<PAGE> 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 30, 1998
[ ] 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 0-21053
PROCOM TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
California 33-0268063
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2181 Dupont Drive, Irvine, CA 92612
(Address of principal executive office) (Zip Code)
(714) 852-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
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 [ ]
The number of shares of Common Stock, $.01 par value, outstanding on May
31, 1998, was 11,178,742.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
APRIL 30, JULY 31,
1998 1997
----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Current assets:
Cash $ 996,000 $ 227,000
Marketable securities 22,777,000 18,550,000
Accounts receivable, less allowance
for doubtful accounts and sales
returns of $1,781,000 and
$992,000, respectively 13,113,000 12,545,000
Inventories, net 10,396,000 9,063,000
Deferred income taxes 1,405,000 1,405,000
Prepaid expenses 385,000 588,000
Other current assets 235,000 49,000
----------- -----------
Total current assets 49,307,000 42,427,000
Property and equipment, net 988,000 816,000
Other assets (Note 3) 811,000 31,000
----------- -----------
Total assets $51,106,000 $43,274,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 204,000 --
Accounts payable 10,522,000 10,518,000
Accrued expenses and other current liabilities 1,526,000 764,000
Accrued compensation 1,394,000 1,462,000
Capital lease obligations 29,000 29,000
Income taxes payable 1,056,000 434,000
----------- -----------
Total current liabilities 14,731,000 13,207,000
----------- -----------
Total liabilities 14,731,000 13,207,000
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value;
10,000,000 shares authorized, no
shares issued and outstanding -- --
Common stock, $.01 par value;
65,000,000 shares authorized,
11,177,242 and 11,024,562 shares
issued and outstanding,
respectively 112,000 110,000
Additional paid in capital 17,504,000 16,467,000
Retained earnings 18,755,000 13,490,000
Foreign currency translation adjustment 4,000 --
----------- -----------
Total shareholders' equity 36,375,000 30,067,000
----------- -----------
Total liabilities and shareholders' equity $51,106,000 $43,274,000
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these consolidated balance sheets.
2
<PAGE> 3
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
-------------- -----------------
APRIL 30, APRIL 25, APRIL 30, APRIL 25,
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 28,518,000 $ 28,071,000 $ 83,323,000 $ 79,597,000
Cost of sales 19,849,000 18,691,000 55,554,000 53,014,000
------------ ------------ ------------ ------------
Gross profit 8,669,000 9,380,000 27,769,000 26,583,000
Selling, general and
administrative
expenses 5,775,000 4,974,000 16,447,000 13,943,000
Research and development
expenses 1,207,000 979,000 3,585,000 2,513,000
------------ ------------ ------------ ------------
Operating income 1,687,000 3,427,000 7,737,000 10,127,000
Other (income) expense
Interest income 316,000 167,000 894,000 208,000
Interest (expense) (10,000) -- (10,000) (131,000)
------------ ------------ ------------ ------------
Income before income taxes 1,993,000 3,594,000 8,621,000 10,204,000
Provision for income taxes 796,000 1,428,000 3,356,000 4,001,000
------------ ------------ ------------ ------------
Net income $ 1,197,000 $ 2,166,000 $ 5,265,000 $ 6,203,000
============ ============ ============ ============
Net income per share:
Basic $ 0.11 $ 0.20 $ 0.47 $ 0.62
============ ============ ============ ============
Diluted $ 0.11 $ 0.19 $ 0.47 $ 0.61
============ ============ ============ ============
Shares used in per share
computation: .
Basic 11,174,000 11,006,000 11,093,000 9,939,000
============ ============ ============ ============
Diluted 11,255,000 11,199,000 11,234,000 10,112,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
3
<PAGE> 4
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------- PAID IN RETAINED CURRENCY
SHARES AMOUNT CAPITAL EARNINGS TRANS. TOTAL
---------- --------- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at July 29, 1994 9,000,000 $ 3,000 $ -- $ 1,561,000 $ -- $ 1,564,000
Net income -- -- -- 723,000 -- 723,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at July 28, 1995 9,000,000 3,000 -- 2,284,000 -- 2,287,000
Net income -- -- -- 2,849,000 -- 2,849,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at July 26, 1996 9,000,000 3,000 -- 5,133,000 -- 5,136,000
Change in par value to
$.01 per share -- 87,000 3,000 (90,000) -- --
Public offering of
2,000,000 shares 2,000,000 20,000 16,166,000 -- -- 16,186,000
Compensatory
stock options -- -- 35,000 -- -- 35,000
Exercise of employee
stock options 24,562 -- 62,000 -- -- 62,000
Tax benefit from exer-
cise of stock options -- -- 201,000 -- -- 201,000
Net income -- -- -- 8,447,000 -- 8,447,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at July 31, 1997 11,024,562 110,000 16,467,000 13,490,000 -- 30,067,000
Exercise of employee stock
options 48,536 1,000 138,000 -- -- 139,000
Acquisition of MegaByte 104,144 1,000 899,000 -- -- 900,000
Foreign currency translation
adjustment -- -- -- -- 4,000 4,000
Net income -- -- -- 5,265,000 -- 5,265,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 1998
(unaudited) 11,177,242 $ 112,000 $ 17,504,000 $ 18,755,000 $ 4,000 $ 36,375,000
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
4
<PAGE> 5
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
APRIL 30, APRIL 25,
1998 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,265,000 $ 6,203,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 466,000 225,000
Changes in assets and liabilities:
Accounts receivable (568,000) (5,684,000)
Inventories (1,333,000) 581,000
Deferred income taxes -- (362,000)
Prepaid expenses 203,000 (432,000)
Other current assets (186,000) (18,000)
Other assets 92,000 (2,000)
Accounts payable 4,000 302,000
Accrued expenses 762,000 82,000
Accrued compensation (68,000) (1,094,000)
Income taxes payable 622,000 893,000
------------ ------------
Net cash provided (used)
by operating activities 5,259,000 694,000
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (610,000) (497,000)
------------ ------------
Net cash provided by(used in)investing
activities (610,000) (497,000)
------------ ------------
Cash flows from financing activities:
Principal payments for capital lease obligations -- (6,000)
Public offering of 2,000,000 shares -- 16,059,000
Exercise of stock options 139,000 25,000
Borrowings on line of credit 1,313,000 38,276,000
Payments made on line of credit (1,109,000) (42,461,000)
------------ ------------
Net cash provided by(used in)financing
activities 343,000 11,893,000
Effect of exchange rate changes on cash and cash equivalents
4,000 --
------------ ------------
Increase (decrease) in cash 4,996,000 12,090,000
Cash and marketable commercial paper at beginning of period
18,777,000 793,000
Cash and marketable commercial paper at end of period $ 23,773,000 $ 12,883,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 10,000 $ 134,000
Income taxes $ 1,928,000 $ 3,388,000
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
5
<PAGE> 6
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
APRIL 30, 1998 AND APRIL 25, 1997
NOTE 1. GENERAL
The accompanying financial information is unaudited, but in the opinion of
management, reflects all adjustments (which include only normally recurring
adjustments) necessary to present fairly the financial position of Procom
Technology, Inc. and its consolidated subsidiaries (the "Company") as of the
dates indicated and the results of operations for the periods then ended.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. While the Company believes that the
disclosures are adequate to make the information presented not misleading, the
financial information should be read in conjunction with the audited financial
statements, and notes thereto for the three years ended July 31, 1997 included
in the Company's Report on Form 10-K for fiscal 1997. Results for the interim
periods presented are not necessarily indicative of the results for the entire
year.
NOTE 2. EARNINGS PER SHARE.
Net income (loss) per share has been computed using the weighted average number
of shares outstanding during the periods presented. Following the principles of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128), effective for both interim and annual periods ending after December
15, 1997, the Company has replaced "primary" earnings per share with "basic"
earnings per share and "fully diluted" earnings per share with "diluted"
earnings per share. Basic and diluted earnings per share were computed as
follows:
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
-------------- -----------------
APRIL 30, APRIL 25, APRIL 30, APRIL 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,197,000 $ 2,166,000 $ 5,265,000 $ 6,203,000
=========== =========== =========== ===========
Shares used in per share
computations:
Basic: Weighted average
shares outstanding 11,174,000 11,006,000 11,093,000 9,939,000
Dilutive effect of
stock options 81,000 193,000 141,000 173,000
----------- ----------- ----------- -----------
Diluted: 11,255,000 11,199,000 11,234,000 10,112,000
=========== =========== =========== ===========
</TABLE>
NOTE 3. ACQUISITION OF MEGABYTE.
On February 3, 1998, the Company acquired all of the outstanding stock of
MegaByte Computerhandels AG ("MegaByte"), a German value added distributor of
networking and storage products. The Company issued approximately 104,000 shares
of its common stock in exchange for the MegaByte common stock. MegaByte's
financial statements and results of operations for periods beginning after
February 3, 1998 will be consolidated with those of the Company. The acquisition
was treated as a purchase for accounting purposes, with approximately $780,000
allocated to goodwill arising from the excess of the purchase price less the
fair value of MegaByte's net assets on the date of closing. The Company will
amortize the goodwill over 7 years, and approximately $28,000 in amortization
expense is included in the Company's results of operations for the quarter ended
April 30, 1998.
6
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
OVERVIEW
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements include, but
are not limited to, comments regarding the Company's revenue, revenue mix,
product pricing, gross margins, increased promotional, advertising, research and
development spending, and the expanded marketing efforts of the Company. Actual
results could differ materially from those projected in the forward-looking
statements as a result of important factors including, without limitation,
competitive product introductions, price competition, any failure or delay in
the Company's ability to develop and introduce new products, the failure of any
significant customer, drops in the value of the Company's inventories, adverse
economic conditions generally and other factors set forth in the Company's
filings with the Securities and Exchange Commission.
The Company was formed in 1987. The Company began producing aftermarket disk
drive upgrade products for computer products sold by other manufacturers, and
such upgrade products continue to be an important area of focus of the Company's
business. In fiscal 1994, the Company introduced its CD server and array product
line while continuing to provide a broad line of disk drive upgrade products. In
addition, during fiscal 1994, the Company began utilizing computer resellers and
VARs as its primary sales channel instead of mass merchants and national
distributors and commenced shipment of its first RAID arrays and fault tolerant,
high performance storage servers.
The Company generally records sales upon product shipment. The Company
presently maintains agreements with many of its computer resellers, VARs and
distributors that allow limited returns (including stock balancing) and price
protection privileges. The Company has in the past experienced high return
rates. The Company maintains reserves for anticipated returns (including stock
balancing) and price protection privileges. These reserves are adjusted at each
financial reporting date to state the Company's estimate of the anticipated
returns (including stock balancing) and price protection claims relating to each
reporting period. Generally, the reserves will increase as sales and
corresponding returns increase but there can be no assurance that such reserves
will adequately cover returns or claims as of any specific reporting date. In
addition, under a product evaluation program established by the Company,
computer resellers, VARs, distributors and end users generally are able to
purchase products on a trial basis and return the products within a specified
period if they are not satisfied. Evaluation units are not recorded as sales
until the customer has paid for such units.
The Company's sales (other than sales of MegaByte (See Note 3 to Condensed
Consolidated Financial Statements) since its acquisition in February 1998) are
denominated in U.S. dollars, and accordingly, fluctuations in foreign exchange
rates have not had a material adverse effect on the Company's domestic results
of operations or financial condition, except to the extent that such
fluctuations could cause the Company's products to become relatively more
expensive to end users in a particular country, leading to a reduction of sales
in that country. With the acquisition of MegaByte, the Company will have
increased exposure to foreign exchange rate fluctuations, and the Company's
consolidated assets, sales and results of operations may be adversely impacted
in the future by unfavorable fluctuations in foreign exchange rates.
Historically, the Company's gross margins have experienced significant
volatility. The Company's gross margins vary significantly by product line, and,
therefore, the Company's overall gross margin varies with the mix of products
sold by the Company. The Company's markets are also characterized by intense
competition and declining average unit selling prices as products mature over
the course of the relatively short life cycle of individual products, which have
often ranged from six to twelve months. For example, during the quarter ended
April 30, 1998, the Company experienced increases in unit sales of certain
products, although actual net revenues from sales of those products declined
compared on a quarter to quarter basis. In addition, the Company's gross margins
may be adversely affected by availability and price increases associated with
key products and components from the Company's suppliers, some of which have
been in the past, and may in the future be in short supply, and inventory
obsolescence resulting from older generation products, increasing return rates
which may cause additional inventory obsolescence or the unexpected
discontinuance of third party components. Finally, the Company's margins vary
with the mix of its distribution channels and with general economic conditions.
7
<PAGE> 8
RESULTS OF OPERATIONS
The following table sets forth the Company's statement of operations data as
a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
APRIL 30, APRIL 25, APRIL 30, APRIL 25,
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.6 66.6 66.7 66.6
------- ------- ------- -------
Gross profit 30.4 33.4 33.3 33.4
Selling, general and administrative
expenses 20.3 17.7 19.7 17.5
Research and development expenses
4.2 3.5 4.3 3.2
------- ------- ------- -------
Operating income (loss) 5.9 12.2 9.3 12.7
Interest income and (expense), net
1.1 0.6 1.0 0.1
------- ------- ------- -------
Income (loss) before income
taxes 7.0 12.8 10.3 12.8
Provision (benefit) for income
taxes 2.8 5.1 4.0 5.0
------- ------- ------- -------
Net income (loss) 4.2% 7.7% 6.3% 7.8%
======= ======= ======= =======
</TABLE>
QUARTER AND NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO QUARTER AND NINE MONTHS
ENDED APRIL 25, 1997
Net Sales
Net sales increased 1.6% from $28.1 million for the quarter ended April 25,
1997 and 21.3% from $23.5 million for the quarter ended January 31, 1998 to
$28.5 million for the quarter ended April 30, 1998. This increase over the prior
quarters was primarily due to the net sales of MegaByte, offset by declining
demand for the Company's CD servers and arrays as well as reduced industry wide
demand for the Company's disk drive upgrade subsystems for desktop computers,
combined with the effect of significant price erosion and lower average unit
selling prices which occurred during the quarter. The Company expects to see a
continued weakness in the demand and continuing price erosion for its upgrade
disk drive storage products and CD-ROM Network Storage Solutions throughout the
fourth quarter of fiscal 1998. For the quarter ended April 30, 1998, sales of
the Company's "Intelligent Network Storage Products", which comprise CD servers
and arrays and RAID storage systems and certain network software and hardware
components sold by MegaByte, comprised approximately 52% of net sales, and sales
of disk drive storage upgrade products comprised approximately 48% of net sales.
International sales, increased to $7.5 million, or approximately 26% of net
sales, in the three months ended April 25, 1998 compared to $2.2 million, or
approximately 8% of net sales, in the quarter ended April 25, 1997 as the
Company recognized sales of MegaByte in the current quarter. Net sales for the
nine months ended April 30, 1998 were $83.3 million, up from $79.6 million for
the nine months ended April 25, 1997. The year over year growth in sales for the
nine month period was caused by the additional revenues of MegaByte in the
current quarter offset by the relatively flat sales of the Company's net sales
of CD Servers and arrays and its desktop and notebook storage subsystems.
Gross Profit
The Company's gross margins decreased from 33.4% of net sales for the quarter
ended April 25, 1997 to 30.4% of net sales for the quarter ended April 30, 1998,
while gross margins decreased from 33.4% of net sales for the nine months ended
April 25, 1997 to 33.3% of net sales for the nine months ended April 30, 1998.
These decreases were
8
<PAGE> 9
primarily the result of the inclusion of the sales of MegaByte which
traditionally have experienced lower gross margins, sales of lower margin disk
drive upgrade products, and to a lesser extent, reductions in sales of CD
Servers and Arrays. In addition, the Company maintained higher margins on sales
of certain disk drive upgrade products for notebook computers, which offset some
of the effect of competition and price erosion typical in the disk drive upgrade
industry. While the Company expects to transition the product mix of MegaByte in
the future toward higher margin, higher value added products, it nonetheless
expects that its consolidated gross margins will be impacted by MegaByte's sales
as well as the continuing pricing erosion and inventory obsolescence which has
occurred, and is expected to continue to occur, in the future.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $5.0 million, or
17.7% of net sales for the quarter ended April 25, 1997, to $5.8 million, or
20.3% of net sales for the quarter ended April 30, 1998, while selling, general
and administrative expenses increased from $13.9 million, or 17.5% of net sales
for the nine months ended April 25, 1997, to $16.4 million, or 19.7% of net
sales for the nine months ended April 30, 1998. The dollar increase in selling,
general and administrative expenses for the second quarter of fiscal 1998
compared to the same quarter in fiscal 1997 was primarily a result of the
inclusion of approximately $900,000 in MegaByte selling and general costs,
increased trade show costs, increased personnel and related costs necessary to
support the Company's growth plans, offset by reductions in advertising costs
and sales commissions, due to the reduction in net sales. The dollar increase
for the nine month period in fiscal 1998 was primarily the result of the
inclusion of MegaByte's increased trade show costs, and increased personnel and
related costs necessary to support the Company's growth plans. In addition, for
the three months ended April 30, 1998, selling, general and administrative costs
were reduced by approximately $200,000 as the Company failed to attain its
operating performance goals, and therefor reduced the estimate of accrued
bonuses payable to the Company's employees and executives. The Company
anticipates that the dollar amount of its selling, general and administrative
expenses will increase as the Company continues to expand its efforts to
penetrate certain sales channels by establishing field sales offices and
continues to strengthen and upgrade its existing management information and
telecommunications systems.
Research and Development
Research and development expenses increased from $.98 million, or 3.5% of net
sales for the quarter ended April 25, 1997, to $1.2 million, or 4.2% of net
sales for the quarter ended April 30, 1998, while research and development
expenses increased from $2.5 million, or 3.2% of net sales for the nine months
ended April 25, 1997, to $3.6 million, or 4.3% of net sales for the nine months
ended April 30, 1998. The increases were primarily due to continued increases in
additional hardware developers and software programmers, including the use of
independent contract programmers and increased related support costs to develop
additional products and enhance existing product features. In addition, the
current year nine month results include license amortization of approximately
$140,000 as the Company has purchased licenses to utilize its software products
with existing software. The Company anticipates that the dollar amount of its
research and development expenses will continue to increase, and also may
increase as a percentage of net sales, with the expected addition of dedicated
engineering resources to develop new product categories. These additions are
being made to increase the likelihood that the Company's products will be
compatible with a wide range of hardware platforms and network topologies and to
further develop CD-FORCE, the Company's proprietary client/server management
storage architecture. In addition, the Company intends to continue to update
software drivers to ensure that the Company's CD servers and arrays function
with a variety of hardware platforms and network operating systems. To date, all
of the Company's software development costs have been expensed as incurred, as
the impact of capitalizing software costs under Financial Accounting Standard
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" would have been immaterial to the Company's financial
statements.
9
<PAGE> 10
Income Taxes
The Company's effective tax rates for the three quarters ended April 30,
1998 and April 25, 1997 were approximately 38.9.% and 39.2% of pretax income,
which approximate the federal and state statutory rates with modest reductions
for benefits resulting from the Company's use of its foreign sales corporation
("FSC") and benefits accruing from the increases in research and development
activity, causing an increased research and development credit in the 1998
fiscal year. This increased benefit is offset somewhat by the MegaByte's current
foreign operating loss, for which only a reduced benefit is available. The
Company expects that its tax rate may be reduced in future periods if MegaByte
should become profitable, and thereby permit the use of approximately $100,000
in net operating loss carryforwards for which no tax asset has been recorded.
Interest Income and Expense
As a result of the initial public offering of 2,000,000 shares of the
Company's common stock completed in December 1996, the Company received net
proceeds, after underwriting discounts and offering costs, of approximately $
15.9 million. As a result of the offering net proceeds, the Company, in late
December 1996 reduced amounts outstanding under its line of credit, thereby
reducing interest expense, and invested the remaining proceeds in short-term
investment grade commercial paper, thereby earning interest income. In addition,
after the acquisition of MegByte, the Company incurred interest expense of
approximately $10,000 before the Company paid down the amount outstanding on
MegByte's credit line. Accordingly, net interest income and expense for the
third quarter of fiscal 1997 was $ 167,000 and $0, while interest income and
expense generated in the third quarter of fiscal 1998 was $316,000 and $10,000.
General comments
The Company's results of operations have in the past varied significantly and
are likely in the future to vary significantly as a result of a number of
factors, including the mix of products sold, the volume and timing of orders
received during the period, the timing of new product introductions by the
Company and its competitors, product line maturation, the impact of price
competition on the Company's average selling prices, the availability and
pricing of components for the Company's products, changes in distribution
channel mix and product returns or price protection charges from customers. Many
of these factors are beyond the Company's control. Although the Company has
experienced growth in sales in some recent periods, there can be no assurance
that the Company will experience growth in the future or be profitable on an
operating basis in any future period. In addition, due to the short product life
cycles that characterize the Company's markets, a significant percentage of the
Company's sales each quarter may result from new products or product
enhancements introduced in that quarter. Since the Company relies on new
products and product enhancements for a significant percentage of sales, failure
to continue to develop and introduce new products and product enhancements or
failure of these products or product enhancements to achieve market acceptance
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Historically, as the Company has planned and implemented new products, it has
experienced unexpected reductions in sales and gross profit of older generation
products as customers have anticipated new products. These reductions have in
the past given and could continue to give rise to charges for obsolete or excess
inventory, returns of older generation products by computer resellers, VARs and
distributors or substantial price protection charges. While the Company attempts
to work with its stocking customers to maintain appropriate levels of
inventories and reduce returns or price protection charges, there can be no
assurance that such efforts will actually reduce inventory carrying costs or the
losses resulting from returns or charges from such customers. From time to time,
the Company has experienced and may in the future experience inventory
obsolescence resulting from the unexpected discontinuance of third party
components, such as disk drives, included in the Company's products. To the
extent that inventories are not successfully processed, or that returns of
inventories increase and such returns can not be effectively processed, there
may be a resulting negative impact on the Company's gross margins and results of
operations. Also, to the extent the Company is unsuccessful in managing product
transitions, it may have a material adverse effect on the Company's business,
financial condition and results of operations.
10
<PAGE> 11
The Company also has historically capitalized on short-term market
opportunities for volume purchases of certain components at favorable prices.
For example, the Company believes that in the quarter ended April 30, 1998, it
saw significant reductions of opportunities to sell significant volumes of high
capacity disk drive upgrade products, which resulted in reduced revenues and
lost gross profit, impacting the Company's sales and results of operations for
that quarter. The Company also has experienced, and expects to continue to
experience, reduced demand and revenues for its CD Servers during the quarter
ended April 30, 1998, and is continuing to analyze the market demands and
opportunities for those products in the future while transitioning existing
users to more complex information access solutions such as CD-FORCE where
possible. Finally, the Company's recent acquisition of MegaByte will present the
Company with additional challenges to market its products internationally, where
sales and results of operations may be subject to additional factors, such as
currency fluctuations, local market conditions and economic conditions
worldwide.
LIQUIDITY AND CAPITAL RESOURCES
In November 1994, the Company instituted a revolving line of credit with
Finova Capital ("Finova"). The facility was amended in November 1996 to provide
the Company with up to $20.0 million in working capital loans, based upon the
Company's accounts receivable and inventory levels. The line of credit accrues
certain commitment fees, unused facility fees and interest on outstanding
amounts at the lender's prime rate (8.0% at April 30, 1998) plus 1.5%. Finova
also makes available to the Company various flooring commitments pursuant to
which the Company may finance the purchase of up to $13.0 million in inventory
(less any amounts outstanding in working capital loans) from certain of the
Company's vendors who have credit arrangements with Finova. As of April 30,
1998, there was no balance outstanding under the credit facility, and $2.8
million outstanding under the flooring arrangements. The agreement governing the
credit facility requires the Company to maintain certain financial covenants
(including the maintenance of working capital of at least $500,000), minimum
levels of tangible net worth and minimum levels of liquidity. As of April 30,
1998, the Company was in compliance with the covenants of the Finova line of
credit. The term of the line of credit expires on November 29, 1998, but
automatically renews for successive one year periods unless terminated by either
party within a specified period in advance of the automatic renewal date.
On February 3, 1998, the Company issued 104,144 shares of its common stock
valued at $900,000 to acquire all of the outstanding stock of MegaByte, a German
distributor of high end networking products. In addition, the Company assumed,
and then paid down, existing credit lines of MegaByte of approximately $1.1
million. The excess of the purchase price over the fair value of the net assets
of MegaByte on the date of acquisition was approximately $780,000, which is
considered goodwill and which will be amortized over 7 years.
As of April 30, 1998, the Company had cash balances of $ 23.8 million and
approximately $11.1 million of availability under its line of credit. The
Company believes that the cash proceeds from its December 1996 public offering,
together with existing cash balances and available credit under its existing
line of credit, will be sufficient to meet anticipated cash requirements for at
least the next twelve months. As of April 30, 1998, the Company had no material
commitments for capital expenditures. While the Company has no present plans,
agreements or commitments to make any acquisitions, the Company intends to
actively pursue opportunities to acquire businesses, products and technologies
that are complementary to those of the Company. In the event the Company's plans
require more capital than is presently anticipated, the Company's remaining cash
balances may be consumed and additional sources of liquidity such as debt or
equity financings may be required to meet working capital needs. There can be no
assurance that additional capital beyond the amounts currently forecasted by the
Company will not be required nor that any such required additional capital will
be available on reasonable terms, if at all, at such time or times as required
by the Company.
11
<PAGE> 12
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
As previously disclosed in the Company's Report on Form 10-K for the year
ended July 31, 1997, the Company was threatened with a claim by Miradco
International Corporation, a private company based in Newport Beach, California,
consisting of two principals ("Miradco"), regarding a purported breach of an
alleged oral contract between the Company and Miradco. Miradco has asserted that
it is entitled to receive up to 280,000 shares of the Company's common stock as
payment for financial advisory services purportedly rendered to the Company by
Miradco. The Company unequivocally denies the existence of any oral contract
with Miradco, and believes any oral contract claim of Miradco is entirely
without merit. The Company and one of its officers were served in December, 1997
with a Complaint of Miradco filed in Orange County Superior Court, Case No.
788412, which seeks to recover the value of 280,000 shares, and in addition,
punitive damages for what the Complaint alleges were negligent or fraudulent
misrepresentations in connection with the alleged agreement. The Company and the
officer intend to defend themselves vigorously with respect to the oral contract
and misrepresentation claims and to assert any and all rights the Company and
the officer has related to such claims. While discovery is now continuing,
the Company does not currently believe the Miradco lawsuit will have a material
adverse effect on the Company's business, results of operations or financial
condition.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
On February 3, 1998, the Company acquired all of the outstanding
capital stock of MegaByte Computerhandels AG ("MegaByte"), a German corporation
in exchange for 104,144 shares of its common stock. The Company shares were
issued to the former owners of the MegaByte capital stock without registration
under the Securities Act of 1933 (the "Act") in reliance on the exemption from
registration provided by Regulation S promulgated under the Act. See Note 3 to
Consolidated Condensed Financial Statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index. No Statement re: Computation of Per Share
Earnings is included, because the computation can be clearly
determined from material contained in this Report. See the
Consolidated Statements of Operations, and the Notes thereto.
(b) No reports on Form 8-K have been filed during the quarter for which
this Report on Form 10-Q is filed.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Irvine, County of
Orange, State of California, on the 10th day of June, 1998.
PROCOM TECHNOLOGY, INC.
By: /s/ Alex Razmjoo
-----------------------
Alex Razmjoo
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-Q has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Alex Razmjoo Chairman of the Board, President June 10, 1998
- --------------------------------------- and Chief Executive Officer (Principal
Alex Razmjoo Executive Officer)
/s/ Alex Aydin Executive Vice President, Finance June 10, 1998
- --------------------------------------- and Administration (Principal Financial
Alex Aydin Officer)
/s/ Frederick Judd Vice President, Finance and June 10, 1998
- --------------------------------------- General Counsel (Principal Accounting
Frederick Judd Officer)
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBER
NUMBER DESCRIPTION PAGE
-------- ----------- ------
<S> <C> <C>
3.1+ Amended and Restated Articles of Incorporation of the Company
3.2+ Amended and Restated Bylaws of the Company
10.1+ Form of Indemnity Agreement between the Company and each of its executive officers
and directors
10.2+ Form of Amended and Restated Procom Technology, Inc. 1995 Stock Option Plan
10.3+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996,
between the Company and Alex Razmjoo
10.4+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996,
between the Company and Frank Alaghband
10.5+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996,
between the Company and Alex Aydin
10.6+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996,
between the Company and Nick Shahrestany
10.7+ Form of Registration Rights Agreement
10.8+ Lease, dated February 10, 1992, between 2181 Dupont Associates and the Company, as
amended
10.9+ Loan and Security Agreement, dated November 18, 1994, by and between the Company
and FINOVA Capital Corporation, as amended
11.1+ Statement re: Computation of Earnings Per Share
21.1+ List of Subsidiaries
27.1 Financial Data Schedule
</TABLE>
- ----------
+ Previously filed
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 996,000
<SECURITIES> 22,777,000
<RECEIVABLES> 17,849,000
<ALLOWANCES> 4,736,000
<INVENTORY> 10,396,000
<CURRENT-ASSETS> 49,307,000
<PP&E> 2,865,000
<DEPRECIATION> 1,877,000
<TOTAL-ASSETS> 51,106,000
<CURRENT-LIABILITIES> 14,731,000
<BONDS> 0
0
0
<COMMON> 112,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 51,106,000
<SALES> 28,518,000
<TOTAL-REVENUES> 28,518,000
<CGS> 19,849,000
<TOTAL-COSTS> 19,849,000
<OTHER-EXPENSES> 6,982,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,000
<INCOME-PRETAX> 1,993,000
<INCOME-TAX> 796,000
<INCOME-CONTINUING> 1,197,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,197,000
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
