<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 OCTOBER 31, 2000
[ ] 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.)
58 Discovery, Irvine California 92618
(Address of principal executive office) (Zip Code)
(949) 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
December 1, 2000, was 11,618,022
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, July 31,
2000 2000
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................. $ 2,792,000 $ 1,450,000
Short-term marketable securities, held to maturity 16,780,000 14,065,000
Accounts receivable, less allowance for doubtful
accounts and sales returns of $2,663,000 and
$2,752,000, respectively ....................... 9,030,000 6,699,000
Inventories, net ................................. 9,319,000 8,430,000
Income tax receivable ............................ 21,000 2,699,000
Deferred income taxes ............................ 2,131,000 1,833,000
Prepaid expenses ................................. 1,186,000 372,000
Other current assets ............................. 176,000 296,000
------------ ------------
Total current assets ......................... 41,435,000 35,844,000
Property and equipment, net ........................ 17,357,000 16,034,000
Other assets ....................................... 880,000 918,000
------------ ------------
Total assets ................................. $ 59,672,000 $ 52,796,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit .................................. $ 5,597,000 $ 610,000
Loan payable ..................................... -- 10,750,000
Accounts payable ................................. 8,428,000 10,399,000
Accrued expenses and other current liabilities ... 2,145,000 1,837,000
Accrued compensation ............................. 1,020,000 1,213,000
Deferred service revenues ........................ 711,000 431,000
Income taxes payable ............................. 19,000 --
Current portion of convertible debenture ......... 9,612,000 --
------------ ------------
Total current liabilities .................... 27,532,000 25,240,000
Convertible debenture ............................ 4,806,000 --
------------ ------------
Total liabilities ............................ 32,338,000 25,240,000
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized, no shares issued and outstanding ... -- --
Common stock, $.01 par value; 65,000,000 shares
authorized, 11,612,307 and 11,531,357 shares
issued and outstanding, respectively ........... 116,000 115,000
Additional paid-in capital ....................... 20,714,000 19,685,000
Retained earnings ................................ 6,916,000 8,007,000
Accumulated other comprehensive loss ............. (412,000) (251,000)
------------ ------------
Total shareholders' equity ................... 27,334,000 27,556,000
------------ ------------
Total liabilities and shareholders' equity ......... $ 59,672,000 $ 52,796,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
2
<PAGE> 3
PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales .................................. $ 13,264,000 $ 18,909,000
Cost of sales .............................. 8,382,000 13,668,000
------------ ------------
Gross profit ........................... 4,882,000 5,241,000
Selling, general and administrative expenses 4,669,000 6,051,000
Research and development expenses .......... 1,772,000 1,646,000
------------ ------------
Operating loss ......................... (1,559,000) (2,456,000)
Interest income ............................ 222,000 286,000
Interest expense ........................... (148,000) --
------------ ------------
Loss before income taxes ................. (1,485,000) (2,170,000)
Benefit for income taxes ................. (394,000) (594,000)
------------ ------------
Net loss ................................... $ (1,091,000) $ (1,576,000)
============ ============
Net loss per common share:
Basic ................................. $ (0.09) $ (0.14)
============ ============
Diluted ............................... $ (0.09) $ (0.14)
============ ============
Weighted average number of common shares:
Basic ................................. 11,570,000 11,238,000
============ ============
Diluted ............................... 11,570,000 11,238,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 4
PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ACC. OTHER
----------------------- ADDITIONAL RETAINED COMPREHENSIVE
SHARES AMOUNT PAID IN CAPITAL EARNINGS INCOME (LOSS) TOTAL
----------- --------- --------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1998 .............. 11,178,742 $ 112,000 $17,751,000 $18,866,000 $ 3,000 $ 36,732,000
Comprehensive loss:
Net loss .............................. -- -- -- (2,875,000) -- (2,875,000)
Foreign currency translation adjustment -- -- -- -- (18,000) (18,000)
------------
Comprehensive loss .................... (2,893,000)
Exercise of employee stock options .... 41,013 -- 152,000 -- -- 152,000
Issuance of stock to employees ........ 5,531 -- 39,000 -- -- 39,000
Tax benefit from stock option exercises -- -- 71,000 -- -- 71,000
Stock repurchases ..................... (77,845) (1,000) (400,000) -- -- (401,000)
Acquisitions .......................... 79,600 1,000 585,000 -- -- 586,000
----------- --------- ------------ ------------ --------- ------------
BALANCE AT JULY 31, 1999 .............. 11,227,041 112,000 18,198,000 15,991,000 (15,000) 34,286,000
Comprehensive loss:
Net loss .............................. -- -- -- (7,984,000) -- (7,984,000)
Foreign currency translation adjustment -- -- -- -- (236,000) (236,000)
------------
Comprehensive loss .................... (8,220,000)
Compensatory stock options ............ -- -- 62,000 -- -- 62,000
Exercise of employee stock options .... 278,587 3,000 1,112,000 -- -- 1,115,000
Issuance of stock to employees ........ 25,729 -- 313,000 -- -- 313,000
----------- --------- ------------ ------------ --------- ------------
BALANCE AT JULY 31, 2000 .............. 11,531,357 115,000 19,685,000 8,007,000 (251,000) 27,556,000
Comprehensive loss:
Net loss .............................. -- -- -- (1,091,000) -- (1,091,000)
Foreign currency translation adjustment -- -- -- -- (161,000) (161,000)
------------
Comprehensive loss .................... (1,252,000)
Compensatory stock options ............ -- -- 6,000 -- -- 6,000
Exercise of employee stock options .... 80,950 1,000 441,000 -- -- 442,000
Issuance of stock warrant to investor -- -- 582,000 -- -- 582,000
----------- --------- ------------ ------------ --------- ------------
BALANCE AT OCTOBER 31, 2000 ........... 11,612,307 $ 116,000 $ 20,714,000 $ 6,916,000 $(412,000) $ 27,334,000
=========== ========= ============ ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $ (1,091,000) $ (1,576,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................... 215,000 226,000
Compensatory stock options ...................... 6,000 --
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable ........................... (2,331,000) (490,000)
Inventories ................................... (889,000) 190,000
Income tax receivable ......................... 2,678,000 --
Deferred income taxes ......................... (298,000) 1,097,000
Prepaid expenses .............................. (814,000) 24,000
Other current assets .......................... 120,000 9,000
Other assets .................................. (2,000) 2,000
Accounts payable .............................. (1,971,000) (783,000)
Accrued expenses and compensation ............. 115,000 (1,818,000)
Deferred service revenues ..................... 280,000 707,000
Income taxes payable .......................... 19,000 (18,000)
------------ ------------
Net cash used in operating activities ...... (3,963,000) (2,430,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .............. (1,498,000) (241,000)
Investments in short-term marketable securities . -- (7,028,000)
------------ ------------
Net cash used in investing activities ...... (1,498,000) (7,269,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debt, net ............... 14,418,000 --
Issuance of stock warrant to investor ........... 582,000 --
Repayment of loan .............................. (10,750,000) --
Net borrowings on lines of credit ............... 4,987,000 --
Stock option exercises .......................... 442,000 45,000
------------ ------------
Net cash provided by financing activities .. 9,679,000 45,000
Effect of exchange rate changes ............... (161,000) (29,000)
------------ ------------
Increase (decrease) in cash ................... 4,057,000 (9,683,000)
Cash and cash equivalents at beginning of period .... 15,515,000 22,433,000
------------ ------------
Cash and cash equivalents at end of period .......... $ 19,572,000 $ 12,750,000
============ ============
Supplemental disclosures of cash flow information:
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest ........................................ $ 117,000 $ --
Income taxes .................................... $ (2,732,000) $ (1,097,000)
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE> 6
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
OCTOBER 31, 2000 AND OCTOBER 31, 1999
NOTE 1. GENERAL.
The accompanying financial information is unaudited, but in the opinion
of management, reflects all adjustments (which include only normal 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 accounting principles generally accepted
in the United States of America 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 included in
the Company's Report on Form 10-K for fiscal 2000. Results for the interim
periods presented are not necessarily indicative of the results for the entire
year.
NOTE 2. INVENTORIES.
Inventories are summarized as follows:
October 31, 2000 July 31, 2000
---------------- -------------
Raw materials $4,929,000 $4,225,000
Work-in process 609,000 255,000
Finished goods 3,781,000 3,950,000
---------- ----------
Total $9,319,000 $8,430,000
========== ==========
NOTE 3. NET LOSS PER SHARE.
Basic net loss per share is computed using the weighted average number
of shares of common stock outstanding during the period. Diluted net loss per
share is computed using the weighted average number of shares of common stock
outstanding and potentially dilutive common shares outstanding during the
period. Potentially dilutive common shares consist of stock options and
warrants. For the periods presented, basic and diluted net loss per share was
based on the weighted average number of shares of common stock outstanding
during the period. At October 31, 2000 and 1999, respectively, options and
warrants to purchase 1,394,000 and 779,000 shares of common stock, respectively,
were not included in the computation of net loss per share as the effect would
have been antidilutive.
NOTE 4. COMPREHENSIVE LOSS.
For the quarters ended October 31, 2000 and 1999, the only differences
between reported net loss and comprehensive loss were foreign currency
translation adjustments of $(161,000) and $(29,000), respectively.
6
<PAGE> 7
NOTE 5. BUSINESS SEGMENT INFORMATION.
The Company operates in one industry segment: The design, manufacture
and marketing of data storage devices. The Company has two major distinct
product families: network attached storage products ("NAS Products") and other
data storage and access products. Net sales of network attached storage (NAS)
products represented approximately 60.3% and 14.0% of total product net sales
for the three months ended October 31, 2000 and 1999.
International sales as a percentage of net sales amounted to 58.0% and
40.9% for the three months ended October 31, 2000 and 1999. International sales
for the first quarter of fiscal 2001 include sales of approximately $3.3 million
in sales to an Italian internet service provider. International sales were
primarily to European customers and secondarily Middle Eastern, Latin American
and Pacific Rim customers. Identifiable assets used in connection with the
Company's foreign operations have not changed materially since July 31, 2000.
NOTE 6. LINES OF CREDIT AND CONVERTIBLE DEBENTURE.
On October 10, 2000, the Company entered into a term loan agreement and
a three-year working capital line of credit with CIT Business Credit. A term
loan of $4,000,000 is due and payable upon the Company's finalization of a
long-term mortgage on its corporate headquarters, or it will be repaid in 12
monthly installments commencing April 1, 2001, while a term loan of $1 million
is due and payable in 90 days. The term loans bear interest at the lender's
prime rate (9.0% at October 31, 2000), plus .5%, with increases if the loan is
not reduced according to a fixed amortization. The working capital line of
credit allows for the Company to borrow, on a revolving basis, for a period of
three years, a specified percentage of its eligible accounts receivable and
inventories (approximately $3.0 million at October 31, 2000), up to a limit of
$5,000,000. Amounts outstanding under the working capital line bear interest at
the lender's prime rate plus .25%. At October 31, 2000, $5.2 million was
outstanding under the various credit arrangements. The lender charged
approximately $130,000 for the credit facilities, some of which may be refunded
if the term loan is paid prior to maturity. The lines accrue various monthly
maintenance, minimum usage and early termination fees. The lines require certain
financial and other covenants, including the maintenance of a minimum EBITDA
requirement for each fiscal quarter beginning in the quarter ending January 31,
2001. The Company was in compliance with all covenants of the lines at October
31, 2001. The combined lines of credit are collateralized by all the assets of
the Company.
In addition to the two lines noted above, the Company replaced the
Finova flooring line of credit with a flooring line with IBM Credit who has
committed to make $2.5 million in flooring inventory commitments available to
the Company. The flooring line is collateralized by the specific inventory
purchased pursuant to the flooring commitments, and the two lenders have entered
into an intercreditor agreement which determines the level of priority of either
lender's security interest. The flooring line requires the maintenance by the
Company of a minimum net worth of $16,000,000, and the Company was in compliance
with the terms of the flooring line at October 31, 2000. At October 31, 2000,
there was $1.0 million outstanding under the IBM flooring line of credit
included in accounts payable.
On October 31, 2000, the Company issued a $15 million convertible
unsecured debenture to a private investor. The debenture bears interest at 6.0%
per annum, and is repayable in full on October 31, 2003, unless otherwise
converted into the common stock of the Company. The debenture is convertible
into the common stock of the Company at the investor's option at $22.79 per
share, and at the Company's option if the common stock of the Company trades at
more than $30.75 for at least 20 consecutive trading days. The investor has a
"put" right, which allows the investor to require the Company to either repay in
cash the face amount of the debenture put by the investor, plus any accrued but
unpaid interest through such time, or pay such amount by issuing its shares at
90% of the average closing price of the Company's common stock for the five-day
period preceding the time the investor makes such a demand. The investor may put
up to $5 million on the 6th month anniversary, $10 million on the 12 month
anniversary, and $15 million on the 18th, 24th and 30th anniversaries of October
31, 2000. If the Company were to issue shares at 90% of the trading price as
repayment of a put demand, the Company may incur a significant charge to its
income statement based on the difference between the issuance price of the
Company's common stock and the value of the common stock at October 31, 2000. In
connection with the issuance of the debenture, the Company issued to the
investor a 5-year warrant to purchase up to 32,916 shares of its common stock at
$32.55 per share. The Company has valued the warrant using a Black-Scholes model
at approximately $582,000, and will amortize this value over the life of the
debt, or if conversion of the debenture occurs, the Company will reclass the
remaining value to interest expense.
7
<PAGE> 8
Because $10 million of the debenture may be put to the Company within
one year from the date of the balance sheet, the principal amount of the
debentures are classified in both current and long-term liabilities, net of the
remaining warrant value. At October 31, 2000, the values were:
Debenture Warrant Net
amount Value Debenture
repayable Remaining Value
----------- --------- -----------
Current portion of long-term debt $10,000,000 $(388,000) $ 9,612,000
Long-term debt 5,000,000 (194,000) 4,806,000
----------- --------- -----------
Total $15,000,000 $(582,000) $14,418,000
=========== ========= ===========
In addition to the warrant cost, costs of approximately $582,000 were incurred
in the debt transactions noted above, and the amounts will be classified as
prepaid expenses, and amortized as interest expense over the life of the debt
instruments.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
138, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. SFAS 133 establishes accounting and reporting standards for derivative
instruments including derivative instruments embedded in other contracts and for
hedging activities. Adoption of SFAS 133 did not have a material impact on the
Company's consolidated financial position, results of operations or liquidity.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulleting (SAB) No. 101, "Revenue Recognition in
Financial Statements," as amended, which for the Company is effective no later
than the fourth quarter of fiscal 2001. SAB No. 101 summarizes certain of the
SEC staff's views regarding the appropriate recognition of revenue in financial
statements. The Company is currently reviewing SAB No. 101 and has not yet
determined the potential impact on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Procom develops, manufacturers and markets NAS appliances and other
storage devices for a wide range of computer networks and operating systems. Our
NAS appliances, which consist of our DataFORCE and NetFORCE product lines,
provide end-users with faster access to data at lower overall cost than other
storage alternatives. We refer to these products collectively as our NAS
appliances. In addition, we sell disk drive storage upgrade systems, CD/DVD-ROM
servers and arrays and tape backup products, which we refer to collectively as
our non-NAS products. In the last two years, we have significantly increased our
focus on the development and sale of NAS appliances. We continue to develop more
advanced NAS appliances and expect this business to be our principal business in
the future. We are currently analyzing the market demands and opportunities for
all of our non-NAS products, and hope to transition users of these products to
our growing line of more complex, generally higher margin NAS solutions.
In December 1999, we executed an agreement with Hewlett-Packard, under
which we supply a customized version of our mid-range NAS appliance hardware and
software for Hewlett-Packard for resale. Under the agreement, which has a
five-year term, and which has no minimum quantity commitments, we expect that
Hewlett-Packard will market and support the NAS appliances through their
Distribution channels. We commenced shipments under the agreement in limited
quantities in April 2000.
8
<PAGE> 9
Changing Business Mix. In recent periods, we have experienced
significantly reduced demand, revenues and gross margins for our non-NAS
products and we have discontinued some non-NAS products. The demand for our CD
servers and arrays has declined and we have experienced increased pricing
pressures on our disk drive storage upgrade systems, resulting in lower overall
revenues and gross margins. Our gross margins vary significantly by product
line, and, therefore, our overall gross margin varies with the mix of products
we sell. For example, our sales of CD servers and arrays have historically
generated higher gross margins than those of our tape back-up and disk drive
products. Because recently we have sold, and expect to continue to sell, fewer
CD server and arrays, we expect our overall gross margins to be negatively
affected. This reduction may be offset as sales of our higher margin NAS
appliances increase as a percentage of total sales, in which case, we expect our
overall gross margins to be positively affected.
Our revenues and gross margins have been and may continue to be affected
by a variety of factors including:
o new product introductions and enhancements;
o competition;
o direct versus indirect sales;
o the mix and average selling prices of products; and
o the cost of labor and components.
Revenue and Revenue Recognition. We generally record sales upon product
shipment. In the case of sales to most of our distributors, we record sales when
the distributor receives the products. We recognize our product service and
support revenues over the terms of their respective contractual periods. Our
agreements with many of our VARs, system integrators and distributors allow
limited product returns, including stock balancing, and price protection
privileges. We maintain reserves, which 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 us, our indirect channel
partners and end users generally are able to purchase appliances on a trial
basis and return the appliances within a specified period if they are not
satisfied. We do not record evaluation units as sales until the customer has
accepted and paid for these units.
Costs and Expenses. Our cost of sales consists primarily of the cost of
components produced by our suppliers, such as disk drives, cabinets, power
supplies, controllers and CPUs, our direct and indirect labor expenses and
related overhead costs such as rent, utilities and manufacturing supplies and
other expenses. In addition, cost of sales includes third-party license fees,
warranty expenses and reserves for obsolete inventory.
Selling, general and administrative expenses include costs directly
associated with the selling process such as salaries and commissions of sales
personnel, marketing, direct and cooperative advertising and travel expenses.
General and administrative expenses include our general corporate expenses, such
as salaries and benefits, rent, utilities, bad debt expense, legal and other
professional fees and expenses, depreciation, and amortization of goodwill.
These costs are expensed as incurred.
Our research and development expenses consist of the costs associated
with software and hardware development. Specifically, these costs include
employee salaries and benefits, consulting fees for contract programmers, test
supplies, employee training and other related expenses. The cost of developing
new appliances and substantial enhancements to existing appliances are expensed
as incurred.
9
<PAGE> 10
The following table sets forth consolidated statement of operations data
as a percentage of net sales for each of the periods indicated:
THREE MONTHS ENDED
OCTOBER 31,
------------------
2000 1999
----- -----
STATEMENT OF OPERATIONS
Net sales 100.0% 100.0%
Cost of sales 63.2 72.3
------ ------
Gross profit 36.8 27.7
Operating expenses:
Selling, general and administrative 35.2 32.0
Research and development 13.4 8.7
------ ------
Total operating expenses 48.6 40.7
------ ------
Operating loss (11.8) (13.0)
------ ------
Interest income, net 0.6 1.5
------ ------
Loss before income taxes (11.2) (11.5)
Benefit for income taxes (3.0) (3.1)
------ ------
Net loss (8.2)% (8.4)%
====== ======
THREE MONTHS ENDED OCTOBER 31, 2000 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1999
Net Sales. Net sales decreased by 29.9% to $13.3 million for the three
months ended October 31, 2000, from $18.9 million for the three months ended
October 31, 1999. This decrease resulted from a significant decrease in unit
sales of CD servers and arrays and disk drive storage upgrade systems, combined
with the effect of significant price erosion of the average selling price of
these products. In addition, sales were reduced due to lower sales of our German
subsidiary and the concurrent weakening of the European currencies. Also, during
the quarter, we relocated our corporate headquarters to Irvine, California, and
sales and operations were disrupted for a significant period during the quarter.
We expect to see continued weakness in the demand for our disk drive storage
upgrade systems and CD servers and arrays and non-NAS product sales throughout
fiscal 2001, and we may accelerate the discontinuance of our non-NAS products.
Net sales related to our disk based NAS appliances were $7.9 million for
the three months ended October 31, 2000, compared to $2.6 million for the three
months ended October 31, 1999. This increase was primarily the result of
increased unit sales of our NetFORCE NAS appliances, offset by decreased sales
of our DataFORCE NAS appliances. Sales of approximately $3.3 million in NAS
appliances to an Italian internet service provider are included in net sales for
the quarter ended October 31, 2000.
International sales remained constant at $7.7 million, but increased to
58.0% of our net sales for the three months ended October 31, 2000, compared to
40.9% of our net sales in the three months ended October 31, 1999. The increase
in international sales as a percentage of our net sales was primarily due to
sales to an Italian internet service provider, of approximately $3.3 million,
included in net sales for the first quarter of fiscal 2001, and other sales of
NAS appliances by our German and Swiss subsidiaries and reduced U.S. sales of
our CD servers and arrays. There can be no assurance that our revenues of our
NAS products will continue to increase in any particular quarter or period.
Gross Profit. Gross profit decreased 6.8% to $4.9 million, for the three
months ended October 31, 2000, from $5.2 million, for the three months ended
October 31, 1999. Gross margin increased to 36.8% of net sales for the three
months ended October 31, 2000, from 27.7% of net sales for the three months
ended October 31, 1999. The increase in gross margin was primarily the result of
the higher percentage of NAS
10
<PAGE> 11
revenues of our European subsidiaries, offset to a lesser extent by a reduction
in sales of CD servers and arrays, which have historically experienced higher
margins. In addition, we realized reduced margins on lower sales of disk drive
upgrade systems due to competition and price erosion in the disk drive upgrade
industry. We expect that gross margins may be impacted by continuing reductions
in sales of some of our higher margin non-NAS product lines, such as CD servers
and arrays, until sales of our NAS appliances significantly increase both in
absolute dollars, and as a percentage of our total sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 22.8% to $4.7 million in the three months
ended October 31, 2000, from $6.1 million in the three months ended October 31,
1999, and increased as a percentage of net sales to 35.2% from 32.0%. The dollar
decrease in selling, general and administrative expenses was primarily the
result of reduced sales commissions, offset partially by the direct costs of
approximately $100,000 to relocate our corporate headquarters to Irvine,
California and net foreign currency losses of approximately $160,000 incurred
due to the weakening of the Euro, and therefore, the German mark and the Italian
lira. In addition, we incurred reduced advertising and marketing costs, and
reduced legal fees, offset by increases in the cost of personnel necessary to
support our NAS sales and marketing efforts. During the three months ended
October 31, 2000, we continued to identify and eliminate certain positions and
functions not related to our core NAS activities. As a result, we experienced a
slight reduction in selling, general and administrative expenses in the past
quarter. However, we expect overall selling, general and administrative expense
to increase in future periods as we plan to substantially increase spending on
efforts to market our NAS appliances and we expect increased facilities costs,
such as utilities, taxes and maintenance, as we utilize our recently completed
corporate headquarters.
Research and Development Expenses. Research and development expenses
increased 7.7% to $1.8 million, or 13.4% of net sales, for the three months
ended October 31, 2000, from $1.6 million, or 8.7% of net sales, for the three
months ended October 31, 1999. These increases were primarily due to
compensation expense for additional NAS software programmers and hardware
developers. We anticipate that our research and development expenses will
continue to increase, both in absolute dollars and as a percentage of net sales,
with the expected addition of dedicated NAS engineering resources.
Interest Income (Expense). Interest income decreased 22.4% to $222,000
for the three months ended October 31, 2000, from $286,000 for the three months
ended October 31, 1999. During the first three months of fiscal year 2001, we
invested the majority of our available cash in investment-grade commercial paper
with maturities of less than 90 days. As a result of a decrease in our
investable cash position, partially offset by slightly increased interest rates,
interest income decreased in fiscal 2001. During the first quarter of fiscal
2001, our new corporate headquarters were placed into service, and we began to
incur interest expense on the amount we have financed for our building.
(Previously, interest expense had been capitalized as part of the developmental
cost of our headquarters.) We expect that interest income will be reduced in the
future and that interest expense will increase significantly due to the
financing of our corporate headquarters, and our need to borrow additional
amounts to finance our operations. On October 31, 2000, we issued a $15 million
6% convertible debenture, and interest expense in future periods will include
interest charges on the amount outstanding under the debenture agreement.
Benefit for Income Taxes. Our effective tax benefit rate for the three
months ended October 31, 2000 was (26.5%), compared to an effective tax benefit
rate of (27.4%) for the same period in fiscal 1999. The fiscal 2001 benefit
approximates the federal and state statutory rates applied to our U.S. operating
losses, reduced by unusable foreign operating losses, and adjusted for research
and development credits. The corresponding fiscal 2000 effective tax rate
reflects the statutory rates and unusable foreign losses, partially offset by
research and development tax credits. The net deferred tax asset recorded on the
balance sheet as of October 31, 2000 is based on the Company's expectation that
it will more likely than not have future taxable income against which it may
apply certain tax attributes, including the Company's net operating loss
deduction. If such future taxable income does not materialize, the Company may
have to reduce or eliminate the value of the tax asset in the future.
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LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2000, we had cash and short-term marketable securities
totaling $19.6 million.
Net cash used in operating activities was $4.0 million in the first
quarter of fiscal 2001 and $ 2.4 million in the first quarter of fiscal 2000.
Net cash used in operating activities relates primarily to increases in our
accounts receivable and inventories and decreases in accounts payable, offset by
a reduction of approximately $2.7 million in our income tax refund receivable,
which we received in the first quarter of fiscal 2001.
Net cash used in investing activities was $1.5 million in the first
quarter of fiscal 2001, while net cash used in investing activities was $ 7.3
million in the first quarter of fiscal 2000. Net cash used in investing
activities in the first quarter of fiscal 2001 was the result of purchases of $
1.3 million to complete our corporate headquarters and $0.2 million of other
property and equipment. Net cash used in investing activities in the first
quarter of fiscal 2000 resulted from the purchase of $ 7.0 million of short-term
marketable securities and purchases of approximately $0.2 million of property
and equipment.
Net cash provided by financing activities was $ 9.7 million in the first
quarter of fiscal 2001. Net cash provided by financing activities in the first
quarter of fiscal 2001 resulted primarily from the issuance of a $15 million
convertible debenture, and the closing of a term loan/line of credit agreement
with CIT Business Credit (see below) and approximately $0.4 million in stock
option exercises, reduced by the repayment of approximately $10.8 million in
loans previously secured by the Company's commercial paper portfolio.
At July 31, 2000, we had established a revolving line of credit with
Finova Capital Corporation. The line had been based on a percentage of our
eligible accounts receivable and inventory, up to a maximum of $10,000,000. We
paid off all amounts outstanding under the Finova flooring line in early October
2000.
In early October 2000, we entered into a term loan agreement and a
three-year working capital line of credit with CIT Business Credit. A term loan
of $4,000,000 is due and payable upon our finalization of a long-term mortgage
on our corporate headquarters, or it will be repaid in 12 monthly installments
commencing April 1, 2001, while a second term loan of $1 million is due and
payable in 90 days. The term loans bear interest at the lender's prime rate
(9.0% at October 31, 2000), plus .5%, with increases if the loan is not reduced
according to a fixed amortization. The working capital line of credit allows for
us to borrow, on a revolving basis, for a period of three years, a specified
percentage of our eligible accounts receivable and inventories (which would have
been approximately $3.0 million at October 31, 2000), up to a limit of
$5,000,000. At October 31, 2000, there was $5 million outstanding under the term
loans, and approximately $0.2 million outstanding under the working capital line
of credit. Amounts outstanding under the working capital line bear interest at
the lender's prime rate plus .25%. The lender charged approximately $130,000 for
the credit facilities, some of which may be refunded if the term loan is paid
prior to maturity. The lines accrue various monthly maintenance, minimum usage
and early termination fees. The lines require certain financial and other
covenants, including the maintenance of a minimum EBITDA requirement for each
fiscal quarter beginning the quarter ending January 31, 2001. We were in
compliance with all covenants of the lines at October 31, 2001. The combined
lines of credit are collateralized by all our assets.
In addition to the CIT lines noted above, we entered into a flooring
line with IBM Credit who has committed to make $2.5 million in flooring
inventory commitments available to us. The flooring line is collateralized by
the specific inventory purchased pursuant to the flooring commitments, and the
two lenders have entered into an intercreditor agreement which determines the
level of priority of either lender's security interest. The flooring line
requires the maintenance by us of a minimum net worth of $16,000,000, and the
Company was in compliance with the terms of the flooring line at October 31,
2000. At October 31, 2000, there was $1.0 million outstanding under the IBM
flooring line of credit included in accounts payable.
In addition to the lines of credit, the Company's foreign subsidiaries
have lines of credit with two German banks, utilized primarily for overdraft and
short-term cash needs. The lines allow Megabyte to borrow up to 1,000,000 German
marks (approximately US$550,000), with interest at approximately 7.45%,
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and are not guaranteed by Procom. At October 31, 2000, there was 988,000 DM
(approximately US$425,000) outstanding under the lines. Also, Procom Technology,
SPA maintains two short-term lines of credit totaling 300 million lira
(approximately US$145,000), bearing interest at 13% per annum. No amounts were
outstanding under this line at October 31, 2000.
On October 31, 2000, the Company issued a $15 million convertible
unsecured debenture to a private investor. The debenture bears interest at 6.0%
per annum, and is repayable in full on October 31, 2003, unless otherwise
converted into the common stock of the Company. The debenture is convertible
into the common stock of the Company at the investor's option at $22.79 per
share, and at the Company's option if the common stock of the Company trades at
more than $30.75 for at least 20 consecutive trading days. The investor has a
"put" right, which allows the investor to require the Company to either repay in
cash the face amount of the debenture put by the investor, plus any accrued but
unpaid interest through such time, or pay such amount by issuing our shares of
common stock at 90% of the average closing price of the Company's common stock
for the five day period preceding the time the investor makes such a demand. The
investor may put up to $5 million on the 6th month anniversary, $10 million on
the 12 month anniversary, and $15 million on the 18th, 24th and 30th
anniversaries of October 31, 2000. If the Company were to issue shares at 90% of
the trading price as repayment of a put demand, the Company may incur a
significant charge to its income statement based on the difference between the
issuance price of the Company's common stock and the value of the common stock
at October 31, 2000. In connection with the issuance of the debenture, the
Company issued to the investor a 5-year warrant to purchase up to 32,916 shares
of its common stock at $32.55 per share. The Company has valued the warrant
using a Black-Scholes model at approximately $582,000, and will amortize this
value over the life of the debt, or if conversion of the debenture occurs, the
Company will reclass the remaining value to interest expense.
Because $10 million of the debentures may be put to the Company within
one year from the date of the balance sheet, the principal amount of the
debentures are classified in both current and long-term liabilities, net of the
remaining warrant value.
We had also borrowed $10.75 million from an investment bank for 18
months, maturing in September 2000, at which time it can be renewed on a monthly
basis, at rates ranging from 6.125% to $7.9%. In September 2000, the loan was
renewed for an additional 6 months. We repaid the entire amount outstanding
under the loan on October 31, 2000. The interest expended under the line of
credit, through the date of completion of construction was capitalized as a cost
of construction of our new headquarters facility.
In March 1999, we purchased an 8.3 acre parcel of land for $7.3 million
in Irvine, California, for development as our corporate headquarters facility.
Construction commenced in late 1999 and was completed in September 2000. The
cost of the land together with the cost of constructing the facility, including
capitalized interest and other carrying costs, is approximately $16.6 million
including $0.7 million in capitalized interest costs. We intend to lease 47,000
square feet of the building and we are currently considering financing options
including a long-term mortgage or sale/leaseback. There can be no assurance,
however, that we will be successful in completing a lease, long-term mortgage or
sale/leaseback on favorable terms, if at all.
On September 14, 1998, our board of directors approved an open market
stock repurchase program. We were authorized to effect repurchases of up to $2.0
million in shares of our common stock. We have repurchased a total of 77,845
shares at an average cost of $5.15 per share. No repurchases were made in the
quarter ended October 31, 2000, and the Company does not intend to make
additional repurchases. In September 2000, the Company's Board terminated the
repurchase program.
We expect to have sufficient cash generated from operations, through
availability under lines of credit and through other sources, such as a
long-term mortgage or a sale-leaseback of our facility, to meet our anticipated
cash requirements for the next twelve months.
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RISK FACTORS
Before investing in our common stock, you should be aware that there are
risks inherent in our business, including those indicated below. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations. If any of the following
risks actually occurs, our business could be harmed. In that case, the trading
price of our common stock could decline, and you might lose all or part of your
investment. You should carefully consider the following factors as well as the
other information in the reports we have filed with the Securities and Exchange
Commission.
IF GROWTH IN THE NAS MARKET DOES NOT MEET OUR EXPECTATIONS, OUR FUTURE FINANCIAL
PERFORMANCE COULD SUFFER.
We believe our future financial performance will depend in large part
upon the continued growth in the NAS market and on emerging standards in this
market. We intend for NAS products to be our primary business. The market for
NAS products, however, may not continue to grow. Long-term trends in storage
technology remain unclear and some analysts have questioned whether competing
technologies, such as storage area networks, may emerge as the preferred storage
solution. If the NAS market grows more slowly than anticipated, or if NAS
products based on emerging standards other than those adopted by us become
increasingly accepted by the market, our operating results could be harmed.
IF WE FAIL TO SUCCESSFULLY MANAGE OUR TRANSITION TO A FOCUS ON NAS PRODUCTS, OUR
BUSINESS AND PROSPECTS WOULD BE HARMED.
We began developing NAS products in 1997. Since then, we have focused
our efforts and resources on our NAS business, and we intend to continue to do
so. We expect to continue to wind down our non-NAS product development and
marketing efforts. In the interim, we expect to continue to rely in large part
upon sales of our non-NAS products to fund operating and development expenses.
Net sales of our non-NAS products have been declining in amount and as a
percentage of our overall net sales, and we expect these declines to continue.
If the decline in net sales of our non-NAS products varies significantly from
our expectations, or the decline in net sales of our non-NAS products is not
substantially offset by increases in sales of our NAS products, we may not be
able to generate sufficient cash flow to fund our operations or to develop our
NAS business.
We also expect our transition to a NAS-focused business to require us to
continue:
o engaging in significant marketing and sales efforts to achieve
market awareness as a NAS vendor;
o reallocating resources in product development and service and
support of our NAS appliances;
o modifying existing and entering into new channel partner
relationships to include sales of our NAS appliances; and
o expanding and reconfiguring manufacturing operations.
In addition, we may face unanticipated challenges in implementing our
transition to a NAS-focused company. We may not be successful in managing any
anticipated or unanticipated challenges associated with this transition.
Moreover, we expect to continue to incur costs in addressing these challenges,
and there is no assurance that we will be able to generate sufficient revenues
to cover these costs. If we fail to successfully implement our transition to a
NAS-focused company, our business and prospects would be harmed.
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OUR AGREEMENT WITH HEWLETT-PACKARD COMPANY MAY NOT GENERATE SIGNIFICANT NET
SALES, AND WE MAY NOT BE ABLE TO ENTER INTO OTHER BUSINESS ALLIANCES IN THE
FUTURE.
We believe our agreement with Hewlett-Packard Company is an important
element of our strategy to increase penetration in the NAS market. However,
Hewlett-Packard has not currently made significant purchase commitments for our
products, and there is no minimum purchase commitment under the agreement. In
addition, because the Hewlett-Packard agreement is relatively new, we do not
have a history upon which to base an estimate of future net sales under the
agreement. We do not currently, and may never, generate significant net sales
under this agreement. Finally, the Hewlett-Packard agreement has a five-year
term, and there is no assurance that the agreement can or will be renewed.
One of our key strategies is to enter into additional business alliances
in the future, including OEM arrangements and joint development and joint
marketing arrangements, with other vendors that sell complementary products.
However, we may not be able to do so, and any business alliances may not
generate significant or profitable net sales.
IF WE FAIL TO INCREASE THE NUMBER OF DIRECT AND INDIRECT SALES CHANNELS FOR OUR
NAS PRODUCTS, OUR ABILITY TO INCREASE NET SALES MAY BE LIMITED.
In order to grow our business, we will need to increase market awareness
and sales of our NAS appliances. To achieve these objectives, we believe it will
be necessary to increase the number of our direct and indirect sales channels.
We plan to significantly increase the number of our direct sales personnel.
However, there is intense competition for these professionals, and we may not be
able to attract and retain sufficient new sales personnel.
We also plan to expand revenues from our indirect sales channels,
including distributors, VARs, OEMs and systems integrators. To do this, we will
need to modify and expand our existing relationships with these indirect channel
partners, as well as enter into new indirect sales channel relationships. We may
not be successful in accomplishing these objectives. If we are unable to expand
our direct or indirect sales channels, our ability to increase revenues may be
limited.
BECAUSE WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS OR
RESELLERS, THESE CUSTOMERS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF COMPETITORS,
WHICH COULD HARM OUR OPERATING RESULTS.
Our distributors and resellers generally offer products of several
different companies, including products of our competitors. Accordingly, these
distributors and resellers may give higher priority to products of our
competitors, which could harm our operating results. In addition, our
distributors and resellers often demand additional significant selling
concessions and inventory rights, such as limited return rights and price
protection. We cannot assure you that sales to our distributors or resellers
will continue, or that these sales will be profitable.
BECAUSE OF OUR LIMITED OPERATING HISTORY IN THE NAS MARKET, WHICH IS NEW AND
RAPIDLY EVOLVING, OUR HISTORICAL FINANCIAL INFORMATION IS OF LIMITED VALUE IN
PROJECTING OUR FUTURE OPERATING RESULTS OR PROSPECTS.
We have been manufacturing and selling our NAS products for only
approximately three years. For the year ended July 31, 2000 and the quarter
ended October 31, 2000, these products accounted for less than 35% and 59%,
respectively, of our total net sales. We expect sales of our NAS products to
represent an increasing percentage of our net sales in the future. Because of
our limited operating history in the NAS product market, as well as the rapidly
evolving nature of the NAS market, it is difficult to evaluate our business or
our prospects. In particular, our historical financial information is of limited
value in projecting our future operating results.
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OUR MARKETS ARE INTENSELY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE
EFFECTIVELY, WE MAY LOSE MARKET SHARE OR BE REQUIRED TO REDUCE PRICES.
The markets in which we operate are intensely competitive and
characterized by rapidly changing technology. Increased competition could result
in price reductions, reduced gross margins or loss of market share, any of which
could harm our operating results. We compete with other NAS companies,
direct-selling storage providers and smaller vendors that provide storage
solutions to end-users. In our non-NAS markets, we compete with computer
manufacturers that provide storage upgrades for their own products, as well as
with manufacturers of hard drives, CD servers and arrays and storage upgrade
products. Many of our current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and greater
financial, technical, marketing and other resources than we do. As a result,
they may be able to respond more quickly to new or emerging technologies and
changes in customer requirements, devote greater resources to the development,
promotion, sale and support of their products, and reduce prices to increase
market share. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We may not be able to
compete successfully against current or future competitors. In addition, new
technologies may increase competitive pressures.
WE DEPEND ON A FEW CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR NET SALES AND
ACCOUNTS RECEIVABLE, AND CHANGES IN THE TIMING AND SIZE OF THESE CUSTOMERS'
ORDERS MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.
Three customers accounted for approximately 42% and 45% of the Company's
total accounts receivable at July 31, 1999 and July 31, 2000, respectively, and
one individual customer accounted for approximately 9% and 7% of the Company's
net sales for fiscal 1999 and 2000. One customer accounted for approximately 25%
of our net sales for the quarter ended October 31, 2000, and three customers
accounted for approximately 61% of our total accounts receivable at October 31,
2000. In fiscal 1999 and 2000, we sold our non-NAS products principally to
distributors and master resellers such as Ingram Micro, Tech Data, Custom Edge
(previously Inacom) and Compucom. Unless and until we diversify and expand our
customer base for NAS products, our future success will depend to a large extent
on the timing and size of future purchase orders, if any, from these customers.
If we lose a major customer, or if one of our customers significantly reduces
its purchasing volume or experiences financial difficulties and is unable to pay
its debts, our results of operation could be harmed. We cannot be certain that
customers that have accounted for significant revenues in past periods will
continue to purchase our products in future periods.
OUR GROSS MARGINS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY, THEREBY HARMING OUR RESULTS OF OPERATIONS.
Historically, our gross margins have fluctuated significantly. Our gross
margins vary significantly by product line and distribution channel, and,
therefore, our overall gross margin varies with the mix of products we sell. Our
markets are characterized by intense competition and declining average unit
selling prices over the course of the relatively short life cycles of individual
products. For example, we derive a significant portion of our sales from disk
drives, CD servers and arrays, and storage upgrade products. The market for
these products is highly competitive and subject to intense pricing pressures.
Sales of disk drive upgrade systems generally generate lower gross margins than
those of our NAS products. If we fail to increase sales of our NAS appliances,
we believe our overall gross margins will continue to decline.
Our gross margins have been and may continue to be affected by a variety
of other factors, including:
o new product introductions and enhancements;
o competition;
o changes in the distribution channels we use;
o the mix and average selling prices of products; and
o the cost and availability of components and manufacturing labor.
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IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS, OR IF OUR PRODUCTS FAIL TO KEEP PACE
WITH TECHNOLOGICAL CHANGES IN THE MARKETS WE SERVE, OUR OPERATING RESULTS COULD
BE MATERIALLY ADVERSELY AFFECTED.
Our future growth will depend in large part upon our ability to
successfully develop and introduce new hardware and software for the NAS market.
Due to the complexity of products such as ours, and the difficulty in estimating
the engineering effort required to produce new products, we face significant
challenges in developing and introducing new products. We may be unable to
introduce new products on a timely basis or at all. If we are unable to
introduce new products in a timely manner, our operating results could be
harmed.
Even if we are successful in introducing new products, we may be unable
to keep pace with technological changes in our markets and our products may not
gain any meaningful market acceptance. The markets we serve are characterized by
rapid technological change, evolving industry standards, and frequent new
product introductions and enhancements that could render our products obsolete
and less competitive. As a result, our position in these markets could erode
rapidly due to changes in features and functions of competing products or price
reductions by our competitors. In order to avoid product obsolescence, we will
have to keep pace with rapid technological developments and emerging industry
standards. We may not be successful in doing so, and if we fail in this regard,
our operating results could be harmed.
WE RELY UPON A LIMITED NUMBER OF SUPPLIERS FOR SOME OF THE COMPONENTS USED IN
OUR PRODUCTS, AND ANY DISRUPTION OR TERMINATION OF THESE SUPPLY ARRANGEMENTS
COULD DELAY SHIPMENT OF OUR PRODUCTS AND HARM OUR OPERATING RESULTS.
We rely upon a limited number of suppliers of several key components
used in our products, including disk drives, computer boards, power supplies and
microprocessors. In the past, we have experienced periodic shortages, selective
supply allocations and increased prices for these and other components. We may
experience similar supply issues in the future. Even if we are able to obtain
component supplies, the quality of these components may not meet our
requirements. For example, in order to meet our product performance
requirements, we must obtain disk drives of extremely high quality and capacity.
Even a small deviation from our requirements could render any of the disk drives
we receive unusable by us. In the event of a reduction or interruption in the
supply or a degradation in quality of any of our components, we may not be able
to complete the assembly of our products on a timely basis or at all, which
could force us to delay or reduce shipments of our products. If we were forced
to delay or reduce product shipments, our operating results could be harmed. In
addition, product shipment delays could adversely affect our relationships with
our channel partners and current or future end-users.
UNDETECTED DEFECTS OR ERRORS FOUND IN OUR PRODUCTS, OR THE FAILURE OF OUR
PRODUCTS TO PROPERLY INTERFACE WITH THE PRODUCTS OF OTHER VENDORS, MAY RESULT IN
DELAYS, INCREASED COSTS OR FAILURE TO ACHIEVE MARKET ACCEPTANCE, WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
Complex products such as those we develop and offer may contain defects
or errors, or may fail to properly interface with the products of other vendors,
when first introduced or as new versions are released. Despite internal testing
and testing by our customers or potential customers, we do, from time to time,
and may in the future encounter these problems in our existing or future
products. Any of these problems may:
o cause delays in product introductions and shipments;
o result in increased costs and diversion of development resources;
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o require design modifications; or
o decrease market acceptance or customer satisfaction with these
products, which could result in product returns.
In addition, we may not find errors or failures in our products until
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could significantly harm our operating results. Our
current or potential customers might seek or succeed in recovering from us any
losses resulting from errors or failures in our products.
IF WE ARE UNABLE TO MANAGE OUR INTERNATIONAL OPERATIONS EFFECTIVELY, OUR
OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.
Net sales to our international customers, including export sales from
the United States, accounted for approximately 58% of our net sales for the
quarter ended October 31, 2000 as compared to 41% of our net sales for the
quarter ended October 31, 1999, 41% of our net sales for the year ended July 31,
2000 and approximately 33% of our net sales for the fiscal year ended July 31,
1999. We believe that our growth and profitability will require successful
expansion of our international operations to which we have committed significant
resources. Our international operations will expose us to operational challenges
that we would not otherwise face if we conducted our operations only in the
United States. These include:
o currency exchange rate fluctuations, particularly when we sell our
products in denominations other than U.S. dollars;
o difficulties in collecting accounts receivable and longer accounts
receivable payment cycles;
o reduced protection for intellectual property rights in some
countries, particularly in Asia;
o legal uncertainties regarding tariffs, export controls and other
trade barriers;
o the burdens of complying with a wide variety of foreign laws and
regulations; and
o seasonal fluctuations in purchasing patterns in other countries,
particularly in Europe.
Any of these factors could have an adverse impact on our existing
international operations and business or impair our ability to continue
expanding into international markets. In addition, in order to successfully
expand our international sales, we must strengthen foreign operations, hire
additional personnel and recruit additional international distributors and
resellers. Expanding internationally and managing the financial and business
operations of our foreign subsidiaries will also require significant management
attention and financial resources. For example, our foreign subsidiaries in
Europe have incurred operational losses. To the extent that we are unable to
address these concerns in a timely manner, our growth, if any, in international
sales will be limited, and our operating results could be materially adversely
affected. In addition, we may not be able to maintain or increase international
market demand for our products.
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OUR PROPRIETARY SOFTWARE RELIES ON OUR INTELLECTUAL PROPERTY, AND ANY FAILURE BY
US TO PROTECT OUR INTELLECTUAL PROPERTY COULD ENABLE OUR COMPETITORS TO MARKET
PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR PRODUCTS, WHICH
WOULD ADVERSELY AFFECT OUR NET SALES.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our proprietary software
or technology. We believe the protection of our proprietary technology is
important to our business. If we are unable to protect our intellectual property
rights, our business could be materially adversely affected. We currently rely
on a combination of copyright and trademark laws, trade secrets and a patent to
protect our proprietary rights. In addition, we generally enter into
confidentiality agreements with our employees and license agreements with
end-users and control access to our source code and other intellectual property.
We have applied for the registration of some, but not all, of our trademarks. We
have applied for one U.S. patent with respect to the design of our NetFORCE
product, and we anticipate that we will apply for additional patents. It is
possible that no patents will issue from our currently pending applications. New
patent applications may not result in issued patents and may not provide us with
any competitive advantages over, or may be challenged by, third parties. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. In addition, the laws of some foreign countries, and the
enforcement of those laws, do not protect proprietary rights to as great an
extent as do the laws of the United States. We cannot assure you that our means
of protecting our proprietary rights will be adequate or that our competitors
will not independently develop similar technology, duplicate our products or
design around any patent issued to us or other intellectual property rights of
ours.
In addition, we may initiate claims or litigation against third parties
for infringement of our proprietary rights to establish the validity of our
proprietary rights. This litigation, whether or not it is resolved in our favor,
could result in significant expense to us and divert the efforts of our
technical and management personnel.
WE MAY FROM TIME TO TIME BE SUBJECT TO CLAIMS OF INFRINGEMENT OF OTHER PARTIES'
PROPRIETARY RIGHTS OR CLAIMS THAT OUR OWN TRADEMARKS, PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS ARE INVALID, AND IF WE WERE TO SUBSEQUENTLY LOSE
OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY
AFFECTED.
We may from time to time receive claims that we are infringing third
parties' intellectual property rights or claims that our own trademarks, patents
or other intellectual property rights are invalid. We expect that companies in
our markets will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. The resolution of any claims
of this nature, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays, require us to redesign our products
or require us to enter into royalty or licensing agreements, any of which could
harm our operating results. Royalty or licensing agreements, if required, might
not be available on terms acceptable to us or at all. The loss of access to any
key intellectual property right could harm our business.
OUR NET SALES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND ANY
FLUCTUATIONS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
In recent periods, we have experienced significant declines in net sales
and gross profit and incurred operating losses, causing our quarterly operating
results to vary significantly. If we fail to meet the expectations of investors
or securities analysts, as well as our internal operating goals, as a result of
any future fluctuations in our quarterly operating results, the market price of
our common stock could decline significantly. Our net sales and quarterly
operating results are likely to fluctuate significantly in the future due to a
number of factors. These factors include:
o market acceptance of our new products and product enhancements or
those of our competitors;
o the level of competition in our target product markets;
o delays in our introduction of new products;
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<PAGE> 20
o changes in sales volumes through our distribution channels, which
have varying commission and sales discount structures;
o changing technological needs within our target product markets;
o the impact of price competition on the selling prices for our
non-NAS products, which continue to represent a majority of our net
sales;
o the availability and pricing of our product components;
o our expenditures on research and development and the cost to expand
our sales and marketing programs; and
o the volume, mix and timing of orders received.
Due to these factors, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indicators of future performance.
In addition, it is difficult for us to forecast accurately our future
net sales. This difficulty results from our limited operating history in the
emerging NAS market, as well as the fact that product sales in any quarter are
generally booked and shipped in that quarter. Because we incur expenses, many of
which are fixed, based in part on our expectations of future sales, our
operating results may be disproportionately affected if sales levels are below
our expectations.
Our revenues in any quarter may also be affected by product returns and
any warranty obligations in that quarter. Many of our distribution and reseller
customers have limited return rights. In addition, we generally extend
warranties to our customers that correspond to the warranties provided by our
suppliers. If returns exceed applicable reserves or if a supplier were to fail
to meet its warranty obligations, we could incur significant losses. In fiscal
2000, we experienced a 14% product return rate. This rate may vary significantly
in the future, and we cannot assure you that our reserves for product returns
will be adequate in any future period.
IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL OR RETAIN OUR EXECUTIVE OFFICERS
AND OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
Our continued success depends, in part, on our ability to identify,
attract, motivate and retain qualified technical and sales personnel.
Competition for qualified engineers and sales personnel, particularly in Orange
County, California, is intense, and we may not be able to compete effectively to
retain and attract qualified, experienced employees. Should we lose the services
of a significant number of our engineers or sales people, we may not be able to
compete successfully in our targeted markets and our business would be harmed.
We believe that our success will depend on the continued services of our
executive officers and other key employees. In particular, we rely on the
services of our four founders, Messrs. Razmjoo, Alaghband, Aydin and
Shahrestany. We maintain employment agreements with each of our founders. We do
not maintain key-person life insurance policies on these individuals. The loss
of any of these executive officers or other key employees could harm our
business.
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<PAGE> 21
WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY, AND OUR FAILURE TO DO SO
COULD REQUIRE US TO SEEK ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE TO US
ON FAVORABLE OR ANY TERMS.
In recent periods, we have experienced significant declines in net sales
and gross profit, and we have incurred operating losses. We incurred operating
losses of $5.2 million for fiscal 1999, $ 12.1 million for fiscal 2000 and $1.6
million for the quarter ended October 31, 2000. We expect to continue to incur
operating losses through the third quarter of fiscal 2001. As part of our
strategy to focus on the NAS market, we plan to significantly increase our
direct sales force and to increase our investment in research and development
and marketing efforts. We will need to significantly increase our revenues from
our NAS products to achieve and maintain profitability. The revenue and profit
potential of these products is unproven. We may not be able to generate
significant or any revenues from our NAS products or achieve or sustain
profitability in the future. In addition, we have invested substantial cash in
our new corporate headquarters. If we are unable to achieve or sustain
profitability in the future, we will have to seek additional financing in the
future, which may not be available to us on favorable or any terms.
CONTROL BY OUR EXISTING SHAREHOLDERS COULD DISCOURAGE POTENTIAL ACQUISITIONS OF
OUR BUSINESS THAT OTHER SHAREHOLDERS MAY CONSIDER FAVORABLE.
Our executive officers, directors and 5% or greater shareholders and
their affiliates own 6,400,000 shares, or approximately 56% of the outstanding
shares of common stock. Acting together, these shareholders would be able to
exert substantial influence on matters requiring approval by shareholders,
including the election of directors. This concentration of ownership could have
the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquiror from attempting to obtain control of us, which
could in turn have an adverse effect on the market price of our common stock or
prevent our shareholders from realizing a premium over the market price for
their shares of common stock.
THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD RESULT IN A DECLINE
IN YOUR INVESTMENT'S VALUE.
The market price for our common stock has been volatile in the past, and
particularly volatile in the last twelve months, and may continue to fluctuate
substantially in the future. The value of your investment in our common stock
could decline due to the impact of any of the above or of the following factors
upon the market price of our common stock:
o fluctuations in our operating results;
o fluctuations in the valuation of companies perceived by investors to
be comparable to us;
o a shortfall in net sales or operating results compared to securities
analysts' expectations;
o changes in analysts' recommendations or projections;
o announcements of new products, applications or product enhancements
by us or our competitors; and
o changes in our relationships with our suppliers or customers.
In addition, the stock market has experienced substantial price and
volume volatility that has particularly affected the market prices of equity
securities of many high technology companies and that often has been unrelated
or disproportionate to the operating results of these companies. As a result,
any broad market fluctuations may adversely affect the market price of our
common stock.
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<PAGE> 22
SOME PROVISIONS OF CALIFORNIA LAW AND OF OUR ARTICLES OF INCORPORATION AND
BYLAWS MAY DISCOURAGE POTENTIAL THIRD-PARTY ACQUIRORS OR THOSE WHO MIGHT SEEK TO
CHANGE OUR MANAGEMENT.
Some provisions of California law and of our articles of incorporation
and bylaws may discourage, delay or prevent a merger or acquisition even if a
change in the ownership of our company or changes in our management would be
beneficial to our shareholders. This may reduce the market price of our common
stock. A summary of these provisions in our articles and bylaws is included in
"Description of Capital Stock - Anti-Takeover Provisions."
WE HAVE ISSUED A CONVERTIBLE DEBENTURE, AND THE OBLIGATIONS OF THE DEBENTURE
POSE RISKS TO THE PRICE OF OUR COMMON STOCK AND OUR OPERATIONS.
As we have described above in the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations, on October 31, 2000, we issued a 3-year $15 million
convertible debenture to a private investor. The debenture provides that in
certain circumstances the holder of the debenture may convert its position into
our stock, or demand that we repay amounts outstanding with cash or by issuing
shares of our common stock. The terms and conditions of the debentures pose
unique and special risks to our operations and the price of our common stock.
Some of those risks are noted in more detail below.
CONVERSION OF THE DEBENTURE, EXERCISE OF THE WARRANTS AND ADDITIONAL SALES OF
COMMON STOCK BY THE HOLDER OF THE DEBENTURE MAY DEPRESS THE PRICE OF OUR COMMON
STOCK AND SUBSTANTIALLY DILUTE YOUR SHARES.
If all of the principal and interest in the debenture are converted into
shares assuming conversion of the debentures and payment of interest at 50% of
the initial conversion price and all the warrants are exercised, an additional
1,586,228 (the number of shares we registered for resale under a Form S-3 we
filed on November 22, 2000) shares of common stock will be issued. Even more
shares could be issued if the market price for our common stock is lower than
$11.40 and we choose, or are required, to issue shares to the holder of the
debenture. The issuance of all or a significant portion of these shares could
result in the substantial dilution to the interests of other shareholders or a
decrease in the price of our common stock due to the additional supply of shares
relative to demand in the market. A decline in the price of our common stock
could encourage short sales of our common stock, which could place further
downward pressure on the price of our common stock.
THE HOLDER OF THE DEBENTURE HAS A RIGHT TO DEMAND REPAYMENT OF PART OR ALL OF
THE DEBENTURE BEFORE ITS STATED MATURITY, AND IF A DEMAND FOR REPAYMENT IS MADE,
AND WE ARE UNABLE OR UNWILLING TO REPAY THE DEBENTURE IN CASH, WE MAY HAVE TO
ISSUE SHARES IN EXCESS OF THOSE ORIGINALLY CONTEMPLATED, AND THOSE ADDITIONAL
SHARES WILL DILUTE YOUR SHARES.
The debenture provides the holder of the debenture with a "put" right,
the opportunity to demand at specified times that we repay the debentures in
cash, or else we must issue shares at 90% of the then market price for shares of
our common stock, but not more than $22.79 per share. Accordingly, if a selling
shareholder exercises its "put" right, and we are either unwilling or unable to
repay the cash, and the market price of our shares is lower than $22.79, we will
have to issue shares to satisfy the amount of the holder of the debentures, and
the issuance of those shares will dilute your shares, and could cause the market
price of our common stock to decline.
IF OUR SHARES ARE ISSUED TO THE HOLDER OF THE DEBENTURE, THOSE SHARES MAY BE
SOLD INTO THE MARKET, WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND ENCOURAGE
SHORT SALES OF OUR STOCK.
To the extent the debenture is converted or interest on the debenture is
paid in shares of our common stock rather than cash, a significant number of
these shares of our common stock may be sold into the market, which could
decrease the price of our common stock and encourage short sales. Short sales
could place further downward pressure on the price of our common stock. In that
case, we could be required to issue an increasingly greater number of shares of
our common stock upon future conversions of the debenture as a result of the
adjustments described above, sales of which could further depress the price of
our common stock, and could cause the market price of our common stock to
decline.
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<PAGE> 23
THE DEBENTURE PROVIDES FOR VARIOUS EVENTS OF DEFAULT THAT WOULD ENTITLE THE
HOLDER OF THE DEBENTURE TO REQUIRE THE COMPANY TO REPAY THE ENTIRE AMOUNT OWED
IN CASH WITHIN THREE DAYS. IF AN EVENT OF DEFAULT OCCURS, WE MAY BE UNABLE TO
IMMEDIATELY REPAY THE AMOUNT OWED, AND ANY REPAYMENT MAY LEAVE US WITH LITTLE OR
NO WORKING CAPITAL IN OUR BUSINESS.
The debenture provides for various events of default. If an event of
default occurs, the holder of the debenture can require us to repay the full
principal amount owed, plus accrued interest, and an additional 15% in
liquidated damages within three days of the date of the event of default. Some
of the events of default include matters over which we may have some, little or
no control, such as various corporate transactions in which the control of our
company changes, or if our common stock ceases to be listed on a trading market.
Many other events of default are described in the agreements we executed when we
issued the debenture. If an event of default occurs, we may be unable to repay
the entire amount, plus the 15% liquidated damages, in cash. Any such repayment
could leave us with little or no working capital for our business.
THE DEBENTURE RESTRICTS OUR ABILITY TO RAISE ADDITIONAL EQUITY WITHOUT THE
CONSENT OF THE HOLDER OF THE DEBENTURE, WHICH COULD HINDER OUR EFFORTS TO OBTAIN
ADDITIONAL NECESSARY FINANCING TO OPERATE OUR BUSINESS, OR TO REPAY THE
DEBENTURE HOLDERS.
The agreements we executed when we issued these debentures prohibit us
from obtaining additional equity or equity equivalent financing for a period of
90 trading days after the date we issued the debentures. We also agreed that for
a period of 180 trading days after the issuance of the debentures, we would not,
without the holder of the debenture's consent, obtain additional equity or
equity equivalent financing unless we first offer the holder of the debenture
the opportunity to provide such financing upon the terms and conditions
proposed. These restrictions have several exceptions, such as issuances of
options to employees and directors, strategic transactions and acquisitions and
bona fide public offerings with proceeds exceeding $20 million in gross
proceeds. However, the restrictions may make it extremely difficult to raise
additional equity capital during the 90 day and 180 day periods. We may need to
raise such additional capital, and if we are unable to do so, we may have little
or no working capital for our business, and the market price of our stock may
decline.
WE MAY BE REQUIRED TO PAY LIQUIDATED DAMAGES IF WE DO NOT OBTAIN SHAREHOLDER
APPROVAL FOR ISSUANCE OF OUR COMMON STOCK, OR IF WE ARE UNABLE TO TIMELY
REGISTER THESE SHARES.
We are subject to National Association of Securities Dealers Rule 4460,
which generally requires shareholder approval of any transaction that would
result in the issuance of securities representing 20% or more of an issuer's
outstanding listed securities. Upon conversion or the payment of interest on
debentures we are not able to issue more than 2,322,150 shares, or 19.99% of our
outstanding common stock on October 30, 2000, the day prior to the date of
issuance of the debentures. The terms of the convertible debentures purchase
agreement also provide that the shareholder desiring to convert has the option
of requiring us either to seek shareholder approval within 75 days of the
request or to pay the converting holder the monetary value of the debentures
that cannot be converted, at a premium to the converting holder. If the
shareholder chooses that we convert the debentures into shares and we have not
obtained the requisite shareholder approval within 75 days, we would be
obligated to pay the monetary value to the purchaser as liquidated damages.
Also, under the terms of the Registration Rights Agreement, we will incur
liquidated damages of approximately $300,000 per month if we are unable to
register the shares, or maintain the registration of the shares, of common stock
issuable upon the conversion of the debentures and the exercise of those
warrants.
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<PAGE> 24
WE MAY ISSUE ADDITIONAL SHARES, WHICH WOULD REDUCE YOUR OWNERSHIP PERCENTAGE AND
DILUTE THE VALUE OF YOUR SHARES.
Events over which you have no control could result in the issuance of
additional shares of our common stock, which would dilute your ownership
percentage in Procom. We may issue additional shares of common stock or
preferred stock: to raise additional capital or finance acquisitions, upon the
exercise or conversion of outstanding options, warrants and shares of
convertible preferred stock, or in lieu of cash payment of dividends. The
issuance of any such shares would dilute your shares.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS.
This Report on Form 10-Q contains "forward-looking" statements,
including, without limitation, the statements under the captions "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business". You can identify these statements by the use of
words like "may," "will," "could," "should," "project," "believe," "anticipate,"
"expect," "plan," "estimate," "forecast," "potential," "intend," "continue," and
variations of these words or comparable words. In addition, all of the
non-historical information in this Report on Form 10-Q is forward-looking.
Forward-looking statements do not guarantee future performance and involve risks
and uncertainties. Actual results may and probably will differ substantially
from the results that the forward-looking statements suggest for various
reasons, including those discussed under "Risk Factors". These forward-looking
statements are made only as of the date of this Report on Form 10-K. We do not
undertake to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, which defines derivatives,
requires that all derivatives be carried at fair value, and provides for hedge
accounting when certain conditions are met. This statement is effective for the
first fiscal quarter of fiscal years beginning after June 15, 2000. Adoption of
this statement did not have a material impact on our consolidated financial
position, results of operations or cash flows.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulleting (SAB) No. 101, "Revenue Recognition in
Financial Statements," as amended, which for the Company is effective no later
than the fourth quarter of fiscal 2001. SAB No. 101 summarizes certain of the
SEC staff's views regarding the appropriate recognition of revenue in financial
statements. The Company is currently reviewing SAB No. 101 and has not yet
determined the potential impact on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our investment portfolio as well as the fluctuation in interest rates on
our various borrowing arrangements. We do not use derivative financial
instruments in our investment portfolio. We invest in high-credit quality
issuers and, by policy, we limit the amount of credit exposure to any one
issuer. As stated in our policy, we ensure the safety and preservation of our
invested principal funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in safe and high-credit quality
securities and by constantly positioning our portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer,
guarantor or depository. The portfolio includes only marketable securities with
active secondary or resale markets to help ensure reasonable portfolio
liquidity.
As discussed elsewhere in this Report on Form 10-Q, we have developed
our headquarters in Irvine, California and we have spent approximately $16.6
million to complete the facility. The Company is seeking long-term mortgage
financing for all or some of the facility cost during the next fiscal year. The
Company has not "locked" in a commitment, and may therefore find such financing
to be much more expensive as a result. Since July 31, 2000, we have entered into
a line of credit and term loan agreements
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pursuant to which amounts outstanding bear interest at the lender's prime rate
plus .50%. Accordingly, since we anticipate that we will be borrowing funds
under such agreements, we expect that we will experience interest rate risk on
our debt.
FOREIGN CURRENCY EXCHANGE RISK
We transact business in various foreign countries, but we only have
significant assets deployed outside the United States in Germany. We have
effected intercompany advances and sold goods to Megabyte as well as our
subsidiaries in Italy and Switzerland denominated in U.S. dollars, and those
amounts are subject to currency fluctuation, and require constant revaluation on
our financial statements. During the quarters ended October 31, 2000 and 1999,
we incurred approximately $160,000 and $25,000, respectively, in foreign
currency losses which are included in our selling, general and administrative
costs. We do not operate a hedging program to mitigate the effect of a
significant rapid change in the value of the German mark compared to the U.S.
dollar. If such a change did occur, we would have to take into account a
currency exchange gain or loss in the amount of the change in the U.S. dollar
denominated balance of the amounts outstanding at the time of such change. At
October 31, 2000, approximately $2.9 million in current intercompany advances
and accounts receivable from our foreign subsidiaries were outstanding. There
can be no assurance that such a loss would not have an adverse material effect
on our results of operations or financial condition.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is from time to time involved in litigation related to its
ordinary operations, such as collection actions and vendor disputes. The Company
does not believe that the resolution of any existing claim or lawsuit will have
a material adverse affect 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.
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) On November 3, 2000, the Company filed a Report on Form 8-K
reporting the sale and issuance of a $15 million convertible
debenture to a private investor. The terms and conditions of the
debenture transaction are contained in the exhibits to the Report
on Form 8-K.
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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 14th of December, 2000.
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 December 14, 2000
----------------------------------- and Chief Executive Officer
Alex Razmjoo (Principal Executive Officer)
/s/ Alex Aydin Executive Vice President, Finance December 14, 2000
----------------------------------- and Administration (Principal
Alex Aydin Financial Officer)
/s/ Frederick Judd Vice President, Finance and December 14, 2000
----------------------------------- General Counsel (Principal
Frederick Judd Accounting Officer)
</TABLE>
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<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
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
4.1+ Form of Convertible Debenture dated October 31, 2000.
4.2+ Form of Common Stock Purchase Warrant dated October 31, 2000.
4.3+ Securities Purchase Agreement dated October 31, 2000 by and between
the Registrant and Montrose Investments Ltd.,
4.4+ Registration Rights Agreement dated October 31, 2000 by and between
the Registrant and Montrose Investments Ltd.
4.5+ Credit Agreement dated October 10, 2000 by and between the
Registrant and CIT Group/Business Credit, Inc.
4.6+ Subordination Agreement dated October 31, 2000 by and between the
Registrant, Montrose Investments Ltd and CIT Group/Business Credit,
Inc.
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
