U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1998
[ ] 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 registrant 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 filingrequirements 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, 1998 was 11,226,798 shares.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
Consolidated Financial Position -- March 31, 1998
and December 31,1997.. .................................... 3
Statement of Consolidated Operations -- Three months
ended March 31, 1998 and 1997.............................. 4
Statement of Consolidated Cash Flows -- Three months
ended March 31, 1998 and 1997.............................. 5
Notes to Consolidated Financial Statements -- March 31, 1998 7
Item 2. Management's Discussion and Analysis..................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 12
Item 5. Other Information........................................ 12
Storage Computer Corporation
Consolidated Financial Position (Unaudited)
March 31, 1998 December 31,1997
ASSETS
Current assets
Cash and cash equivalents $ 1,412,245 $ 1,113,379
Accounts receivable (net) 10,785,871 13,910,001
Inventories 8,247,179 7,879,485
Other current assets 415,317 554,804
Deferred tax asset 350,000 350,000
Total current assets 21,210,612 23,807,669
Property and equipment, net of
accumulated depreciation 2,552,697 2,520,774
Deferred tax asset 1,369,000 1,844,000
Other assets 2,427,922 2,639,510
Total assets $27,560,231 $30,811,953
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 5,669,885 $ 6,442,701
Accounts payable 1,379,135 1,980,721
Accrued expenses 959,433 2,149,871
Accrued income taxes 90,095 628,510
Total current liabilities 8,098,548 11,201,803
Long-term debt 710,000 710,000
Total liabilities 8,808,548 11,911,803
Stockholders' equity
Common stock 11,218 11,149
Additional paid-in capital 13,462,051 13,385,240
Retained earnings 5,814,248 5,503,761
Translation gain(loss) (535,834)
Total stockholders' equity 18,751,683 18,900,150
$27,560,231 $30,811,953
See Notes to Consolidated Financial Statements
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months Ended
March 31, 1998 March 31, 1997
Revenue $7,016,310 $8,454,913
Product cost 3,488,521 4,147,156
Gross margin 3,527,789 4,307,757
Operating expenses:
Research and development 883,513 639,697
Selling and marketing 1,835,016 2,215,378
General and administrative 361,575 355,997
Total 3,080,104 3,211,072
Operating income 447,685 1,096,685
Other income (expense):
Interest expense net (128,618) (55,971)
Other income (expense) 158,420 97,429
Total other income(expense) 29,802 41,458
Income before income taxes 477,487 1,138,143
Provision for income taxes 167,000 210,000
Net income $ 310,487 $ 928,143
Net income per basic share $ .03 $ .09
Net income per diluted share $ .03 $ .08
Basic shares 11,183,416 10,715,085
Diluted shares 11,944,213 11,999,177
See Notes to Consolidated Financial Statements
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,1998 March 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $310,487 $928,143
Reconciliation to operating cash flows:
Depreciation and amortization 112,675 80,087
Deferred tax (benefit) -- (70,000)
(Gain) or loss on foreign currency
translation adjustment -- (59,217)
Changes in operating assets and liabilities:
Accounts receivable 3,124,130 (1,232,806)
Inventories (367,694) (2,546,339)
Other current asset s 139,487 (105,524)
Accounts payable
and accrued expenses (2,391,273) 771,763
NET CASH PROVIDED(USED) IN OPERATIONS 927,812 (2,233,893)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment net (144,598) (70,459)
Other assets 211,588
NET CASH PROVIDED(USED)
IN INVESTING ACTIVITIES 66,990 (70,459)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in credit line (772,816) 2,548,328
Issuance of common stock 76,880 152,283
NET CASH PROVIDED(USED)
IN FINANCING ACTIVITIES (695,936) 2,700,611
Effect of exchange rate changes on cash -- (5,400)
Net increase in cash and cash equivalents 298,866 390,859
CASH AND CASH EQUIVALENTS AT BEGINNING 1,113,379 1,852,762
OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,412,245 $2,243,621
See Notes to Consolidated Financial Statements.
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,1998 March 31, 1997
Supplemental disclosures of cash
flow information
Cash payments for:
Interest $128,618 $120,000
Taxes $430,415 $1,389,031
See Notes to Consolidated Financial Statements
STORAGE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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., Storage Computer UK Ltd.,
and Storage Computer Pty., 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.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. 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 Report on
Form 10-KSB filed by the Company with theSecurities and Exchange Commission,
containing the Company's financial statements for the fiscal year ended
December 31, 1997. 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, 1998 are not necessarily indicative of the results
to be expected for the full year.
NOTE B - INVENTORIES
At March 31, 1998 and 1997 inventories consisted of raw materials of
$2,249,003 and $5,387,949; work in process of $1,760,181 and $1,084,889; and
finished goods of $4,237,995 and $1,406,647, respectively.
NOTE C - RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform with the current period
presentation.
STORAGE COMPUTER CORPORATION
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.
REVENUES
Revenue for the three month period ended March 31, 1998 was $7,016,310
compared to revenue of $8,454,913 in the corresponding period of 1997. First
quarter revenue was impacted by extensive final product development testing
which has delayed the introduction of enhanced performance software features
and softness in the Asian markets. For the three months ended
March 31, 1998, U.S. domestic product sales and international product sales
were 47.5% and 52.5% respectively of total revenue. In the 1997 period such
percentages were 35.5% and 64.5% respectively.
Product sales which occur through the European sales offices are conducted in
the local functional currency. All export 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 March 31, 1998 and 1997 were
$3,488,521 and $4,147,156, respectively, or 50% and 49% of revenue. The
increase in product cost percentage between 1997 and 1998 of approximately
1% was the result of increased technical service expenditures to support the
larger deployed base of storage systems, offset in part by a reduction in the
cost of component parts.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three month periods ended March 31,
1998 and 1997 were $883,513 and $639,697, respectively, or approximately 13%
and 8% of revenue in each period. The increase in expenditures between the
three month periods ended March 31, 1998 and 1997 of approximately $244,000,
resulted primarily from increased personnel costs and outside consulting and
engineering fees.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the three month periods ended March 31,
1998 and 1997 were $1,835,016 and $2,215,378, respectively, or 26% of revenue
in each period. The decrease in expenses between the three month periods
ended March 31, 1998 and the comparable period of 1997 of approximately
$380,000, was principally due to provisions for accounts receivable and
incentives recorded in the 1997 first quarter which were not required in
the 1998 first quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month periods ended March
31, 1998 and 1997 were $361,575 and $355,997, respectively, or 5% and 4% of
revenue. The absolute dollar increase in general and administrative expenses
between the three month periods ended March 31, 1998 and 1997 of
approximately $5,600 resulted primarily from the cost related to increased
head count.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The tax provision for the three month periods ended March 31, 1998 and 1997
was $167,000 and $210,000, respectively, resulting in effective tax rates of
approximately 35% and 18%. The tax provision for 1997 included the
recognition of certain net operating loss carryforwards for financial
reporting purposes, which were not included in the 1998 first quarter.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The cash flow for operating activities is impacted by the timing of product
shipments and inventory purchases to support new product introductions and
revenue growth.
DEBT AND EQUITY
In 1997, 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 interestat the bank's prime rate or under certain conditions,
at the bank's LIBOR Rate plus 150 basis points. As of March 31, 1998 the
Company had drawn down $5,670,000 of the credit line. Management believes the
credit facility will accommodate all of its working capital requirements for
the 1998 year.
ACCOUNTS RECEIVABLE
The decrease in accounts receivable from December 31, 1997 to March 31, 1998 of
approximately $3,124,000 is due to the decrease in product sales in the
respective quarters. 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 $368,000 from December 31, 1997 to March
31,1998. 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.
FOREIGN CURRENCY TRANSACTIONS
Management does not currently utilize any derivative products to hedge its
foreign currency risk. The Company's foreign subsidiaries' obligations to the
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, the
British pound and the Australian dollar. 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 ofoperation. Management currently has no plans to
utilize any derivative products to hedge its foreign currency risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 28, 1998, the Superior Court, Cheshire County, New Hampshire,
rendered its decision in the suit brought by Raul Kacirek (Dkt. No.94-E-0102)
seeking specific performance to have the Company issue up to 300,000 shares
of its stock based on stock options Mr. Kacirek had been previously issued,
damages for an alleged breach of an implied covenant of good faith and fair
dealing and injunctive relief, based upon a trial on the merits. The Court
found in favor of the Company on all claims in this action. In counterclaims
brought by Mr. Kacirek Goodlander v. Kacirek Dkt. No. 95-E-0025), against
Mr. Goodlander seeking damages for unjust enrichment, breach of a strict
fiduciary duty, and freeze out of a minority shareholder, the Court found in
favor of Mr. Goodlander and no monetary damages were awarded on these issues.
As of May 5, 1998, the Company and Mr. Goodlander were not aware of any motions
or appeals having been filed on these matters.
ITEM 5. OTHER INFORMATION
Form S-8 was filed during the quarter ending March 31, 1998 to register
75,000 shares for the
Company's 401K plan.
On February 28, 1998 Mr. Gregory Scoziello, Senior Vice President, Sales and
Marketing, resigned his position and terminated his employment with the company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit 27, Financial Data Schedule
REPORTS ON FORM 8-K
None
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 11, 1998 /s/James C. Louney
James C. Louney
Chief Financial Officer & Treasurer
(Principal Financial and Accounting Officer)
