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 30,1997
[ ] 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
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(Exact name of small business issuer as specified in its charter)
Delaware 02-0450593
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11 Riverside Street Nashua , NH 03062-1373
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(Address of principal executive offices)
(603) 880-3005
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(Issuer's telephone number)
N/A
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(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 June 30, 1997 was 10,716,253 shares.
Transitional Small Business Disclosure Format (Check One)
Yes [ ] No [ X ]
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page(s)
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Consolidated Financial Position -- June 30, 1997
and December 31, 1996...................................................................... 3
Statement of Consolidated Operations -- Three and six months
ended June 30, 1997 and 1996............................................................... 4
Statement of Consolidated Cash Flows -- Six months
ended June 30, 1997 and 1996............................................................... 5
Notes to Consolidated Financial Statements --
June 30, 1997.............................................................................. 7
Item 2. Management's Discussion and Analysis ................................................... 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders ...................................... 12
Item 5. Other Matters.......................................................................... 12
Item 6. Exhibits and Reports on Form 8-K....................................................... 12
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2
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PART I. FINANCIAL INFORMATION
STORAGE COMPUTER CORPORATION
CONSOLIDATED FINANCIAL POSITION (UNAUDITED)
JUNE 30, 1997 December 31, 1996
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,068,543 $ 1,852,762
Accounts receivable (net) 10,944,574 9,030,955
Inventories 8,478,882 6,274,244
Other current assets 239,783 103,796
Deferred tax asset 498,468 400,000
---------------------- --------------------
Total current assets 21,230,250 17,661,757
---------------------- --------------------
Deferred tax asset 1,857,400 2,138,550
Property and equipment, less
allowance for depreciation 1,162,166 1,080,002
---------------------- --------------------
Investments in and advances to affiliates 655,161 55,000
---------------------- --------------------
$24,904,977 $20,935,309
====================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 4,699,990 $ 576,421
Lease obligations 46,302 29,753
Accounts payable 1,694,205 2,201,556
Accrued expenses 1,215,641 2,236,853
Accrued income taxes 150,600 935,600
Deferred stockholder compensation 299,500 299,500
---------------------- --------------------
Total current liabilities 8,106,238 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 3,635,510 1,612,008
---------------------- --------------------
Total stockholders' equity 16,088,739 13,912,954
---------------------- --------------------
$24,904,977 $20,935,309
====================== ====================
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See Notes to Consolidated Financial Statements.
3
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STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
JUNE 30, June 30, JUNE 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue $9,660,453 $7,321,410 $18,115,366 $13,356,668
Product cost 4,744,956 3,788,752 8,892,112 6,990,747
----------------- ----------------- ------------------ -----------------
Gross margin 4,915,497 3,532,658 9,223,254 6,365,921
----------------- ----------------- ------------------ -----------------
Operating expenses:
Selling and marketing 1,849,046 1,526,649 4,064,424 2,830,840
General and administrative 391,179 364,394 747,176 650,140
Research and development 741,458 567,704 1,381,155 1,048,048
----------------- ----------------- ------------------ -----------------
2,981,683 2,458,747 6,192,755 4,529,028
----------------- ----------------- ------------------ -----------------
Operating income 1,933,814 1,073,911 3,030,499 1,836,893
----------------- ----------------- ------------------ -----------------
Other income (expense):
Interest expense net (66,617) (22,373) (122,588) (72,683)
Other income (expense) 11,762 29,474 109,191 70,275
----------------- ----------------- ------------------ -----------------
(54,855) 7,101 (13,397) (2,408)
----------------- ----------------- ------------------ -----------------
Income before income taxes 1,878,959 1,081,012 3,017,102 1,834,485
----------------- ----------------- ------------------ -----------------
Provision for federal and state income taxes:
Current tax expense 531,000 376,000 811,000 555,088
Deferred tax (benefit) expense 252,600 96,000 182,600 130,014
----------------- ----------------- ------------------ -----------------
783,600 472,000 993,600 685,102
----------------- ----------------- ------------------ -----------------
Net income $1,095,359 $ 609,012 $ 2,023,502 $ 1,149,383
================= ================= ================== =================
Net income per share $0.09 $0.05 $0.17 $0.10
Weighted average shares outstanding 11,930,710 12,094,098 11,959,969 12,028,582
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See Notes to Consolidated Financial Statements.
4
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STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended
JUNE 30, June 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,023,502 $1,149,383
Adjustments to reconcile net income
to net cash used for operating
activities:
Depreciation and amortization 163,712 155,728
Deferred tax provision 182,600 130,014
(Gain) or loss on foreign currency
translation adjustment (58,414) 21,180
Changes in operating assets and liabilities:
Accounts receivable (1,873,619) 314,764
Inventories (2,174,638) (1,509,322)
Other current assets (135,905) (3,511)
Accounts payable and accrued expenses (2,345,472) 1,394
--------------------- ----------------------
NET CASH PROVIDED(USED) IN OPERATIONS (4,218,234) 259,630
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment net (245,876) (251,247)
Advances to Affiliates (600,161)
--------------------- ----------------------
NET CASH USED IN INVESTING ACTIVITIES (846,037) (251,247)
--------------------- ----------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 4,123,569 1,888,763
Issuance of common stock 152,283 14,951
--------------------- ----------------------
NET CASH PROVIDED IN FINANCING ACTIVITIES 4,275,852 1,903,714
--------------------- ----------------------
Effect of exchange rate changes on cash 4,200 (21,180)
--------------------- ----------------------
NET INCREASE(DECREASE) IN CASH (784,219) 1,890,917
CASH AT BEGINNING OF PERIOD 1,852,762 871,101
--------------------- ----------------------
CASH AT END OF PERIOD $1,068,543 $2,762,018
===================== ======================
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See Notes to Consolidated Financial Statements.
5
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STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended
JUNE 30, June 30,
1997 1996
<S> <C> <C>
Supplemental disclosures of cash flow information Cash payments for:
Interest $151,640 $77,004
Taxes $1,639,031 $1,185,000
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See Notes to Consolidated Financial Statements
6
STORAGE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six
months ended June 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 June 30, 1997 of $9,660,453 reflected
an increase in product sales of $2,339,043 or 32%, compared with the quarter
ended June 30, 1996. Revenue for the six month period ended June 30, 1997 of
$18,115,366 reflected an increase in product sales of $4,758,698 or 36%,
compared with the same period in 1996. The increase in revenue is attributed to
new product introductions, increased international and domestic distribution
channels utilizing value-added resellers, 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.
For the six months ended June 30, 1997, U.S. domestic product sales and
international product sales were 49% and 51%, 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 the expansion of the U.S. sales force and softness in product
sales in Europe.
Except for product 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 substantially conducted in the local functional
currency, all product sales are made in US dollars to limit the amount of
foreign currency risk.
8
PRODUCT COST
Product cost for the three month periods ended June 30, 1997 and 1996 were
$4,744,956 and $3,788,752 respectively, or 49% and 52% of net revenue. Product
cost for the six month periods ended June 30, 1997 and 1996 were $8,892,112 and
$6,990,747, respectively, or 49% and 52% of revenue. The decrease in product
cost 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.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the six month periods ended June 30, 1997 and
1996 were $4,064,424 and $2,830,840, respectively or 22% and 21% of revenue. The
increase in selling and marketing expenses between the six month period ended
June 30, 1997 and the comparable period in 1996 of approximately $1,234,000, was
principally due to the addition of 25 employees in the United States and
International direct sales organizations and related overhead costs during the
past year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the six month periods ended June 30,
1997 and 1996 were $747,176 and $650,140, respectively or 4% and 5% of revenue.
The absolute dollar increase in general and administrative expenses between the
six month periods ended June 30, 1997 and 1996 of approximately $97,000 resulted
primarily from the cost related to increased revenue.
RESEARCH AND DEVELOPMENT
Research and development expenses for the six month periods ended June 30, 1997
and 1996 were $1,381,155 and $1,048,048, respectively or approximately 8% of
revenue in each period. The increase in expenditures between the six month
periods ended June 30, 1997 and 1996 of approximately $333,100, resulted
primarily from an increase in personnel and outside consulting and engineering
fees.
INTEREST EXPENSE
Interest expense for the six month periods ended June 30, 1997 and 1996 was
$150,645 and $111,752. The increased interest expense for the six months ended
June 30, 1997 of approximately $38,900 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 product and product enhancement introductions.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The tax provision for the six month periods ended June 30, 1997 and 1996 was
$993,600 and $685,102, respectively, resulting in effective tax rates of
approximately 33% and 37%. The tax provision for 1997 includes the expected
recognition of certain net operating loss carryforwards for both income tax and
financial reporting purposes. The June 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%.
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 revenue 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 150 basis points. As of June 30, 1997 the Company had
drawn down $4,699,990 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 June 30, 1997 of
approximately $1,874,000 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 $2,175,000 from December 31, 1996 to June 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.
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 4. Submission of Matters to a Vote of Stockholders
The Annual Meeting of Stockholders of Storage Computer Corporation was held on
July 14, 1997 at the offices of the Company. Upon motion duly made and seconded
and carried, it was voted to elect Theodore J. Goodlander, Shigeho Inaoka and
Steve S. Chen to the position of Director of the Company, each to serve until
the next annual meeting, and until the election and qualification of a
successor. No stockholder elected to vote in person by written ballot and all
voting was by proxy. The votes for the election of Messrs. Goodlander, Inaoka
and Chen were 9,819,135 FOR, 17,706 OPPOSED and 0 ABSTAINING.
The second order of business was to vote to ratify the selection of Richard A.
Eisner & Company as the auditors for the Company for the year ending December
31, 1997. The vote for the selection of Richard A. Eisner & Company was
9,817,480 FOR, 7,340 OPPOSED and 12,021 ABSTAINING. There being no further
business to come before the meeting, upon motion duly made, seconded and
carried, it was voted to adjourn the meeting.
Item 5. Other Information
On July 14, 1997 the Company filed an S-8 Registration Statement with the
Securities and Exchange Commission to register 2,500,000 shares of common stock
of the Company for the exercise of stock options, either previously issued or
issuable under the Company's Amended and Restated Stock Incentive Plan, as
amended.
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
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Registrant
Date: July 24, 1997 /s/ James C. Louney
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James C. Louney
Chief Financial Officer & Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Jun-30-1997
<CASH> 1,068,543
<SECURITIES> 0
<RECEIVABLES> 10,944,574
<ALLOWANCES> 0
<INVENTORY> 8,478,882
<CURRENT-ASSETS> 21,230,250
<PP&E> 2,481,043
<DEPRECIATION> 1,318,877
<TOTAL-ASSETS> 24,904,977
<CURRENT-LIABILITIES> 8,106,238
<BONDS> 710,000
0
0
<COMMON> 10,702
<OTHER-SE> 16,078,037
<TOTAL-LIABILITY-AND-EQUITY> 24,904,977
<SALES> 18,115,366
<TOTAL-REVENUES> 18,115,366
<CGS> 8,892,112
<TOTAL-COSTS> 8,892,112
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122,588
<INCOME-PRETAX> 3,017,102
<INCOME-TAX> 993,600
<INCOME-CONTINUING> 2,023,502
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,023,502
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
