<PAGE> 1
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, 1999
[ ] 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, 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
August 1, 1999 was 11,369,829.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page(s)
Consolidated Financial Position -- June 30, 1999
and December 31, 1998 3
Statement of Consolidated Operations -- Three and six months
ended June 30, 1999 and 1998 4
Statement of Consolidated Cash Flows -- Six months
ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements -- June 30, 1999 6
Item 2. Management's Discussion and Analysis 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
2
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PART I. FINANCIAL INFORMATION
STORAGE COMPUTER CORPORATION
CONSOLIDATED FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999 December 31, 1998
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $1,009,455 $925,259
Accounts receivable (net) 3,267,727 5,187,351
Income tax refund receivable - 2,160,211
Inventories 7,659,202 8,263,040
Other current assets 872,693 707,300
----------- -----------
Total current assets 12,809,077 17,243,161
----------- -----------
Property and equipment, net of accumulated depr. 1,972,516 2,742,252
----------- -----------
Deferred tax asset 2,194,000 2,194,000
Other assets 740,032 720,489
----------- -----------
$17,715,625 $22,899,902
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $7,613,031 $9,336,377
Accounts payable 1,500,610 2,298,655
Accrued expenses 2,026,422 2,209,232
----------- -----------
Total current liabilities 11,140,063 13,844,264
----------- -----------
Long-term debt 1,060,000 710,000
----------- -----------
Total liabilities 12,200,063 14,554,264
----------- -----------
Stockholders' equity
Common Stock 11,370 11,348
Additional paid-in capital 13,755,440 13,721,021
Retained earnings (8,251,248) (5,386,731)
----------- -----------
Total stockholders' equity 5,515,562 8,345,638
----------- -----------
$17,715,625 $22,899,902
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
JUNE 30, 1999 June 30, 1998 JUNE 30, 1999 June 30, 1998
<S> <C> <C> <C> <C>
Revenue $3,057,350 $3,275,639 $5,737,023 $10,291,949
Product Cost 1,823,249 2,131,433 3,420,051 5,619,954
---------- ---------- ---------- ----------
Gross margin 1,234,101 1,144,206 2,316,972 4,671,995
---------- ---------- ---------- ----------
Operating expenses:
Research and development 458,588 1,127,173 1,328,479 2,010,686
Selling and marketing 918,835 1,930,171 2,313,014 3,765,187
General and administrative 829,732 587,749 1,437,718 949,324
---------- ---------- ---------- ----------
Total 2,207,155 3,645,093 5,079,211 6,725,197
---------- ---------- ---------- ----------
Operating income (loss) ($973,054) ($2,500,887) ($2,762,239) ($2,053,202)
---------- ---------- ---------- ----------
Other income (expense):
Interest expense, net (185,072) (138,573) (401,774) (267,191)
Other income 72,361 (47,206) 104,915 111,214
---------- ---------- ---------- ----------
(112,711) (185,779) (296,859) (155,977)
---------- ---------- ---------- ----------
Income (loss) before income
taxes (1,085,765) (2,686,666) (3,059,098) (2,209,179)
Provision for income taxes (200,372) (937,000) (200,372) (770,000)
---------- ---------- ---------- ----------
Net income (loss) ($885,393) ($1,749,666) ($2,858,726) ($1,439,179)
========== ========== ========== ==========
Net income (loss) / basic share ($0.08) ($0.16) ($0.25) ($0.13)
Net income (loss) / diluted share ($0.08) ($0.16) ($0.25) ($0.13)
sharee
Basic shares 11,364,931 11,225,816 11,359,429 11,204,616
Diluted shares 11,364,931 11,225,816 11,359,429 11,204,616
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
JUNE 30, 1999 June 30, 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($2,858,726) ($1,439,179)
Reconciliation to operation cash flows:
Depreciation and amortization 292,826 220,655
Changes in operating assets and liabilities:
Accounts receivable 1,919,624 5,360,250
Income tax refund receivable 2,160,211 -
INVENTORIES 1,074,535 (2,105,574)
Other current assets (165,393) 26,579
Accounts payable and accrued expenses (980,855) (2,240,722)
---------- ----------
NET CASH PROVIDED (USED) IN OPERATIONS 1,442,222 (177,991)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment -- (224,978)
Other assets (19,933) (307,892)
---------- ----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (19,933) (532,870)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in credit line (1,722,534) 1,384,411
Increase in long-term debt 350,000
Issuance of common stock 34,441 133,155
---------- ----------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (1,338,093) 1,517,566
---------- ----------
Net increase in cash and cash equivalents 84,196 806,705
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 925,259 1,113,379
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,009,455 $1,920,084
========== ==========
Supplemental disclosures of cash flow information
Cash payments for:
Interest $359,090 $128,618
Taxes -- $430,415
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
STORAGE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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.,
Storage Computer France S.A., and Storage Computer Pty., Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company also has a 20% investment in Storage Computer (Asia) Ltd. which is
accounted for by the equity method. Additionally, the Company has a 45%
investment in HVVR, LLC which is an inactive holding company.
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-K filed by the Company with the Securities and Exchange Commission,
containing the Company's financial statements for the fiscal year ended
December 31, 1998. 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, 1999 are not necessarily indicative of the
results to be expected for the full year.
NOTE B - RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform with the current period
presentation.
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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, 1999 was $3,057,350 compared to
revenue of $3,275,639 in the corresponding period in 1998. For the six months
ended June 30, 1999 revenue was $5,737,023 compared to revenue of $10,291,949
in the respective period in 1998. Revenue has been impacted by reduced
promotional budgets and lower sales force headcount.
All United States export sales are denominated in United States dollars to
limit the amount of foreign currency risk. Export sales from the European
sales offices are denominated in United States dollars. Sales which occur
through the Company's subsidiaries located in England and Germany are
conducted in the local functional currency.
PRODUCT COST
Product cost for the three-month periods ended June 30, 1999 and 1998 was
$1,823,249 and $2,131,433 respectively, or 60% and 65% of net revenue in each
period. Product cost for the six-month periods ended June 30, 1999 and 1998
was $3,420,051 and $5,619,954 respectively, or 60% and 55% of revenue. The
increase in product cost percentage between the 6 month periods ending June
30, 1999 and 1998 of approximately 5% was primarily the result of lower
production utilizations.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter ended June 30, 1999 and the
corresponding 1998 period were $458,588 and $1,127,173. For the six months
ended June 30, 1999 and 1998 such expenses were $1,328,479 and $2,010,686. The
decrease in 1999 research and development expenditures for this period
resulted primarily from a reduction in the number of outside contractors and
the completion of work on certain phases of the next generation products.
7
<PAGE> 8
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the second quarters ended June 30, 1999 and
1998 were $918,835 and $1,930,171, respectively. Selling and marketing
expenses for the six months ended June 30, 1999 and 1998 were $2,313,014 and
$3,765,187, respectively. The decrease in selling and marketing expenses
between the six-month period ended June 30, 1999 and the comparable period in
1998 of approximately $1,452,000 was principally due to reduced sales volume
commissions in the United States and International sales organizations and
attrition in the field sales headcount.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three-month periods ended June 30,
1999 and 1998 were $829,732 and $587,749, respectively. For the six-month
periods ended June 30, 1999 and 1998 general and administrative expenses were
$1,437,718 and $949,534. The absolute dollar increase in general and
administrative expenses between the six-month periods ended June 30, 1999 and
1998 of approximately $488,000 resulted primarily from increased professional
fees.
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 April 1999, the Company reached agreement with its bank on new terms
amending the Company's loan agreement, decreasing the commitment from
$10,300,000 to $8,700,000. Under the agreement, the Company agreed to
undertake certain actions to reduce the line of credit with the bank during
1999. The line of credit expires on January 4, 2000. The Company raised
$350,000 in new investment in April 1999 through the sale of convertible
debentures. Management believes the credit facility or other financing
programs will accommodate working capital requirements and other cash
requirements for the 1999 year.
ACCOUNTS RECEIVABLE
The reduction in accounts receivable from December 31, 1998 to June 30, 1999
of approximately $1,920,000 is due to the decrease in product sales. 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 decrease was net of approximately $604,000 from December 31, 1998 to
June 30, 1999. The inventory decrease of about $1,075,000 is principally a
result of programs implemented by the Company to reduce the level of component
parts in inventory. During the three months ended March 31, 1999, the Company
transferred equipment amounting to $470,697 to inventory.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital expenditures at
this time.
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<PAGE> 9
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.
YEAR 2000
Many current computer systems and software products were not designed to
handle any dates beyond the year 1999. As a result, computer systems and/or
software used by many companies may need to be modified prior to the Year 2000
in order to remain functional. Significant uncertainty exists in the hardware
and software industry concerning the potential effects associated with such
compliance. In mid-1998, the Company formed an internal task force to evaluate
those areas of the Company that may be affected by the Year 2000 problem and
devised a plan for the Company to become Year 2000 compliant in a timely
manner (the "Plan"). The Plan focuses on three major areas; the Company's
internal business transaction systems; the products the Company sells and the
business transaction systems of its business partners, including suppliers,
customers and bankers. To date, the Company has executed approximately
one-half of its Plan and anticipates completing the remaining portions of the
Plan by the end of calendar year 1999.
Internal Business Transaction Systems
The Company has completed a review of its critical business transaction
systems, and its Year 2000 compliance related to business transaction systems
is as follows:
All of the Company's systems for processing business transactions prior to and
following 12:00am January 1, 2000 are tested for transaction integrity. This
compliance extends to the underlying hardware, operating systems, and other
software on which the Company's business system operates. This compliance
includes the following transactions and related printed documents: accepting
orders from customers, fulfilling customer orders, invoicing customers,
crediting customer accounts, applying customer payments, refunding customers,
placing orders with vendors, receiving vendor shipments, processing vendor
invoices, and paying vendors.
The Company is in the process of evaluating certain ancillary PC office
applications (e.g. word processing, spreadsheets, e-mail, etc.) and
specialized PC applications including art, drawing and other creative
department applications, hardware design and other engineering department
applications, software development systems, bank account management, fixed
asset management, and stock option database management. This effort will
continue through 1999.
The Company has incurred to date no incremental material costs associated with
its efforts to become Year 2000 compliant, as the majority of the costs have
occurred as a result of normal upgrade procedures. Based on current
information, the Company does not expect future costs to modify its
information technology infrastructure to be material to its financial
condition or results of operations. However, there can be no assurances that
there will not be interruptions or
9
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other limitations of financial and operating systems functionally or that the
Company will not incur significant costs to avoid such interruptions or
limitations.
Products the Company Sells
The Company has also completed a review of its manufactured product line;
however, the Company is still in the process of evaluating third party
products and software sold by Storage Computer for Year 2000 compliance. The
Company's Year 2000 compliance status related to the products it sells is as
follows:
Storage Computer Corporation has conducted an extensive review of its internal
and external requirements and believes that its computer systems and
applications will continue to function properly into the Year 2000.
All StorageSuite storage products are Y2K compliant. The Company has now
completed its review and test of all products. Current and past products are
Y2K compliant as will be any future product developments. Expenditures related
to this portion of the Company's Y2K plan have been expensed as incurred and
are immaterial in their impact on the Company's operating results.
SCC is continuing to work with major vendors and suppliers to ensure that the
Company's manufacturing and infrastructure systems will not experience any
difficulties as a result of their products and services. However, there can be
no guarantee that these parties' systems, on which the Company relies, will be
timely converted. Any effects on the Company's results of operations as a
result of such parties' failures are not estimable. Management does not
believe that any individual vendor's failure to comply will have a material
effect on the Company's products, financial condition or continuing
operations.
The Company's Business Partners
The Company's suppliers (particularly sole-source and long lead-time
suppliers), key customers and other key business partners (e.g. bankers) may
be adversely affected by their respective failure to address the Year 2000
issue. Should any of the Company's suppliers encounter Year 2000 problems that
cause them to delay manufacturing or shipments of key components to Storage
Computer, the Company may be forced to delay or cancel shipments of its
products, which would have a material adverse effect on the Company's results
of operations. Any inability of Storage Computer's key customers to become
Year 2000 compliant which would cause them to delay or cancel substantial
purchase orders or delivery of Storage Computer products would also have a
material adverse effect on the Company's results of operations. Additionally,
any inability of the Company's other key business partners, including the
Company's bank, to become Year 2000 compliant could cause them to become
unable to provide critical business services, such as to provide funding on
the Company's line of credit, and could therefore also have a material adverse
effect on the Company.
The Company is currently in the process of identifying key customers, vendors
and other significant business partners (e.g. bankers) and obtaining Year 2000
compliance statements. The Company anticipates completion of this effort by
the end of 1999; however, there can be no assurances that any such efforts
will be successful.
The Company has incurred to date no incremental material costs associated with
the Year 2000 issue. Based on current information, the Company does not expect
future costs to execute the remainder of its Year 2000 compliance plan to be
material to its financial condition or results of operations. However, there
can be no assurances that there will not be interruptions or other limitations
of financial and operating systems functionally or that the Company will not
incur significant costs to avoid such interruptions or limitations.
Costs incurred relating to Year 2000 issue will be expensed by the Company
during the period in which they are incurred. The Company's expectations about
future costs associated with the Year 2000 issue are subject to uncertainties
that could cause actual results to have a greater financial impact than
currently anticipated. Factors that could influence the amount and timing of
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future costs include but are not limited to the success of the Company's
customers and suppliers in addressing the Year 2000 issue.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 believes that the disk drives supplied by Micropolis, together
with its inability to support the disk drives supplied, caused the Company
material and adverse damages in 1998. These damages include, but are not
limited to, lost sales, deferred sales, substantial field and factory
expenses, loss of reputation, and inventory writeoffs.
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) Ltd., in the court in Singapore. The
Company cannot estimate what its continuing involvement in, any judicial
decision rendered, or the resolution of the set of claims will have upon the
Company's business, operating results, or financial condition.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibit 27, Financial Data Schedule
B. Reports on Form 8-K
None.
11
<PAGE> 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: August 12, 1999 /s/ Theodore J. Goodlander
-------------------------------------
Theodore J. Goodlander
Chief Executive Officer & President
12
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,009,455
<SECURITIES> 0
<RECEIVABLES> 3,267,727
<ALLOWANCES> 0
<INVENTORY> 7,659,202
<CURRENT-ASSETS> 12,809,077
<PP&E> 4,336,089
<DEPRECIATION> 2,363,573
<TOTAL-ASSETS> 17,715,625
<CURRENT-LIABILITIES> 11,140,063
<BONDS> 0
0
0
<COMMON> 11,370
<OTHER-SE> 5,504,192
<TOTAL-LIABILITY-AND-EQUITY> 17,715,625
<SALES> 5,737,023
<TOTAL-REVENUES> 5,737,023
<CGS> 3,420,051
<TOTAL-COSTS> 5,079,211
<OTHER-EXPENSES> (296,859)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,059,098)
<INCOME-TAX> (200,372)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,858,726)
<EPS-BASIC> (.25)
<EPS-DILUTED> (.25)
</TABLE>
