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 June 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 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, 1998 was 11,233,816
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page(s)
Consolidated Financial Position -- June 30, 1998
and December 31, 1997................................ 3
Statement of Consolidated Operations -- Three and six months
ended June 30, 1998 and 1997......................... 4
Statement of Consolidated Cash Flows -- Six months
ended June 30, 1998 and 1997.......................... 5
Notes to Consolidated Financial Statements --
June 30,1998.......................................... 7
Item 2. Management's Discussion and Analysis ................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 12
Item 5. Other Information.................................... 12
Item 6. Exhibits and Reports on Form 8-K .................... 12
<PAGE>
PART I. FINANCIAL INFORMATION
STORAGE COMPUTER CORPORATION
CONSOLIDATED FINANCIAL POSITION (UNAUDITED)
JUNE 30,1998 December 31, 1997
ASSETS
Current assets
Cash and cash equivalents $ 1,920,084 $ 1,113,379
Accounts receivable (net) 8,549,751 13,910,001
Inventories 9,985,059 7,879,485
Other current assets 528,225 554,804
Deferred tax asset 350,000 350,000
Total current assets 21,333,119 23,807,669
Property and equipment, net of
accumulated depreciation 2,525,097 2,520,774
Deferred tax asset 1,369,000 1,844,000
Other assets 2,947,402 2,639,510
28,174,618 30,811,953
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note Payable $ 7,827,112 $ 6,442,701
Accounts payable 2,348,524 1,980,721
Accrued expenses 230,690 2,778,381
Total current liabilities 10,406,326 11,201,803
Long-term debt 710,000 710,000
Stockholders' equity
Common stock 11,234 11,149
Additional paid-in capital 13,518,310 13,385,240
Retained earnings 4,064,582 5,503,761
Translation loss (535,834)
Total stockholders' equity 17,058,292 18,900,150
28,174,618 30,811,953
<PAGE>
See Notes to Consolidated Financial Statements.
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1998 1997 1998 1997
Revenue $3,275,639 $9,660,453 $10,291,949 $18,115,366
Product cost 2,131,433 4,744,956 5,619,954 8,892,112
Gross margin 1,144,206 4,915,497 4,671,995 9,223,254
Operating expenses:
Research and development 1,127,173 741,458 2,010,686 1,381,155
Selling and marketing 1,930,171 1,737,046 3,765,187 3,952,424
General and administrative 587,749 503,179 949,324 859,176
3,645,093 2,981,683 6, 725,197 6,192,755
Operating income (loss) (2,500,887) 1,933,814 (2,053,202) 3,030,499
Other income (expense):
Interest (expense) net (138,573) (66,617) (267,191) (122,588)
Other income (expense) (47,206) 11,762 111,214 109,191
(185,779) (54,855) (155,977) (13,397)
Income (loss) before income taxes (2,686,666) 1,878,959 (2,209,179) 3,017,102
Provision for income tax (benefit) (937,000) 783,600 (770,000) 993,600
Net income (loss) $(1,749,666)$1,095,359 $ (1,439,179) $2,023,502
Net income per basic share $ (0.16) $ 0.10 $ (0.13) $ 0.19
Net income (loss) per diluted share (0.16) 0.09 (0.13) 0.17
Basic shares 11,225,816 10,716,253 11,204,616 10,708,422
Diluted shares 11,225,816 11,930,710 11,204,616 11,959,969
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
See Notes to Consolidated Financial Statements.
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended
June 30, 1998 June 30, 1997
Cash flows from Operating Activities:
Net income (loss) $(1,439,179) $2,023,502
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization 220,655 163,712
Changes in operating assets and liabilities:
Accounts receivable 5,360,250 (1,873,619)
Inventories (2,105,574) (2,174,638)
Other assets 26,579 (135,905)
Accounts payable and accrued expenses (2,240,722) (2,221,286)
NET CASH USED IN OPERATIONS (177,991) (4,218,234)
Cash flows from investing activities:
Purchases of property & equipment net (224,978) (245,876)
Other assets (307,892) (600,161)
NET CASH USED IN INVESTING ACTIVITIES (532,870) (846,037)
Cash flow from financing activities:
Increase (decrease) in credit line 1,384,411 4,123,569
Issuance of common stock 133,155 152,283
NET CASH PROVIDED IN FINANCING ACTIVITIES 1,517,566 4,275,852
Effect of exchange rate changes on cash -- 4,200
NET INCREASE(DECREASE) IN CASH 806,705 (784,219)
CASH AT BEGINNING OF PERIOD 1,113,379 1,852,762
CASH AT END OF PERIOD $1,920,084 $1,068,543
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
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STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended
Supplemental disclosures of cash flow information
Cash payments for:
Interest $ 246,992 $ 151,640
Taxes $ 415,002 $ 1,639,031
</TABLE>
<PAGE>
See Notes to Consolidated Financial Statements
STORAGE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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.,
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 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, 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,
1998 are not necessarily indicative of the results to
be expected for the full year.
NOTE B - INVENTORIES
At June 30, 1998 and December 31, 1997 inventories
consisted of raw materials of $4,966,826 and
$1,710,998; work in process of $2,687,993 and
$2,631,078 and finished goods of $2,330,240 and
$3,537,409, respectively.
NOTE C - RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform
with the current period presentation.
<PAGE>
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 June 30, 1998 was
$3,275,639 compared to revenue of $9,660,453 in the
corresponding period in 1997. For the six months ended
June 30, 1998 revenue was $10,291,949 compared to
revenue of $18,115,366 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 flat to declining as the
reseller-based distribution channels continued to
focus on the highly competitive low end of the market,
where the Company's product line is at a price
disadvantage; and the Company experienced a slower
than expected ramp-up of the direct sales force which
focuses on the high-end enterprise sales. Finally,
some customers have delayed purchases waiting for the
integration and rollout of higher capacity 18GB and
47GB drives, which occurred late in the quarter, and
new internally-developed products which are scheduled
to be released during the 1998 third and fourth quarters.
During the second quarter, the Company entered into
strategic relationships with Network Storage Solutions
for network attached storage, and ATL Products, Inc.
for tape backup solutions. The product offerings from
these partnerships, which complement and expand the
Company's core technology, are expected to be
available for shipment during the 1998 third quarter.
For the six months ended June 30, 1998, U.S. domestic
product sales and international product sales were 48%
and 52%, respectively of total revenue. For the 1997
six-month period such percentages were 49% and 51%.
<PAGE>
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 June
30, 1998 and 1997 was $2,131,433 and $4,744,956,
respectively, or 65% and 49% of net revenue in each
period. Product cost for the six-month periods ended
June 30, 1998 and 1997 was $5,619,954 and $8,892,112,
respectively, or 55% 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 product margin contribution to cover
non-variable expenses associated with product support.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter
ended June 30, 1998 and the corresponding 1997 period
were $1,127,173 and $741,458. For the six months
ended June 30, 1998 and 1997 such expenses were
$2,010,686 and $1,381,155. The increase in 1998
research and development expenditures resulted
primarily from design prototype expenses and increases
in personnel and outside consulting and engineering
fees associated with the company's focused emphasis on
completion of certain development projects during the
next two quarters.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the second quarters
ended June 30, 1998 and 1997 were $1,930,171 and
$1,737,046, respectively. Selling and marketing expenses
for the six months ended June 30, 1998 and 1997 were
$3,765,187 and $3,952,424, respectively. The decrease in
selling and marketing expenses between the six-month
period ended June 30, 1998 and the comparable period in
1997 of approximately $187,000 was principally due to
reduced sales volume commissions in the United States and
International sales organizations.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three-month
periods ended June 30, 1998 and 1997 were were $587,749
and $503,179, respectively. For the six-month periods
ended June 30, 1998 and 1997 general and administrative
expenses were $949,534 and $859,176. The absolute dollar
increase in general and administrative expenses between
the six-month periods ended June 30, 1998 and 1997 of
approximately $90,000 resulted primarily from increased
legal fees associated with the recently concluded
litigation against the Company by a former employee.
NET INTEREST EXPENSE
For the quarter ended June 30, 1998 and the corresponding
1997 quarter net interest expense was $138,573, and
$66,617 respectively. Net interest expense for the
six-month periods ended June 30, 1998 and 1997 was
$267,191 and $122,588, respectively. The increased net
interest expense for the six months ended June 30, 1998
of approximately $145,000 is the result of increased
short-term borrowing under the Company's line of credit.
<PAGE>
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The tax provision (benefit) for the six-month periods
ended June 30, 1998 and 1997 was $(770,000) and $993,600
respectively, resulting in effective tax rates of
approximately 35% and 33% to pre-tax income. 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
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 June 30, 1998 the
Company had drawn down $7,827,000 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 reduction in accounts receivable from December 31,
1997 to June 30, 1998 of approximately $5,360,000 is due
to the reduced level of revenue during the first and
second quarters of 1998. During the 1998 second quarter
certain distributors requested extensions for payment of
amounts due to the Company. The Company in most
instances granted 60 to 120 day extensions for settlement
of such balances. It is expected that such balances will
be collected during the third quarter of 1998 and that
customer receivables will return to historical ratios.
At December 31, 1997 the Company had reclassified from
current assets to long-term assets approximately
$2,000,000 due from a customer pending completion of
agreements to restructure the liquidation of such
balance. At June 30, 1998 no satisfactory agreement has
been reached as to such restructure, and as a
consequence, the amount continues to be classified as a
long-term asset.
INVENTORY
Inventory increased approximately $2,100,000 from
December 31, 1997 to June 30, 1998. The inventory
increase is principally composed of purchased component
parts, such as disk drives. The increased balance in
component parts is the result of the introduction of the
new 18GB and 47GB drives during the second quarter and
planned purchases of such component parts associated with
the historical level of revenue. The Company has
implemented certain programs to reduce the level of
component parts in inventory.
<PAGE>
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.
<PAGE>
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 suit was based
upon the attempted exercise of 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. A trial was concluded in February,
1998 and the Court found in favor of the Company on all
claims in this action. In counterclaims brought by Mr.
Kacirek against Mr. Goodlander (Goodlander v. Kacirek
Dkt. No. 95-E-0025), 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.
On June 22, 1998, the Superior Court, Cheshire
County, New Hampshire, granted the parties' requests for
the withdrawal of all appeals in the related suits
between Raul Kacirek, Storage Computer Corporation and
its President Theodore J. Goodlander. The parties agreed
to resolve all remaining issues in this litigation by
mutually waiving all future rights to appeal and to abide
by the decisions rendered by the Cheshire Superior Court.
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.
Item 5. Other Information
On April 30, 1998 James Nolan, Sr. Vice President
of Research and Development terminated his employment
with the company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 Financial Data Schedule
(b) Form 8-K was filed during the quarter ending
June 30, 1998 to report the sale of the Boston office of
the Company's auditors, Richard A. Eisner & Co.,LLP to
BDO Seidman, LLP, and the resulting selection of BDO
Seidman (Boston office) as auditors for the year ending
December 31, 1998
<PAGE>
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: August 12, 1998 /s/ James C. Louney
James C. Louney
Chief Financial Officer & Treasurer
(Principal Financial and
Accounting Officer)
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