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 September 30,1997
-----------------
[ ] 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 September 30, 1997 was 10,918,466 shares.
Transitional Small Business Disclosure Format (Check One)
Yes [ ] No [ X ]
1
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page(s)
------
<S> <C>
Consolidated Financial Position -- September 30, 1997
and December 31, 1996........................................................... 3
Statement of Consolidated Operations -- Three and nine months
ended September 30, 1997 and 1996............................................... 4
Statement of Consolidated Cash Flows -- Nine months
ended September 30, 1997 and 1996............................................... 5
Notes to Consolidated Financial Statements --
September 30, 1997.............................................................. 7
Item 2. Management's Discussion and Analysis............................................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................. 12
Item 6. Exhibits and Reports on Form 8-K................................................ 12
</TABLE>
2
PART I. FINANCIAL INFORMATION
STORAGE COMPUTER CORPORATION
CONSOLIDATED FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, 1996
1997
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,539,833 $ 1,852,762
Accounts receivable (net) 9,189,031 9,030,955
Inventories 8,113,103 6,274,244
Other current assets 374,149 103,796
Deferred tax asset 498,468 400,000
---------------------- --------------------
Total current assets 19,714,584 17,661,757
---------------------- --------------------
Deferred tax asset 1,857,400 2,138,550
Property and equipment, less
allowance for depreciation 2,152,850 1,080,002
---------------------- --------------------
Investments and other assets 2,726,571 55,000
---------------------- --------------------
$26,451,405 $20,935,309
====================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 6,283,173 $ 576,421
Lease obligations 41,700 29,753
Accounts payable 1,607,060 2,201,556
Accrued expenses 1,366,048 2,236,853
Accrued income taxes 140,213 935,600
Deferred stockholder compensation 100,000 299,500
---------------------- --------------------
Total current liabilities 9,538,194 6,279,683
---------------------- --------------------
Long-term lease obligations 32,672
Long-term debt, related party 710,000 710,000
---------------------- --------------------
Total liabilities 710,000 742,672
---------------------- --------------------
Stockholders' equity
Common stock 10,702 10,701
Additional paid in capital 12,442,527 12,290,245
Retained earnings 3,749,982 1,612,008
---------------------- --------------------
Total stockholders' equity 16,203,211 13,912,954
---------------------- --------------------
$26,451,405 $20,935,309
====================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
3
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue $7,647,253 $7,470,830 $25,762,619 $20,827,498
Product cost 3,792,415 3,678,730 12,684,527 10,669,477
----------------- ----------------- ------------------ -----------------
Gross margin 3,854,838 3,792,100 13,078,092 10,158,021
----------------- ----------------- ------------------ -----------------
Operating expenses:
Selling and marketing 2,226,432 1,954,221 6,290,856 4,785,061
General and administrative 297,358 312,704 1,044,534 962,844
Research and development 731,347 503,487 2,112,502 1,551,535
----------------- ----------------- ------------------ -----------------
3,255,137 2,770,412 9,447,892 7,299,440
----------------- ----------------- ------------------ -----------------
Operating income 599,701 1,021,688 3,630,200 2,858,581
----------------- ----------------- ------------------ -----------------
Other income (expense):
Interest expense net (90,106) (57,911) (212,694) (130,594)
Other income (expense) (108,723) 43,406 468 113,681
------------------ -----------------
----------------- -----------------
(198,829) (14,505) (212,226) (16,913)
----------------- ----------------- ------------------ -----------------
Income before income taxes 400,872 1,007,183 3,417,974 2,841,668
----------------- ----------------- ------------------ -----------------
Provision for federal and state income taxes:
Current tax expense 286,400 322,000 1,097,400 877,088
Deferred tax (benefit) expense 8,177 182,600 138,191
------------------ -----------------
----------------- -----------------
286,400 330,177 1,280,000 1,015,279
----------------- ----------------- ------------------ -----------------
Net income $114,472 $ 677,006 $ 2,137,974 $ 1,826,389
================== ================= ================= =================
Net income per share $0.01 $0.06 $0.18 $0.15
Weighted average shares outstanding 11,879,269 12,127,839 11,874,826 12,052,245
</TABLE>
See Notes to Consolidated Financial Statements.
4
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
SEPTEMBER 30, September 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,137,974 $1,826,389
Adjustments to reconcile net income
to net cash used for operating
activities:
Depreciation and amortization 240,838 249,614
Deferred tax provision 182,600 138,191
(Gain) or loss on foreign currency
translation adjustment 1,505 (43,515)
Changes in operating assets and liabilities:
Accounts receivable (156,909) (48,928)
Inventories (1,838,859) (1,786,770)
Other assets (2,341,681) (78,777)
Accounts payable and accrued expenses (2,480,913) (490,871)
--------------------- ----------------------
NET CASH PROVIDED(USED) IN OPERATIONS (4,255,445) (234,667)
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment net (1,313,686) (347,864)
Advances to Affiliates (600,161)
--------------------- ----------------------
NET CASH USED IN INVESTING ACTIVITIES (1,913,847) (347,864)
--------------------- ----------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 5,706,752 1,539,785
Issuance of common stock 152,283 14,951
--------------------- ----------------------
NET CASH PROVIDED IN FINANCING ACTIVITIES 5,859,035 1,554,736
--------------------- ----------------------
Effect of exchange rate changes on cash (2,672) 43,514
--------------------- ----------------------
NET INCREASE(DECREASE) IN CASH (312,929) 1,015,719
CASH AT BEGINNING OF PERIOD 1,852,762 871,101
--------------------- ----------------------
CASH AT END OF PERIOD $1,539,833 $1,886,820
===================== ======================
</TABLE>
See Notes to Consolidated Financial Statements.
5
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
SEPTEMBER 30, September 30,
1997 1996
<S> <C> <C>
Supplemental disclosures of cash flow information Cash payments for:
Interest $239,171 $114,000
Taxes $1,839,031 $1,714,000
</TABLE>
See Notes to Consolidated Financial Statements
6
STORAGE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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 S.A., 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 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 a Special Financial Report on 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, 1996. 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 three and nine
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full year.
NOTE B - RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the current period
presentation.
7
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
REVENUE
Revenue for the three month period ended September 30, 1997 was $7,647,253
compared to revenue of $7,470,830 in the corresponding period in 1996. Third
quarter revenue growth was impacted by longer evaluation test periods associated
with the recently introduced high-end product, OmniRaid SuperServers . At
September 30, 1997, the Company had the highest inventory dollar value of
storage equipment at customer locations for evaluation and testing in its
history. Additionally, extensive final product development testing which delayed
the introduction of enhanced performance software features and softness in the
European markets were factors in the revenue result. For the three months ended
September 30, 1997, U.S. domestic product sales and international product sales
were 55% and 45%, respectively of total revenue.
Revenue for the nine month period ended September 30, 1997 of $25,762,619
reflected an increase in product sales of $4,935,121 or 24%, compared with the
same period in 1996. The increase in revenue is attributed to new product
introductions, increased domestic distribution channels utilizing value-added
resellers, and expansion of the direct sales force. For the nine months ended
September 30, 1997, U.S. domestic product sales and international product sales
were 53% and 47%, respectively, of total revenue. For the year ended December
31, 1996, such percentages were 47% and 53%, respectively. The increase in the
percentage of U.S. domestic product sales in 1997 is due to increased domestic
maintenance revenue, the expansion of the U.S. direct sales force and softness
in product sales in Europe.
8
In June the Company initiated pricing adjustments related to changes in the cost
of purchased materials and value added features. The effect of such pricing
actions did not have a significant impact on revenue.
Product sales which occur through the Central European sales offices are
substantially conducted in the local functional currency. All product sales are
made in US dollars to limit the amount of foreign currency risk.
PRODUCT COST
Product cost for the three month periods ended September 30, 1997 and 1996 were
$3,792,415 and $3,678,730 respectively, or approximately 49% of net revenue in
each period. Product cost for the nine month periods ended September 30, 1997
and 1996 were $12,684,527 and $10,669,477, respectively, or 49% and 51% of
revenue. The decrease in product cost percentages between 1997 and 1996 is the
result of a reduction in the cost of component parts and an increase in sales
volume by the direct sales force.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the nine month periods ended September 30,
1997 and 1996 were $6,290,856 and $4,785,061, respectively or 24% and 23% of
revenue. The increase in selling and marketing expenses between the nine month
period ended September 30, 1997 and the comparable period in 1996 of
approximately $1,506,000 was principally due to the addition of 22 employees in
the United States and International sales organizations and related overhead
costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine month periods ended September
30, 1997 and 1996 were $1,044,534 and $962,844, respectively or 4% and 5% of
revenue. The absolute dollar increase in general and administrative expenses
between the nine month periods ended September 30, 1997 and 1996 of
approximately $82,000 resulted primarily from employee related expenses
associated with the increase in revenue.
RESEARCH AND DEVELOPMENT
Research and development expenses for the nine month periods ended September 30,
1997 and 1996 were $2,112,502 and $1,551,535, 8% and 7%, respectively of revenue
in each period. The increase in expenditures between the nine month periods
ended September 30, 1997 and 1996 of approximately $561,000, resulted primarily
from an increase in personnel and outside consulting and engineering fees.
INTEREST EXPENSE
Interest expense for the nine month periods ended September 30, 1997 and 1996
was $212,694 and $130,594, respectively. The increased interest expense for the
nine months ended September 30, 1997 of approximately $82,000 is the result of
increased short-term borrowing under the Company's line of credit to support the
Company's revenue growth and the resulting increase in accounts receivable, and
increases in inventory due to new products and customer product evaluations.
9
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The tax provision for the nine month periods ended September 30, 1997 and 1996
was $1,280,000 and $1,015,279, respectively, resulting in effective tax rates of
approximately 37% and 36% to pre-tax income. The tax provision for 1997 includes
the expected recognition of certain net operating loss carryforwards for both
income tax and financial reporting purposes. The September 30, 1996 effective
tax rate was revised for such carryforward operating losses in the fourth
quarter of 1996 with the resulting effect that the effective tax rate for the
year 1996 was approximately 8%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The cash flow used for the operating activities is principally the result of the
growth of the Company, causing fluctuations in accounts receivable which are
impacted by the timing of product shipments and inventory purchases to support
new product introductions and revenue growth.
Should the Company's growth and expansion rate continue , operating cash flow
deficits may occur in the future as a result of such expansion. Management
believes that the growth can be financed through additional borrowing
arrangements as required.
DEBT AND EQUITY
In 1997, the Company renewed the $10,000,000 unsecured demand line of credit
with a bank to be used for the working capital needs of the Company. Borrowings
against such credit facility bear interest at the bank's prime rate or, under
certain conditions, at the bank's LIBOR Rate plus 150 basis points. As of
September 30, 1997 the Company had drawn down $6,283,000 against the credit
line. Management believes the credit facility, or other available financing
programs, will accommodate working capital requirements and other cash
requirements.
ACCOUNTS RECEIVABLE
The growth in accounts receivable from December 31, 1996 to September 30, 1997
of approximately $157,000 is due to the increase in product sales, new product
introductions and expansion of the distribution channels for the Company's
products. The Company did not change its standard credit terms during the period
and there has been no material deterioration in the aging of accounts receivable
during the period.
INVENTORY
Inventory increased approximately $1,839,000 from December 31, 1996 to September
30, 1997. The investment in inventory is impacted by several factors, including
but not limited to, new product and product enhancement introductions; the
increased value of parts associated with larger storage units; 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.
10
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital expenditures at
this time.
FOREIGN CURRENCY TRANSACTIONS
Management does not currently utilize any derivative products to hedge its
foreign currency risk. The Company's foreign subsidiaries' obligations to their
parent are denominated in US dollars. There is a potential for a foreign
currency gain or loss based upon fluctuations between the US dollar and its
subsidiaries' functional currencies, currently the German mark and the British
pound. This exposure is limited to the period between the time of accrual of
such liability to the parent in the subsidiaries' functional currency and the
time of its payment in US dollars.
Other than the intercompany balances noted above, the Company does not believe
it has material unhedged monetary assets, liabilities or commitments which are
denominated in a currency other than the operations' functional currencies.
Management expects such exposure to continue until its foreign subsidiaries
reach a more mature level of operation. Management currently has no plans to
utilize any derivative products to hedge its foreign currency risk.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During the third quarter of 1997, all of the legal actions brought by
Michael J. Flannery, former Vice President of U.S. Sales, against Storage
Computer Corporation and Theodore J. Goodlander, its President and Chief
Executive Officer, (Massachusetts Civil Action No. 95-1154-A) were dismissed
with prejudice, as part of the terms of a settlement agreement between the
parties. Management firmly believes that the resolution of this matter and the
disposition of the legal proceedings were in the best interests of the Company
and did not have a material effect upon the Company's business, operating
results or financial condition.
Item 6. Exhibits and Reports on 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.
12
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: November 11, 1997 /s/ James C. Louney
---------------------------------- -----------------------
James C. Louney
Chief Financial Officer & Treasurer
(Principal Financial and
Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANYS
FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 1,539,833
<SECURITIES> 0
<RECEIVABLES> 9,189,031
<ALLOWANCES> 0
<INVENTORY> 8,113,103
<CURRENT-ASSETS> 19,714,584
<PP&E> 3,518,210
<DEPRECIATION> 1,365,360
<TOTAL-ASSETS> 26,451,405
<CURRENT-LIABILITIES> 9,538,194
<BONDS> 0
0
0
<COMMON> 10,702
<OTHER-SE> 16,192,509
<TOTAL-LIABILITY-AND-EQUITY> 26,451,405
<SALES> 25,762,619
<TOTAL-REVENUES> 25,762,619
<CGS> 12,684,527
<TOTAL-COSTS> 12,684,527
<OTHER-EXPENSES> 9,447,892
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212,226
<INCOME-PRETAX> 3,417,974
<INCOME-TAX> 1,280,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,137,974
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
