U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 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 ExchangeAct 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, 1998 was 11,334,080.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page(s)
Consolidated Financial Position -- September 30, 1998
and December 31, 1997 .............................................. 3
Statement of Consolidated Operations -- Three and nine months
ended September 30, 1998 and 1997 .................................... 4
Statement of Consolidated Cash Flows -- Nine months
ended September 30, 1998 and 1997 ............................. 5
Notes to Consolidated Financial Statements --
September 30, 1998 ................................................. 7
Item 2. Management's Discussion and Analysis .............................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 12
Item 4. Submission of Matters to a Vote of Shareholders....................12
Item 5. Other Information .................................................13
Item 6. Exhibits and Reports on Form 8-K ..................................13
PART I. FINANCIAL INFORMATION
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STORAGE COMPUTER CORPORATION
CONSOLIDATED FINANCIAL POSITION (UNAUDITED)
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September 30, 1999 December 31, 1997
ASSETS
Current assets
Cash and cash equivalents $ 1,404,670 $ 1,113,379
Accounts receivable (net) 6,722,082 13,910,001
Income tax refund receivable 2,133,603 --
Inventories 9,085,739 7,879,485
Other current assets 650,307 554,804
Deferred tax asset 350,000 350,000
Total current assets 20,346,401 23,807,669
Property and equipment, less
allowance for depreciation 2,527,635 2,520,774
Deferred tax asset 1,419,000 1,844,000
Investments and other assets 2,769,652 2,639,510
$27,062,688 $30,811,953
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 9,402,629 $ 6,442,701
Accounts payable 651,298 1,980,721
Accrued expenses 702,481 2,000,915
Deferred revenue 571,055 777,466
Total current liabilities 11,327,463 11,201,803
Long-term debt 710,000 710,000
Stockholders' equity
Common stock 11,334 11,149
Additional paid in capital 13,565,852 13,385,240
Retained earnings 1,983,873 5,503,761
Translation loss (535,834) --
Total stockholders' equity 15,025,225 18,900,150
$27,062,688 $30,811,953
</TABLE>
See Notes to Consolidated Financial Statements.
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
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Three Months Ended Nine Months Ended
SEPTEMBER September SEPTEMBER SEPTEMBER 30,
1998 1997 1998 1997
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Revenue $ 3,198,182 $7,647,253 $13,490,131 $25,762,619
Product cost 2,768,875 3,792,415 8,388,829 12,684,527
Gross margin 429,307 3,854,838 5,101,302 13,078,092
Operating expenses:
Research and development 1,016,409 731,347 3,027,095 2,112,502
Selling and marketing 1,781,838 2,038,432 5,547,025 5,990,856
General and administrative 686,646 485,358 1,635,970 1,344,534
3,484,893 3,255,137 10,210,090 9,447,892
Operating income (loss) (3,055,586) 599,701 (5,108,788) 3,630,200
Other income (expense):
Interest expense net (130,295) (90,106) (397,486) (212,694)
Other income (expense) (20,828) (108,723) 90,386 468
(151,123) (198,829) (307,100) (212,226)
Income (loss) before (3,206,709) 400,872 (5,415,888) 3,417,974
income taxes
Provision (benefit) for income taxes (1,126,000) 286,400 (1,896,000) 1,280,000
Net income(loss) $ (2,080,709)$ 114,472 $ (3,519,888) $ 2,137,974
Net income(loss) per basic share $(0.18) $0.01 $(0.31) $0.20
Net income(loss) per diluted share $(0.18) $0.01 $(0.31) $0.18
Basic shares 11,283,948 10,817,360 11,231,165 10,765,240
Diluted shares 11,283,948 11,879,269 11,231,165 11,874,826
</TABLE>
See Notes to Consolidated Financial Statements.
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
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Nine Months Ended
SEPTEMBER 30,1998 September 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,519,888) $2,137,974
Adjustments to reconcile net
income (loss) to net cash used for
operating activities:
Depreciation and amortization 338,944 240,838
Changes in operating assets and liabilities:
Receivables 5,054,316 (156,909)
Inventories (1,206,254) (1,838,859)
Other assets (95,503) (2,341,681)
Accounts payable and accrued
expenses and deferrals (2,945,102) (2,296,808)
NET CASH PROVIDED(USED) IN OPERATIONS (2,373,487) (4,255,445)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment, Net (345,805) (1,313,686)
Other Assets (130,142) (600,161)
NET CASH USED IN INVESTING ACTIVITIES (475,947) (1,913,847)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in Credit Line 2,959,928 5,706,752
Issuance of Common Stock 180,797 152,283
NET CASH PROVIDED IN FINANCING ACTIVITIES 3,140,725 5,859,035
Effect of Exchange Rate Changes on Cash (2,672)
NET INCREASE(DECREASE) IN CASH 291,291 (312,929)
CASH AT BEGINNING OF PERIOD 1,113,379 1,852,762
CASH AT END OF PERIOD 1,404,670 $1,539,833
</TABLE>
See Notes to Consolidated Financial Statements.
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
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Nine Months Ended
September 30, 1998 September 30, 1997
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
CASH PAYMENTS FOR:
Interest $346,899 $ 239,171
Taxes
$390,448 $1,839,031
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See Notes to Consolidated Financial Statements
STORAGE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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.,
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
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, 1997. In the opinion of
management, the accompanying financial statements reflect all adjustments 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, 1998 are not necessarily indicative of the
results to be expected for the full year.
NOTE B - INVENTORIES
At September 30, 1998 and December 31, 1997 inventories consisted of raw
materials of $4,584,249 and $1,710,998; work in process of $1,902,106 and
$2,631,078 and finished goods of $2,599,384 and $3,537,409, respectively.
NOTE C - RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform with the current
period presentation.
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 months ended September 30, 1998 was $3,198,182 compared
to revenue of $7,647,253 in the corresponding period in 1997. For the nine
months ended September 30, 1998 revenue was $13,490,131 compared to revenue
of $25,762,619 in the respective period in 1997. Revenue has been impacted
by several factors. In East Asia, which historically has contributed
approximately 25% to total revenue, the Company is experiencing a decline in
revenue due to that geographical area's economic problems. North American and
European revenues were soft due to deferral or loss of customer orders due to
delays in the introduction of enhanced hardware and software features.
During the quarter the Company undertook the following actions: consolidated
the European sales, marketing and service organizations under the direction
of a Senior Vice President to facilitate the cohesive focus towards revenue
growth; appointed a Senior Vice President of North American and Asian Sales
and Marketing and commenced a restructuring of those organizations, including
the expansion of North America territories from three designated regions to
five regions; implemented strategic marketing programs and product
repositioning and pricing directives with respect to the Company's existing
products offerings and also to new product offerings expected to be released
during the 1998 fourth quarter.
To support the implementation of these strategic initiatives and directives, the
Company recorded product and operational provisions of approximately $1.1
million. These provisions adversely affected third quarter product margins
by approximately $.8 million.
For the nine months ended September 30, 1998, U.S. domestic product sales and
international product sales were 51% and 49% respectively of total revenue.
For the 1997 nine-month period such percentages were 53% and 47%.
Product sales which occur through the International 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 September 30, 1998 and 1997
was $2,768,875 and $3,792,415, respectively, or 87 % and 50% of net revenue
in each period. Product cost for the nine-month periods ended September 30,
1998 and 1997 was $8,388,829 and $12,684,527, respectively, or 62% and 49%
of revenue. The increase in product cost percentages between 1998 and 1997
is the result of the decrease in sales volume which resulted in less dollar
product margin contribution to cover non-variable expenses associated with
product production and support, and approximately $800,000 in third quarter
1998 product reserve provisions to support strategic marketing objectives.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter ended September 30, 1998
and the corresponding 1997 period were $1,016,409 and $731,347. For the nine
months ended September 30, 1998 and 1997 such expenses were $3,027,095 and
$2,112,502. The increase in 1998 research and development expenditures
result primarily from the Company's focused emphasis to complete certain
hardware and software development projects.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the third quarters ended September 30, 1998
and 1997 were $1,781,838 and $2,038,432, respectively. Selling and marketing
expenses for the nine months ended September 30, 1998 and 1997 were
$5,547,025 and $5,990,856, respectively. The decrease in selling and
marketing expenses between the nine-month period ended September 30, 1998 and
the comparable period in 1997 of approximately $444,000 was principally due
to decreased sales volume commissions associated with the 1998 lower level
of revenue.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three-month periods ended September
30, 1998 and 1997 were $686,646 and $485,358, respectively. For the nine-
month periods ended September 30, 1998 and 1997 general and administrative
expenses were $1,635,970 and $1,344,534. The absolute dollar increase in
general and administrative expenses between the nine-month periods ended
September 30, 1998 and 1997 of approximately $292,000 resulted primarily from
expenses associated with increased investment in affiliates, geographical
expansion and legal fees incurred in connection with the recently concluded
litigation against the Company.
NET INTEREST EXPENSE
For the quarter ended September 30, 1998 and the corresponding 1997 quarter
net interest expense was $130,295 and $90,106 respectively. Net interest
expense for the nine-month periods ended September 30, 1998 and 1997 was
$397,486 and $212,694, respectively. The increased net interest expense for
the nine months ended September 30, 1998 of approximately $185,000 is the
result of increased short-term borrowing under the Company's line of credit.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The tax provision (benefit) for the nine-month periods ended September 30,
1998 and 1997 was $(1,896,000) and $1,280,000 respectively, resulting in
effective tax rates of approximately 35% and 37% to pre-tax income (loss).
The effective tax rate percentage for the year ended December 31, 1997 was
38%.
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 fluctuations.
DEBT AND EQUITY
The Company has signed an amended loan agreement with a bank, increasing the
commitment from a $10,000,000 unsecured demand line of credit to a
$10,500,000 secured line of credit to be used for the working capital needs
of the Company. The amended loan agreement requires, among other things,
maintenance of a defined minimum tangible net worth. Borrowings against such
credit facility bear interest at the bank's prime rate plus a stipulated fee.
As of September 30, 1998 the Company had drawn down $9,403,000 against the
credit line. Management believes the credit facility, or other financing
programs, will accommodate working capital requirements and other cash
requirements.
ACCOUNTS RECEIVABLE
The reduction in accounts receivable from December 31, 1997 to September 30,
1998 of approximately $7,188,000 is due to the reduced level of revenue
during the first three quarters of 1998.
At December 31, 1997 the Company had reclassified from current assets to
long-term assets approximately $2,039,000 due from a customer pending
completion of agreements to restructure the liquidation of such balance.
In August, 1998 the Company converted the balance then due from such
customer, $2,194,000 to an ownership interest in the customer's recently
announced computer server technology. Concurrent with that acquisition,
the company and the other investor in such technology granted the customer an
exclusive license. The agreements with the customer provide, among other
things, priority in distributions and recission provisions.
INVENTORY
Inventory increased approximately $1,206,000 from December 31, 1997 to
September 30, 1998. The Company has instituted programs to reduce the level
of component parts in inventory.
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 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 of operation. 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 common stock. The Court found in favor of the Company on all claims
in this action. The Company does not believe that its involvement in, the
judicial decisions rendered or the final resolution of this legal proceeding,
has had a material effect upon the Company's business, operating results or
financial condition.
One of the Company's suppliers of disk drives, Micropolis (USA) Inc., filed for
a plan of reorganization under chapter 11 of the Bankruptcy Code. If the
Bankruptcy Court does not approve the Plan, then the likelihood is that the
case would be converted to one under chapter 7 of the Bankruptcy Code. The
Company has filed various proof of claims against Micropolis (USA) Inc. in
the United States Bankruptcy Court in the Central District of California and
against its parent, Micropolis (S) Limited, in the court in Singapore. The
Company does not believe that its continuing involvement in, any judicial
decision rendered or the resolution of this set of claims will have a
material effect upon the Company's business, operating results or financial
condition.
Item 4. Submission of Matters to a Vote of Shareholders
At the Company's Annual Meeting of Shareholders held on May 18, 1998 the
following individuals
were elected to the Board of Directors:
Votes For Votes Withheld
Theodore J. Goodlander 9,819,135 17,706
Shigeho Inaoka 9,819,519 17,322
Steven S. Chen 9,819,519 17,322
The vote for the selection of Richard A. Eisner & Company, LLP, now BDO
Seidman, LLP by merger of the Boston office in June 1998, as auditors for the
year ending December 31, 1998 was:
Votes For Votes Withheld
10,686,617 17,851
Item 5. Other Information
On August 7, 1998 the Company announced the appointment of Mr. Wolfgang
Dembowy, 49, as Senior Vice President for European Operations. He will
manage Storage Computer's marketing, sales, and technical support
organizations across Europe. Prior to his appointment as Senior Vice
President for European Operations, Mr. Dembowy served as the managing
director for the Company's German subsidiary. Mr. Dembowy served as general
manager for EMC Germany for 10 years and held key sales and technical positions
with Hewlett-Packard and Nicolett Instruments.
On September 1, 1998 Mr. Keith C. Perry joined the Company as Senior Vice
President of Sales and Marketing. Mr. Perry, 42, had been with Amdahl
Corporation, a manufacturer of RAID storage systems since 1986. He holds a
BS in Computer Science from the University of Manitoba.
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 ending September 30,
1998 for which this report is filed.
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 14, 1998 /s/ James C. Louney
James C. Louney
Chief Financial Officer & Treasurer
(Principal Financial and
Accounting Officer)
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