<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 JANUARY 31, 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 February 28, 1998, was 11,073,098.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1997
----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Current assets:
Cash ........................................ $ 819,000 $ 227,000
Marketable securities ....................... 21,637,000 18,550,000
Accounts receivable, less allowance
for doubtful accounts and sales
returns of $1,670,000 and
$992,000, respectively .................... 10,827,000 12,545,000
Inventories, net ............................ 9,118,000 9,063,000
Deferred income taxes ....................... 1,405,000 1,405,000
Prepaid expenses ............................ 345,000 588,000
Other current assets ........................ 13,000 49,000
----------- -----------
Total current assets ................ 44,164,000 42,427,000
Property and equipment, net ................... 901,000 816,000
Other assets .................................. 32,000 31,000
----------- -----------
Total assets ........................ $45,097,000 $43,274,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 7,718,000 $10,518,000
Accrued expenses and other current
liabilities ............................. 919,000 764,000
Accrued compensation ........................ 1,366,000 1,462,000
Capital lease obligations ................... 29,000 29,000
Income taxes payable ........................ 793,000 434,000
----------- -----------
Total current liabilities ........... 10,825,000 13,207,000
----------- -----------
Total liabilities ................... 10,825,000 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,
11,073,098 and 11,024,562 shares
issued and outstanding,
respectively .............................. 111,000 110,000
Additional paid in capital .................. 16,603,000 16,467,000
Retained earnings ........................... 17,558,000 13,490,000
----------- -----------
Total shareholders' equity .......... 34,272,000 30,067,000
----------- -----------
Total liabilities and
shareholders' equity.................... $45,097,000 $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 SIX MONTHS ENDED
-------------- ----------------
JANUARY 31, JANUARY 24, JANUARY 31, JANUARY 24,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ................ $ 23,514,000 $ 26,611,000 $ 54,805,000 $ 51,526,000
Cost of sales ............ 15,098,000 17,833,000 35,705,000 34,323,000
------------ ------------ ------------ ------------
Gross profit ........ 8,416,000 8,778,000 19,100,000 17,203,000
Selling, general and
administrative
expenses ............... 5,009,000 4,602,000 10,672,000 8,969,000
Research and development
expenses ............... 1,098,000 846,000 2,378,000 1,534,000
------------ ------------ ------------ ------------
Operating income .... 2,309,000 3,330,000 6,050,000 6,700,000
Other (income) expense
Interest income ......... 291,000 41,000 578,000 41,000
Interest (expense) ...... -- (71,000) -- (131,000)
------------ ------------ ------------ ------------
Income before income taxes 2,600,000 3,300,000 6,628,000 6,610,000
Provision for income taxes 1,005,000 1,278,000 2,560,000 2,573,000
------------ ------------ ------------ ------------
Net income .......... $ 1,595,000 $ 2,022,000 $ 4,068,000 $ 4,037,000
============ ============ ============ ============
Net income per share:
Basic ................... $ 0.14 $ 0.21 $ 0.37 $ 0.43
============ ============ ============ ============
Diluted ................. $ 0.14 $ 0.20 $ 0.36 $ 0.42
============ ============ ============ ============
Shares used in per share
computation: .
Basic ................... 11,069,000 9,813,000 11,053,000 9,407,000
============ ============ ============ ============
Diluted ................. 11,191,000 9,987,000 11,188,000 9,569,000
============ ============ ============ ============
</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
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <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 and
related tax benefits.... 48,536 1,000 136,000 -- 137,000
Net income .............. -- -- -- 4,068,000 4,068,000
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1998
(unaudited) ............ 11,073,098 $ 111,000 $ 16,603,000 $ 17,558,000 $ 34,272,000
============ ============ ============ ============ ============
</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>
SIX MONTHS ENDED
----------------
JANUARY 31, JANUARY 24,
1998 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,068,000 $ 4,037,000
Adjustments to reconcile net
income to net cash
provided by
operating activities:
Depreciation and amortization 222,000 142,000
Changes in assets and
liabilities:
Accounts receivable 1,718,000 (1,644,000)
Inventories (55,000) (3,866,000)
Deferred income taxes -- (219,000)
Prepaid expenses 243,000 (263,000)
Other current assets 36,000 (7,000)
Other assets (1,000) (4,000)
Accounts payable (2,800,000) (546,000)
Accrued expenses 155,000 132,000
Accrued compensation (96,000) (1,617,000)
Income taxes payable 359,000 1,204,000
------------ ------------
Net cash provided (used) by
operating activities 3,849,000 (2,651,000)
------------ ------------
Cash flows from investing activities:
Purchase of property and
equipment (307,000) (303,000)
------------ ------------
Cash flows from financing activities:
Principal payments for capital
lease obligations -- (5,000)
Public offering of 2,000,000
shares -- 15,956,000
Exercise of stock options 137,000 --
Borrowings on line of credit -- 38,276,000
Payments made on line of credit -- (42,461,000)
------------ ------------
Net cash provided by
(used in) financing
activities 137,000 11,766,000
------------ ------------
Increase (decrease) in cash 3,679,000 8,812,000
Cash and marketable commercial paper at
beginning of period 18,777,000 793,000
------------ ------------
Cash and marketable commercial paper at
end of period $ 22,456,000 $ 9,605,000
============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the periods for:
Interest $ -- $ 134,000
Income taxes $ 1,428,000 $ 1,150,000
</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 SIX MONTHS ENDED
JANUARY 31, 1998 AND JANUARY 24, 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 subsidiary (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 QUARTERS ENDED
--------------------------- ---------------------------
JANUARY 31, JANUARY 24, JANUARY 31, JANUARY 24,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $1,595,000 $2,022,000 $4,068,000 $4,037,000
========== ========== ========== ==========
Shares used in per share
computations:
Basic:
Weighted average
shares outstanding 11,069,000 9,813,000 11,053,000 9,407,000
Dilutive effect of
stock options 122,000 174,000 133,000 162,000
---------- ---------- ---------- ----------
Diluted: 11,191,000 9,987,000 11,188,000 9,569,000
========== ========== ========== ==========
</TABLE>
NOTE 3. SUBSEQUENT EVENT-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, and the
acquisition will be treated as a purchase for accounting purposes, and
Megabyte's financial statements and results of operations will be consolidated
with those of the Company for periods beginning after February 3, 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, 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 fairly 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. 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.
All of 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, the Company does not
believe that fluctuations in foreign exchange rates have had or will have a
material adverse effect on the Company's 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 additional exposure to foreign exchange rate
fluctuations, and the Company's assets, sales and results of operations may be
adversely impacted in the future.
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. 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
7
<PAGE> 8
from older generation products 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.
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 SIX MONTHS ENDED
------------------ ----------------
JANUARY 31, JANUARY 24, JANUARY 31, JANUARY 24,
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 ........................ 64.2 67.0 65.1 66.6
------------ ------------ ------------ ------------
Gross profit ....................... 35.8 33.0 34.9 33.4
Selling, general and administrative
expenses ........................... 21.3 17.3 19.5 17.4
Research and development expenses..... 4.7 3.2 4.3 3.0
------------ ------------ ------------ ------------
Operating income (loss) ............ 9.8 12.5 11.0 13.0
Interest income and (expense), net.... 1.2 0.1 1.1 0.2
------------ ------------ ------------ ------------
Income (loss) before income
taxes ............................ 11.1 12.4 12.1 12.8
Provision (benefit) for income
taxes .............................. 4.3 4.8 4.7 5.0
------------ ------------ ------------ ------------
Net income (loss) .................. 6.8% 7.6% 7.4 7.8%
============ ============ ============ ============
</TABLE>
QUARTER AND SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO QUARTER AND SIX MONTHS
ENDED JANUARY 24, 1997
Net Sales
Net sales decreased 11.6% from $26.6 million for the quarter ended January
24, 1997 and 25.4% from $31.5 million for the quarter ended October 31, 1997, to
$23.5 million for the quarter ended January 31, 1998. This reduction was
primarily due to decreases in sales of 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 which occurred
during the quarter. Net sales were also affected by significant trade show
activity which occurred in November 1997, seven fewer selling days during the
quarter as a result of the holidays, and customer reluctance to commit to
purchases prior to year end. The Company expects to see a continued weakness in
the demand for its upgrade disk drive storage products and CD-ROM Network
Storage Solutions throughout the third quarter of fiscal 1998. For the quarter
ended January 31, 1998, sales of the Company's "Intelligent Network Storage
Products", which comprise CD servers and arrays and RAID storage systems,
comprised approximately 46% of net sales, and sales of disk drive storage
upgrade products comprised approximately 54% of net sales. International sales
decreased from $2.3 million, or approximately 8.6% of net sales, in the three
months ended January 24, 1997 to $1.8 million, or approximately 7.7% of net
sales, in the quarter ended January 31, 1998. Net sales for the six months ended
January 31, 1998 increased 6.4% to $54.8 million from $51.5 million for the six
months ended January 24, 1997. The reduced growth in sales for the six month
period was caused by and affected by the factors set forth above.
Gross Profit
8
<PAGE> 9
The Company's gross margins increased from 33.0% of net sales for the quarter
ended January 24, 1997 to 35.8% of net sales for the quarter ended January 31,
1998, while gross margins increased from 33.4% of net sales for the six months
ended January 24, 1997 to 34.9% of net sales for the six months ended January
31, 1998. These increases were primarily the result of the significant
reductions in 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
realized higher margins on increased sales of disk drive upgrade products for
notebook computers and RAID storage products, and such increases more than
offset the effect of competition and price erosion typical in the disk drive
upgrade industry.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $4.6 million, or
17.3% of net sales for the quarter ended January 24, 1997 to $5.1 million, or
21.3% of net sales for the quarter ended January 31, 1998, while selling,
general and administrative expenses increased from $9.0 million, or 17.4% of net
sales for the six months ended January 24, 1997 to $10.7 million, or 19.5% of
net sales for the six months ended January 31, 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
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 six month period in fiscal 1998 was primarily the result of increased
trade show costs, and increased personnel and related costs necessary to support
the Company's growth plans. Bad debt expense for the second three months of
fiscal 1998 was approximately $77,000 or .32% of net sales, compared to
approximately $113,000, or .42% of net sales, for the second three months of
fiscal 1997. 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 and regions and continues
to strengthen and upgrade its existing management information and
telecommunications systems.
Research and Development
Research and development expenses increased from $.85 million, or 3.2% of net
sales for the quarter ended January 24, 1997, to $1.1 million, or 4.7% of net
sales for the quarter ended January 31, 1998, while research and development
expenses increased from $1.5 million, or 3.0% of net sales for the six months
ended January 24, 1997, to $2.4 million, or 4.3% of net sales for the six months
ended January 31, 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. However, during the
quarter ended January 31, 1998, the Company reduced somewhat its reliance on
outside programmers and reduced the purchase of support supplies and materials,
reducing its research and development costs compared to the first quarter of
fiscal 1998. 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.
Income Taxes
9
<PAGE> 10
The Company's effective tax rates for each of the two quarters ended
January 31, 1998 and January 24, 1997 were approximately 38.7% 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.
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. Accordingly,
net interest income and expense for the second quarter of fiscal 1997 was $
41,000 and $71,000, while interest income generated in the second quarter of
fiscal 1998 was $291,000.
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. 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 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.
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 January 31, 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 seen reduced demand and revenues for its CD
Servers during the quarter ended January 31, 1998, and is currently analyzing
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.
LIQUIDITY AND CAPITAL RESOURCES
10
<PAGE> 11
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 (8.5% at January 31, 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 January 31,
1998, there was no balance outstanding under the credit facility, and $3.1
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 January 31,
1998, the Company was in compliance with the covenants of the Finova line of
credit. The initial term of the line of credit expired on November 29, 1997, but
automatically renews for successive one year periods unless terminated by either
party within a specified period in advance of the automatic renewal date.
As of January 31, 1998, the Company had cash balances of $ 22.4 million and
$16.9 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 January 31, 1998, the Company had no material commitments
for capital expenditures. 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. See Note 3 to the
Consolidated Condensed Financial Statements. While the Company has no other
present plans, agreements or commitments to make any acquisitions, the Company
may 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 has been 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 only now commencing,
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.
The annual meeting of shareholders was held on January 23, 1998. The
shareholders elected the following six directors to hold office until the next
annual meeting and until their successors are elected and qualified:
<TABLE>
<CAPTION>
NUMBER OF VOTES
--------------------
FOR AGAINST
--------- -------
<S> <C> <C>
Alex Razmjoo................................... 8,322,097 6,355
Nick Shahrestany............................... 8,322,097 6,355
Frank Alaghband................................ 8,322,097 6,355
Dom Genovese................................... 8,321,497 6,955
Alex Aydin..................................... 8,321,622 6,830
David Blake.................................... 8,321,022 7,430
</TABLE>
In addition, the shareholders approved the following proposals:
<TABLE>
<CAPTION>
NUMBER OF VOTES
--------------------------------
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C> <C>
An Amendment of the Company's 1995 Stock
Option Plan to increase the number of shares
reserved for issuance thereunder by 450,000
shares to an aggregate of 990,000 shares. 7,375,992 949,780 2,680
The appointment of Arthur Andersen L.L.P. as the
independent auditors of the
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C> <C> <C>
Company for 1998. 8,325,572 2,325 555
</TABLE>
Item 5. Other Information.
Not applicable.
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.
13
<PAGE> 14
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 12th day of March, 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 March 12, 1998
- ----------------------------------- and Chief Executive Officer (Principal
Alex Razmjoo Executive Officer)
/s/ Alex Aydin Executive Vice President, Finance March 12, 1998
- ----------------------------------- and Administration (Principal Financial
Alex Aydin Officer)
/s/ Frederick Judd Vice President, Finance and March 12, 1998
- ------------------------------------ General Counsel (Principal Accounting
Frederick Judd Officer)
</TABLE>
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
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
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 819,000
<SECURITIES> 21,637,000
<RECEIVABLES> 10,827,000
<ALLOWANCES> 1,670,000
<INVENTORY> 9,118,000
<CURRENT-ASSETS> 44,164,000
<PP&E> 2,562,000
<DEPRECIATION> 1,662,000
<TOTAL-ASSETS> 45,097,000
<CURRENT-LIABILITIES> 10,825,000
<BONDS> 0
0
0
<COMMON> 111,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 45,097,000
<SALES> 23,514,000
<TOTAL-REVENUES> 23,514,000
<CGS> 15,098,000
<TOTAL-COSTS> 15,098,000
<OTHER-EXPENSES> 6,107,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (291,000)
<INCOME-PRETAX> 2,600,000
<INCOME-TAX> 1,005,000
<INCOME-CONTINUING> 1,595,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,595,000
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
