes
Thomas I. Unterberg 2,698,741 Votes 76,280 Votes
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(B) Proposal to amend the 1995 Employee Stock Purchase Plan (the "Purchase
Plan") to increase the maximum aggregate number of shares of the Company's
common stock available for issuance under the Purchase Plan from 66,667 to
150,000 shares and to reserve an additional 83,333 shares of common stock of the
Company for issuance under the Purchase Plan:
FOR 2,673,396 Votes AGAINST 64,020 Votes ABSTAIN 37,605 Votes
(C) Proposal to ratify the appointment of Eisner LLP as independent
auditors of the Company for the year ending December 31, 2002:
FOR 2,734,021 Votes AGAINST 4,397 Votes ABSTAIN 36,452 Votes
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Statement Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STORAGE ENGINE, INC.
Date: August 14, 2002 By: /s/ Gregg M. Azcuy
------------------------------------
Gregg M. Azcuy, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2002 By:/s/ Louis J. Altieri
--------------------------------------
Louis J. Altieri, Vice President,
Finance and Administration
(Principal Financial and
Accounting Officer)
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