Storage Computer Seeks to Soothe Nerves

Most storage companies have suffered severely from the downturn ininformation technology spending, which began about a year ago. But Storage Computer Corp. (AMEX: SOS) has taken this agony to the extreme. The Nashua, N.H., developer ofdisk arrays is in the midst of its fourth straight year of dramatic revenuedeclines.

Storage Computer held a conference call Thursday to soothe the nerves ofanxious investors and discuss second-quarter operating results and a recentround of financing, both of which the company reported earlier this month.They also reviewed product developments and marketing issues.

Officials blamed a second-quarter revenue shortfall on a large productbacklog for a single customer, which was finally delivered on Aug. 15 andwill be booked as revenue for the third quarter. But the sale didnt appearto make a big improvement in the company’s cash position. Despite a $5million sale of convertible stock earlier this month, officials said thecompany now has only $10 million cash. Based on the current cash burn rateof about $2.5 million per quarter, they expect to have enough money tooperate until the middle of next year without the need for additionalfinancing.

Chief operating officer John Thonet is pinning his hopes on some newproduct introductions later this year. In September, the company plans tointroduce a network attached storage product with failover capabilities andthe ability to address multiple networks. He also expects to deliver adatabase product in the fourth quarter to Crimson Media, an online videoacquisition portal. The Crimson deal is worth an initial $1.35 million, andthe total value of the contract may exceed $2 million, according to thecompanies.

Thonet said Storage Computer is now turning to “very high-end VARs [valueadded resellers] and systems integrators to go after the enterprise world.”The company is using some of these specialists to penetrate specificindustries like medical imaging and media pre-press and graphicsoperations.Despite their optimism, officials note that short sellers are punishingthe company’s thinly traded stock for the short term. But they maintain thatshould not be a long-term issue, as the short sellers will have to repurchasethe stock at prices company officials hope will be higher than the presenttrading level.

The company also hopes to benefit from patent infringement suits it filedearlier this year against Hitachi Ltd. (NYSE: HIT;Paris: PHA)and Seagate Technology Inc.

But it will take time so see whether Storage Computer has the financialcapability to carry out such litigation much longer.

In filings with the Securities and Exchange Commission, Storage Computer notes that its manufacturing costs have increaseddramatically, while the cost of beefing up its sales force is anotherfinancial strain. These increased expenses can be particularly painful aftera prolonged slowdown in revenues.

Annual sales slid from $37 million in 1997 to $17 million in 1998, $11million in 1999, and $6.5 million in 2000; they are on pace to reach about $4million in 2001. It remains to be seen whether the company’s revenuesrecognized from deferred sales will be enough to bump up the 2001number.

Meanwhile, the company still has an $86 million market value, as the stocklanguishes at around $5. Perhaps thanks to the conference call, StorageComputer’s stock edged up 2.83 percent Thursday to close at $5.45.— Tom Davey, special to Byte and Switch, http://www.byteandswitch.com