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 March 31,1997
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[ ] 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
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(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 May 10, 1997 was 10,701,591 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>
Condensed Consolidated Balance Sheets -- March 31, 1997
and December 31, 1996.......................................................... 3
Condensed Consolidated Statements of Operations -- Three months
ended March 31, 1997 and 1996.................................................. 4
Condensed Consolidated Statements of Cash Flows -- Three months
ended March 31, 1997 and 1996.................................................. 5
Notes to Condensed Consolidated Financial Statements --
March 31, 1997................................................................. 7
Item 2. Management's Discussion and Analysis or Plan of Operation....................... 8
PART II. OTHER INFORMATION
Item 5. Other Information............................................................. 12
Item 6. Exhibits and Reports on Form 8-K............................................... 12
</TABLE>
2
PART I. FINANCIAL INFORMATION
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,243,621 $ 1,852,762
Accounts receivable (net) 10,263,761 9,030,955
Inventories 8,885,200 6,274,244
Prepaid expenses and other current assets 209,320 103,796
Deferred tax asset 481,150 400,000
---------------------- --------------------
Total current assets 22,083,052 17,661,757
---------------------- --------------------
Deferred tax asset 2,057,400 2,138,550
Property and equipment, less
allowance for depreciation 1,070,374 1,080,002
---------------------- --------------------
Investment in affiliates 55,000 55,000
---------------------- --------------------
$25,265,826 $20,935,309
====================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 3,126,965 $ 576,421
Current portion of long-term debt
and lease obligation 32,400 29,753
Accounts payable 4,132,731 2,201,556
Accrued expenses 1,940,394 2,236,853
Accrued income taxes 935,600
Deferred stockholder compensation 299,500 299,500
---------------------- --------------------
Total current liabilities 9,531,990 6,279,683
---------------------- --------------------
Long-term debt and lease obligations,
less current portion 30,456 32,672
Long-term debt, related party 710,000 710,000
---------------------- --------------------
Total liabilities 740,456 742,672
---------------------- --------------------
Stockholders' equity
Common stock 10,702 10,701
Additional paid in capital 12,442,527 12,290,245
Retained earnings 2,540,151 1,612,008
---------------------- --------------------
14,993,380 13,912,954
---------------------- --------------------
$25,265,826 $20,935,309
====================== ====================
</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
MARCH 31, MARCH 31,
1997 1996
<S> <C> <C>
Net sales $8,454,913 $6,035,258
Cost of goods sold 4,147,156 3,130,742
----------------- -----------------
Gross profit 4,307,757 2,904,516
----------------- -----------------
Operating expenses:
Selling and marketing 2,215,378 1,304,191
General and administrative 355,997 285,746
Research and development 639,697 480,344
----------------- -----------------
3,211,072 2,070,281
----------------- -----------------
Operating income 1,096,685 834,235
----------------- -----------------
Other income (expense):
Interest expense net (55,971) (50,310)
Other income (expense) 97,429 (30,452)
----------------- -----------------
41,458 (80,762)
----------------- -----------------
Income before income taxes 1,138,143 753,473
----------------- -----------------
Provision for federal and state
income taxes
Current tax expense 280,000 179,088
Deferred tax (benefit) expense (70,000) 34,014
----------------- -----------------
210,000 213,102
----------------- -----------------
Net income $928,143 $540,371
================= =================
Net income per share $0.08 $0.05
Weighted average shares outstanding 11,999,177 11,886,529
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
MARCH 31, MARCH 31,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $928,143 $540,371
Adjustments to reconcile net income
to net cash used for operating
activities:
Depreciation and amortization 80,087 59,260
Deferred tax (benefit) (70,000) 34,014
(Gain) or loss on foreign currency
translation adjustment (59,217) 47,976
Changes in operating assets and liabilities:
Accounts receivable (net) (1,232,806) 1,258,540
Inventories (2,546,339) (478,555)
Other current assets (105,524) 16,772
Accounts payable and accrued expenses 771,763 (1,099,776)
--------------------- ----------------------
NET CASH PROVIDED(USED) IN OPERATIONS (2,233,893) 378,602
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment net (70,459) (174,536)
--------------------- ----------------------
NET CASH USED IN INVESTING ACTIVITIES (70,459) (174,536)
--------------------- ----------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from credit line 2,548,328 519,149
Issuance of common stock 152,283 14,403
--------------------- ----------------------
NET CASH PROVIDED IN FINANCING ACTIVITIES 2,700,611 533,552
--------------------- ----------------------
Effect of exchange rate changes on cash (5,400) (7,075)
--------------------- ----------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 390,859 730,543
Cash and cash equivalents at beginning of period 1,852,762 871,101
--------------------- ----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,243,621 $1,601,644
===================== ======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months Ended
MARCH 31, MARCH 31,
1997 1996
<S> <C> <C>
Supplemental disclosures of cash flow information Cash payments for:
Interest $ 120,000 $ 79,160
Taxes $1,389,031 $1,035,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 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 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 months ended
March 31, 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 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.
NET SALES
Net sales for the three month period ended March 31, 1997 of $8,454,913
reflected an increase in combined product sales of $2,419,655 or 40%, compared
with the quarter ended March 31, 1996. The increased sales are attributed to new
product introductions, increased international and domestic distribution
channels utilizing value-added resellers, the opening of corporate sales
offices/locations, targeted marketing, and expansion of the direct sales force.
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 local functional currency, all sales are made
in US dollars to limit the amount of foreign currency risk.
COST OF GOODS SOLD
Cost of goods sold for the three month periods ended March 31, 1997 and 1996
were $4,147,156 and $3,130,742, respectively, or 49% and 52% of net sales. The
decrease in cost of goods sold percentage between 1997 and 1996 of approximately
3% was the result of a reduction in the cost of component parts, the increased
dollar value of sales of larger systems, and an increase in sales volume by the
direct sales force.
8
SELLING AND MARKETING EXPENSES
Selling expenses for the three month periods ended March 31, 1997 and 1996 were
$2,215,378 and $1,304,191, respectively or 26% and 22% of net sales. The
increase in selling expenses between the three month periods ended March 31,
1997 and the comparable period in 1996 of approximately $911,000, was
principally due to the expansion of the United States and International direct
sales force and related overhead costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month periods ended March 31,
1997 and 1996 were $355,997 and $285,746, respectively or 4% and 5% of net
sales. The absolute dollar increase in general and administrative expenses
between the three month periods ended March 31, 1997 and 1996 of approximately
$70,000 resulted primarily from the cost related to increased sales volume.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three month periods ended March 31,
1997 and 1996 were $639,697 and $480,344, respectively or approximately 8% of
net sales in each period. The increase in expenditures between the three month
periods ended March 31, 1997 and 1996 of approximately $159,000, resulted
primarily from increased personnel costs and outside consulting and engineering
fees.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The tax provision for the three month periods ended March 31, 1997 and 1996 was
$210,000 and $213,102 respectively, resulting in effective tax rates of
approximately 18% and 28%. The tax provision for 1997 and 1996 includes the
recognition of certain net operating loss carryforwards for financial reporting
purposes.
9
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The cash flow used for the operating activities is principally the result of the
rapid 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 sales growth.
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. Management believes that the growth can be financed through
additional borrowing arrangements as required.
DEBT AND EQUITY
In 1996, the Company entered into a $10,000,000 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. As of March 31, 1997 the Company had
drawn down $3,126,965 of the credit line. Management believes the credit
facility will accommodate all of its working capital requirements for the 1997
year.
ACCOUNTS RECEIVABLE
The growth in accounts receivable from December 31, 1996 to March 31, 1997 of
approximately $1,230,000 is due to the increase in product sales 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 $2,610,000 from December 31, 1996 to March 31,
1997. The investment in inventory is impacted by several factors, including but
not limited to, 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.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital expenditures at
this time.
10
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 5. OTHER INFORMATION
On April 15, 1997, Christopher Torregrossa, Controller and Vice
President-Finance, resigned his positions and terminated his employment with the
Company.
Effective May 1, 1997, James Louney was named Chief Financial Officer
and Treasurer of the Company. In connection with the appointment of Mr. Louney
as the senior financial officer of the Company, Theodore Goodlander, CEO and
Chairman of the Board of Directors, resigned his position as Chief Financial
Officer of the Company and retained all other positions maintained by him with
the Company. Additionally, Norunn Heilevang resigned her office as Treasurer of
the Company. Ms. Heilevang continues her employment with the Company in a senior
administrative capacity.
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: May 15, 1997 /s/ James C. Louney
---------------------- -------------------
James C. Louney
Chief Financial Officer & Treasurer
(Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,243,621
<SECURITIES> 0
<RECEIVABLES> 10,263,761
<ALLOWANCES> 0
<INVENTORY> 8,885,200
<CURRENT-ASSETS> 22,083,052
<PP&E> 2,305,626
<DEPRECIATION> 1,235,252
<TOTAL-ASSETS> 25,265,826
<CURRENT-LIABILITIES> 9,531,990
<BONDS> 740,456
0
0
<COMMON> 10,702
<OTHER-SE> 14,982,678
<TOTAL-LIABILITY-AND-EQUITY> 25,265,826
<SALES> 8,454,913
<TOTAL-REVENUES> 8,552,342
<CGS> 4,147,156
<TOTAL-COSTS> 4,147,156
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,971
<INCOME-PRETAX> 1,138,143
<INCOME-TAX> 210,000
<INCOME-CONTINUING> 928,143
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 928,143
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
