U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT
For the transition period from _______ to ________
Commission file number 1-13616
STORAGE COMPUTER CORPORATION
----------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 02-0450593
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11 Riverside Street Nashua , NH 03062-1373
------------------------------------------
(Address of principal executive offices)
(603) 880-3005
--------------
(Issuer's telephone number)
N/A
-----------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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 outstanding as of the close of
business on August 9, 1996 was 10,672,955 shares.
Transitional Small Business Disclosure Format (Check One)
Yes [ ] No [ X ]
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page(s)
-------
<S> <C> <C>
Condensed Consolidated Balance Sheets -- June 30, 1996
and December 31, 1995.................................................. 3
Condensed Consolidated Statements of Operations -- Three months ended
June 30, 1996 and 1995; Six months ended June 30, 1996 and 1995........ 4
Condensed Consolidated Statements of Cash Flows -- Six months
ended June 30, 1996 and 1995........................................... 5
Notes to Condensed Consolidated Financial Statements --
June 30, 1996.......................................................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation.............. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ................... 15
Item 5. Other Information...................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................... 15
</TABLE>
2
PART I. FINANCIAL INFORMATION
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 2,762,018 $ 871,101
Accounts receivable (net) 6,693,072 7,212,091
Lease contract receivable 43,533
Inventories 6,089,388 4,580,066
Prepaid expenses and other current assets 96,679 106,751
Tax refund receivable 55,087 34,003
Deferred tax asset, current portion (Note C) 399,983 529,997
---------------- --------------
Total current assets 16,139,760 13,334,009
---------------- --------------
Lease contract receivable, less current portion 160,722
---------------- --------------
Deferred tax asset, less current portion 588,000 588,000
---------------- --------------
Property and equipment, less
allowance for depreciation 886,124 790,605
---------------- --------------
Investment in affiliates 47,499 55,000
---------------- --------------
$17,822,105 $14,767,614
================ ==============
Liabilities and Stockholders' Equity
Current liabilities
Note payable $ 2,302,139 $ 399,973
Current portion of long-term debt
and lease obligations 39,677 39,677
Accounts payable 2,334,922 2,350,730
Accrued expenses 1,704,483 990,171
Accrued income taxes 233,906 931,016
Deferred stockholder compensation 299,500 299,500
---------------- --------------
Total current liabilities 6,914,627 5,011,067
---------------- --------------
Long term debt and lease obligations,
less current portion 48,191 61,594
Long-term debt, related party 910,000 910,000
---------------- --------------
Total long-term liabilities 958,191 971,594
---------------- --------------
Stockholders' equity
Common stock 10,664 10,636
Additional paid in capital 12,238,783 12,223,860
Retained earnings (deficit) (2,300,160) (3,449,543)
---------------- --------------
9,949,287 8,784,953
---------------- --------------
$17,822,105 $14,767,614
================ ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1995 June 30,1996 June 30, 1995
<S> <C> <C> <C> <C>
Net sales $7,321,410 $5,052,377 $13,356,668 $9,484,638
Cost of goods sold 3,788,752 2,683,264 6,990,747 4,656,018
----------------- ----------------- -------------------- -------------------
Gross profit 3,532,658 2,369,113 6,365,921 4,828,620
----------------- ----------------- -------------------- -------------------
Operating expenses:
Selling and marketing 1,526,649 1,136,647 2,830,840 2,223,736
General and administrative 364,394 73,724 650,140 491,202
Research and development 567,704 512,620 1,048,048 983,390
Royalty expense 133,396 240,932
----------------- ----------------- -------------------- -------------------
2,458,747 1,856,387 4,529,028 3,939,260
----------------- ----------------- -------------------- -------------------
Operating income 1,073,911 512,726 1,836,893 889,360
----------------- ----------------- -------------------- -------------------
Other income (expense):
Reorganization (expense) credit 134,521 134,521
Foreign currency transaction gain (loss) 15,014 (57,721) 38,291 (36,820)
Interest income 32,617 14,369 39,069 55,834
Interest expense (54,990) (17,481) (111,752) (130,893)
Other income (expense) 21,961 (21,871) 39,485 59,698
----------------- ----------------- -------------------- -------------------
14,602 51,817 5,093 82,340
----------------- ----------------- -------------------- -------------------
Equity in net income (loss) of
affiliates (7,501) 0 (7,501) (19,549)
----------------- ----------------- -------------------- -------------------
Income before income taxes 1,081,012 564,543 1,834,485 952,151
----------------- ----------------- -------------------- -------------------
Provision for federal and state
income taxes
Current tax expense 376,000 136,721 555,088 389,433
Deferred tax (benefit) expense 96,000 12,000 130,014 (696,237)
----------------- ----------------- -------------------- -------------------
472,000 148,721 685,102 (306,804)
----------------- ----------------- -------------------- -------------------
Net income $ 609,012 $ 415,822 $ 1,149,383 $1,258,955
================= ================= ==================== ===================
Net income per share: 0.05 0.03 0.10 0.11
Weighted average shares outstanding 12,094,098 12,034,001 12,028,582 11,965,296
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996 June 30, 1995
<S> <C> <C>
Cash flows from Operating Activities:
Net income $1,149,383 $1,258,955
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 155,728 133,274
Deferred tax (benefit) 130,014 (696,237)
Original issue discount charged due to conversion
of notes payable to common stock 74,854
Equity in net (income) loss of affiliates 7,501 19,549
(Gain) or loss on foreign currency
translation adjustment 21,180 9,379
Changes in operating assets and liabilities:
Accounts receivable (net) 519,019 (929,474)
Lease contract receivable (204,255)
Inventories (1,509,322) (1,105,065)
Other assets (11,012) (84,220)
Accounts payable and accrued expenses 1,394 55,356
--------------------- ----------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 259,630 (1,263,629)
--------------------- ----------------------
Cash flows from investing activities,
Purchases of property & equipment net (251,247) (152,817)
--------------------- ----------------------
Cash flow provided by (used in) financing activities:
Net advances (payments) on credit line 1,902,166
Repayment of debt (13,403) (17,400)
Issuance of common stock 14,951
Reduction of other long-term liabilities (87,000)
--------------------- ----------------------
NET CASH FLOW PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,903,714 (104,400)
--------------------- ----------------------
Effect of exchange rate changes on cash (21,180) (9,379)
--------------------- ----------------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 1,890,917 (1,530,225)
Cash and cash equivalents at beginning of period 871,101 3,288,106
--------------------- ----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 2,762,018 $1,757,881
===================== ======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months Ended
June 30, 1996 June 30, 1995
<S> <C> <C>
Supplemental disclosures of cash flow information Cash payments for:
Interest $77,004 $56,039
Taxes $1,185,000 $1,035,000
Supplemental schedule of noncash financing activities:
Debt converted to common stock
Increase in common stock 135
Increase in additional paid in capital 624,865
Decrease in debt $625,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
Storage Computer Corporation (the "Company") and its subsidiaries are engaged in
the development, manufacture and sale of computer disk arrays and computer
equipment worldwide. The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, Storage Computer Europe GmbH,
Vermont Research Products, Inc. and Storage Computer UK Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company also has investments in Storage Computer (Asia) Ltd. and Storage
Computer France, SA, 20%-owned affiliates, which are accounted for by the equity
method.
On March 6, 1995, Vermont Research Products, Inc., a wholly-owned subsidiary of
the Company, acquired the entire business and substantially all of the property
and assets of Vermont Research Corporation ("VRC") in exchange for shares of
Common Stock (the "Reorganization"). The Reorganization was accounted for as a
pooling of interests. Accordingly, the results of operations of Vermont Research
Products, Inc. are included in the accompanying financial statements for all
periods presented as if the Reorganization had been consummated at the beginning
of the earliest period presented. In connection with the Reorganization, the
Company registered certain shares with the Securities and Exchange Commission to
exchange with the former shareholders of Vermont Research Corporation whereby
the Company became an SEC reporting company for the first time.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements and related notes included in Form 10-KSB filed by the Company with
the Securities and Exchange Commission, containing the Company's financial
statements for the fiscal year ended December 31, 1995. In the opinion of
management, the accompanying financial statements reflect all adjustments, all
of which are of a normal, recurring nature, to fairly present the Company's
consolidated financial position, results of operations and cash flows. The
results of operations for the six months ended June 30, 1996 are not necessarily
indicative of the results to be expected for the full year.
NOTE B - CONVERSION OF DEBENTURES
In March 1995, Vermont Research Products, Inc. assumed certain debentures and
common stock purchase warrants issued by Vermont Research Corporation in 1993.
On March 7, 1995 the debenture holders converted all of the debentures
($625,000) and related warrants into 135,000 shares of the Company's Common
Stock.
7
NOTE C - DEFERRED TAX ASSET
Subsequent to the Reorganization discussed above, the Company determined that
the benefit of the net operating loss of a wholly-owned foreign subsidiary of
Vermont Research Products, Inc. was more likely than not to be realized and,
accordingly, a previously established valuation reserve against the asset was
reduced. Net income for the three month period ended March 31, 1995 was impacted
by a $685,000 reduction of the valuation reserve.
Also, in December of 1995 the Company determined that some of the benefit of the
net operating loss generated by the domestic operations of Vermont Research
Products, Inc. was more likely than not to be realized and, accordingly, a
previously established valuation reserve was reduced by approximately $525,000.
NOTE D - RECLASSIFICATIONS
Certain 1995 and 1996 amounts have been reclassified to conform with the current
period presentation.
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers, or
employees may contain "forward-looking" information which involve risk and
uncertainties. Any statements in this report that are not statements of
historical fact are forward-looking statements (including, but not limited to,
statements concerning the characteristics and the growth of the Company's market
and customers, the Company's objectives and plans for future operations,
possible acquisitions and the Company's expected liquidity and capital
resources). Such forward-looking statements are based on a number of assumptions
and involve a number of risks and uncertainties, and, accordingly, actual
results could differ materially. Factors that may cause such differences
include, but are not limited to: the continued and future acceptance of the
Company's products and services, the rate of growth in the industries of the
Company's customers; the presence of competitors with greater technical,
marketing and financial resources; the Company's ability to promptly and
effectively respond to technological change which meets evolving customer needs;
capacity and supply constraints or difficulties; and the Company's ability to
successfully integrate new operations.
8
NET SALES
Net sales for the three month period ended June 30, 1996 of $7,231,410 reflected
an increase in combined product sales of $2,269,033 or 45%, compared with the
quarter ended June 30, 1995. Net sales for the six month period ended June 30,
1996 of $13,356,668 reflected an increase in combined product sales of
$3,872,030 or 41% compared with the six month period ended June 30, 1995. The
increase in sales is primarily attributed to the RAID 7 product line. The
increase in sales is strictly attributable to an increase in sales activity as
the Company continues its US and international marketing an sales efforts. The
Company did not initiate any price changes during the period, except for price
adjustments relating to component parts such as disk drives.
Except for sales which occur through the Central European sales office located
in Germany and the Western European sales office located in the United Kingdom,
which sales are conducted in the functional currencies of those operations, all
sales are made or denominated in US dollars to limit the amount of foreign
currency risk. At the present time the Company is analyzing the cost benefit of
hedging activities and derivative products to offset currency risk, which, in
connection with sales transactions, is currently considered minimal by
management. For a further discussion of the impact of foreign currency risks,
see the analysis and discussion of Foreign Currency Transaction Gain (Loss)
below.
COST OF GOODS SOLD
Cost of goods sold for the three month periods ended June 30, 1996 and 1995 were
$3,788,752 and $2,683,264, respectively, or 52% and 53% of net sales. Cost of
goods sold for the six month periods ended June 30, 1996 and 1995 were
$6,990,747 and $4,656,018 or 52% and 49%, respectively.
The increase in the cost of goods sold as a percentage of net sales is
attributable to primarily two factors. The Company has experienced a shift in
sales which reflects an increased demand for larger systems which generate lower
profit margins. The lower profit margins are caused by a greater percentage of
system costs being associated with components manufactured by third parties, for
example, disk drives, which have lower profit margins than the
Company-manufactured components contained in the Company's products. However,
the Company believes that this shift resulted from the increased storage
capacities of standard disk drive solutions which make the Company's lower end
products appear more expensive when measured against competitors' lower
performing products on a price per gigabyte basis.
The Company believes that customer demand for higher performance data storage
solutions and the trend toward a greater percentage of larger system sales of
its products will continue. The Company is continuously seeking to develop
products and product upgrades to accommodate the larger systems segment of the
data storage market, where the Company believes it can sell its products
emphasizing greater performance, including faster data transfer rates combined
with the required functionality, and should be able to maintain or increase
gross profit margins associated with larger system sales.
Additionally, management has focused on developing its distributor network which
has generated sales that have a lower gross profit margin than direct sales to
end users. The Company anticipates that the development of the distributor
network will continue as the Company develops new markets, territories and
products. The Company is currently expanding its direct sales force which should
mitigate the pressure that the lower profit margins on distributor sales has on
gross profit. However, this impact is subject to the constraints caused by the
development period of the direct sales force.
9
SELLING AND MARKETING EXPENSES
Selling expenses for the three month periods ended June 30, 1996 and 1995 were
$1,526,649 and $1,136,647, respectively or 21% and 22% of net sales. Selling
expenses for the six month periods ended June 30, 1996 and 1995 were $2,830,840
and $2,223,736, respectively or 21% and 23% of net sales. The increase in
selling expenses between the three and six month periods ended June 30, 1996 and
the comparable periods in 1995 of approximately $390,000 and $607,000,
respectively, were primarily caused by the following: expansion of the sales and
marketing efforts reflected in hiring new personnel and costs incurred relating
to tradeshows, marketing and promotional expenditures; and increased
compensation costs directly related to the increased sales volume.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month periods ended June 30,
1996 and 1995 were $364,394 and $73,724, respectively or 5% and 1% of net sales.
General and administrative expenses for the six month periods ended June 30,
1996 and 1995 were $650,140 and $491,202, respectively, or 5% and 5% of net
sales. The increase in general and administrative expenses between the three and
six month periods ended June 30, 1996 and 1995 of approximately $291,000 and
$159,000, respectively resulted primarily from increased legal, accounting and
professional fees offset by the reduction and reallocation of personnel.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three month periods ended June 30,
1996 and 1995 were $567,704 and $512,620, respectively or 8% and 10% of net
sales. Research and development expenses for the six month periods ended June
30,1996 and 1995 were $1,048,048 and $983,390, respectively or 8% and 10% of net
sales. The increase in expenditures between the three and six month periods
ended June 30, 1996 and 1995 of approximately $55,000 and $65,000, respectively,
resulted primarily from increased personnel costs, outside consulting and
engineering fees, and patent costs.
10
ROYALTY EXPENSE
Royalty expense for the three month periods ended June 30, 1996 and 1995 were $-
and $133,396 respectively, or -% and 3%; of net sales. Royalty expense for the
six month periods ended June 30, 1996 and 1995 were $- and $240,932,
respectively or -% and 3% of net sales. The decrease in royalty expense was
caused by the termination of the royalty agreement by mutual consent as of
December 31, 1995.
REORGANIZATION (EXPENSE) CREDIT
The reorganization credit of $134,521 reflected in the six month periods ended
June 30, 1996 is the reversal of the remaining balance of the initial accrual of
$506,088 booked in December of 1994 to account for a reduction in the costs
associated with the Reorganization.
FOREIGN CURRENCY TRANSACTION GAIN (LOSS)
The foreign currency transaction gain (loss) for the three month periods ended
June 30, 1996 and 1995 were $15,014 and $(57,721), respectively, or .2% and
(1.1)% of net sales. The foreign currency transaction gain (loss) for the six
month period ended June 30, 1996 and 1995 was $38,291 and $(36,820),
respectively, or .3% and (.4)% of net sales. The foreign currency transaction
gain (loss) for the three and six month periods ended June 30, 1996 was due
primarily to the increase in the value of the dollar in relation to the German
mark.
The Company's foreign subsidiaries' obligations to their parent company are
denominated in US Dollars. Subsidiary transaction gain or losses related to
obligations due to inventory purchases are charged to cost of sales. There is a
potential for a foreign currency gain or loss based upon the fluctuations
between the US Dollar and the subsidiaries' functional currencies. The exposure
is limited to the time period between the accrual of such liability to the
parent in the subsidiaries' local currency and the time of its payment in US
Dollars. Other than the intercompany balances noted above, the Company does not
believe it has any material unhedged monetary assets, liabilities or commitments
which are denominated in a currency other than the operation's functional
currency, The Company expects the exposure to mitigate as its foreign
subsidiaries reach a more mature level of operation and are able to pay the
intercompany obligations in a more timely manner.
INTEREST INCOME
Interest income for the three month periods ended June 30, 1996 and 1995 was
$32,617 and $14,369, respectively, or .4% and .3% of net sales. Interest income
for the six month periods ended June 30, 1996 and 1995 was $39,069 and $55,834,
respectively or .3% and .6% of net sales. Interest income increased (decreased)
in absolute dollars between the three and six month periods ended June 30, 1996
and 1995 by approximately $18,000 and $(16,000), respectively due to an
increase/decrease in the availability of cash, and due to increases in accounts
receivable and inventory.
11
INTEREST EXPENSE
Interest expense for the three month periods ended June 30, 1996 and 1995 was
$54,990 and $17,481, respectively, or .8% and .3% of net sales. Interest expense
for the six month periods ended June 30, 1996 and 1995 was $111,752 and $130,893
or .8% and 1.4% of net sales. The increase in interest expense for the three
month period ended June 30, 1996 of approximately $37,000 as compared to the
three month period ended June 30, 1995 is the result of increased borrowings on
the Company's credit line caused by the timing of cash collections and payments
relating to accounts receivable, inventory and tax obligations. The decline in
interest expense between the six month periods ended June 30, 1996 and 1995 of
approximately $19,000 is the net result of the debt conversion of $625,000 of
VRP notes and warrants in March of 1995 into stock which resulted in the
recognition in the quarter ended March 31, 1995 of original issue discount on
the VRP notes of approximately $70,000 which was offset by the borrowings on the
Company's credit line as noted above.
OTHER INCOME (LOSS)
The changes in the three and six month periods ended June 30, 1996 of $43,832
and $20,213 is the net result of the receipt of funds relating to the terminated
VRC pension plan caused by over funding of plan contributions in previous years,
the reversal of an overaccrual of the VRC environmental liability, which was not
assumed as part of the Reorganization, and other non operating expenses
associated with foreign operations.
EQUITY IN NET INCOME (LOSS) OF AFFILIATES
In September 1993 the Company obtained a 20% interest in Storage Computer (Asia)
Ltd. which was formed for the purpose of selling and servicing the Company's
products in Hong Kong and China. In December of 1995 the Company obtained a 20%
interest in Storage Computer France, SA for the purpose of selling and servicing
the Company's products in France. For the three month periods ended June 30,
1996 and 1995 the Company recognized a loss of $(7,501) and $-, respectively,
from the affiliates. For the six month periods ended June 30, 1996 and 1995 the
Company recognized a loss of $(7,501) and $(19,549), respectively from the
affiliates.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The tax expense provision for the three month periods ended June 30, 1996 and
1995 was $472,000 and $148,721, respectively, resulting in effective tax rates
of approximately 44% and 26% . The tax expense provision for the six month
periods ended June 30, 1996 and 1995 was $685,102 and $(306,804), respectively,
resulting in effective tax rates of approximately 37% and (32%).
12
The 18 percentage point increase in the effective tax rate between the three
month periods ended June 30, 1996 and 1995 resulted primarily to the non taxable
income generated in 1995 relating to the reorganization expense credit and
operating losses generated in 1996 at the foreign subsidiary level which are not
available to offset current taxable income. The 69 percentage point increase in
the effective tax rate between the six month periods ended June 30, 1996 and
1995 resulted primarily from the foreign operating entities in 1996 generating
operating losses which were not able to be utilized to offset income generated
at the US operations and the reduction of the valuation reserve for foreign net
operating losses resulting in a tax benefit as described below.
The increase in the deferred tax benefit for the six month period ended June 30,
1996 of $696,237 primarily relates to the foreign tax net operating loss
carryforwards of Storage Computer UK Ltd., formerly Vermont Research Limited a
wholly owned subsidiary of Vermont Research Products, Inc. The valuation reserve
related to the deferred tax asset was reduced since, in management's opinion, it
is more likely than not that the loss carryforwards will be utilized, through
the generation of profits at the subsidiary level. Pursuant to UK tax law there
is no statutory carryforward time limitation relating to the tax net operating
losses. The utilization of the losses is dependent upon the wholly owned
subsidiary achieving profit in the same line of business which generated the
losses, and in which it continues to operate.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The cash flow provide by or used for the operating activities are primarily a
function of the rapid growth of the Company, causing a fluctuations in accounts
receivable and inventory which are impacted by the timing of collections and
payments. It is anticipated that should the Company's growth and expansion rate
continue at its current trend, operating cash flow deficits may occur in the
future as a result of such expansion. However, Management believes that its
growth can be financed through additional borrowing arrangements as needed.
DEBT AND EQUITY
On August 4, 1995 the Board of Directors approved, and the Company entered into
a $6,000,000 unsecured, demand line of credit with a bank to be used for the
working capital needs of the Company. The loan bears interest at the bank's
prime rate or under certain conditions, at the bank's LIBOR Rate plus 200 basis
points. The loan is in the process of being renewed and currently the Company
has a commitment from the bank to increase the credit facility to $10,000,000.
Management believes the credit facility will accommodate all of its short term
working capital requirements.
During the quarter ended June 30,1996, the Company had additional net borrowings
on the credit line of approximately $1,377,000 which resulted in a total
outstanding liability on June 30, 1996 of approximately $2,302,000.
As of June 30, 1996, the only significant long term debt is a note with CEO and
President Mr. Theodore J. Goodlander for $910,000 with interest at prime plus
1%, which is due in January 1998.
During the six month period ended June 30, 1995, the Company converted total
debt with a book value of $625,000 into 135,000 shares of the Company's Common
Stock.
13
ACCOUNTS RECEIVABLE
The decrease in accounts receivable from December 31, 1995 to June 30, 1996 of
approximately $519,000 is primarily due to the collection of accounts receivable
resulting from significant sales occurring in the quarter ended December 31,
1995. The Company did not change its credit terms during the period and there
has been no material change in the aging of accounts receivable during the
period.
INVENTORY
Inventory increased approximately $1,509,000 or 33% from the December 31, 1995
to June 30, 1996. The investment in inventory is impacted by several factors,
including but not limited to, the timing of purchasing component parts such as
disk drives; the non recognition of revenue and corresponding inventory
increases due to inventory transfers deemed to be evaluation units; the timing
of inventory reductions due to intercompany transfers and increased inventory
locations throughout the United States and Europe.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital expenditures at
this time.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Stockholders of Storage Computer Corporation was held
on May 21, 1996 at the offices of the Company. Upon motion duly made and
seconded and carried, it was voted to elect Theodore J. Goodlander and Shigeho
Inaoka to the position of director of the Company, each to serve until the next
annual meeting, and until the election and qualification of his successor. No
Stockholder elected to vote in person by written ballot and all voting was by
proxy and voice vote. The votes for the election of each of Messrs. Goodlander
and Inaoka were 9,471,163 FOR and 8,112 AUTHORITY WITHHELD.
The second order of business was to vote to ratify the selection of Richard A.
Eisener & Company as the auditors for the Company for the fiscal year ending
December 31, 1996. The vote for the selection of the auditors was 9,345,412 FOR,
3,120 OPPOSED and 30,743 ABSTAINING. There being no further business to come
before the formal meeting, upon motion duly made, seconded and carried, it was
voted to adjourn the meeting.
Item 5. Other Information
On May 21, 1996, the Company filed an S-3 Registration Statement with the
Securities and Exchange Commission to register 2,318,200 shares of previously
issued Common Stock of the Company.
A meeting of the directors of Storage Computer Corporation was held on May 21,
1996 at the offices of the Company. Upon motions duly made, seconded and
unanimously carried, it was voted to: elect Steven S. Chen to the office of
director of the Company to fill the existing vacancy, and to have Messrs. Chen
and Inaoka serve on the Compensation Committee until the next annual meeting.
Item 6. Exhibits and Reports of Form 8-K.
(a) Exhibit 27 Financial Data Schedule:
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STORAGE COMPUTER CORPORATION
----------------------------
Registrant
Date: August 13, 1996 /s/ Theodore J. Goodlander
--------------- --------------------------
Theodore J. Goodlander
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer and
Principal Financial and Accounting Officer)
16
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