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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington DC 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 31,1999
[ ] 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 registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 02-0450593
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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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 May 10, 1999 was 11,360,032 shares.
1
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INDEX
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited) Page
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Consolidated Financial Position -- March 31, 1999
and December 31, 1998............................................... 3
Statement of Consolidated Operations -- Three months
ended March 31, 1999 and 1998....................................... 4
Statement of Consolidated Cash Flows -- Three months
ended March 31, 1999 and 1998....................................... 5
Notes to Consolidated Financial Statements --
March 31, 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
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PART I. FINANCIAL INFORMATION
STORAGE COMPUTER CORPORATION
CONSOLIDATED FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999 December 31, 1998
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $1,239,349 $925,259
Accounts receivable (net) 3,301,348 5,187,351
Income tax refund receivable 1,960,001 2,160,211
Inventories 9,016,947 8,263,040
Other current assets 814,409 707,300
----------------------------------- ----------------------------------
Total current assets 16,332,054 17,243,161
----------------------------------- ----------------------------------
Property and equipment, net of accumulated depreciation 2,154,717 2,742,252
----------------------------------- ----------------------------------
Deferred tax asset 2,194,000 2,194,000
Other assets 740,032 720,489
----------------------------------- ----------------------------------
$21,420,803 $22,899,902
=================================== ==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $9,703,055 $9,336,377
Accounts payable 2,456,025 2,298,655
Accrued expenses 2,169,697 2,209,232
----------------------------------- ----------------------------------
Total current liabilities 14,328,777 13,844,264
----------------------------------- ----------------------------------
Long-term debt 710,000 710,000
----------------------------------- ----------------------------------
Total liabilities 15,038,777 14,554,264
----------------------------------- ----------------------------------
Stockholders' equity
Common Stock 11,360 11,348
Additional paid-in capital 13,730,730 13,721,021
Retained earnings (7,360,064) (5,386,731)
----------------------------------- ----------------------------------
Total stockholders' equity 6,382,026 8,345,638
----------------------------------- ----------------------------------
$21,420,803 $22,899,902
=================================== ==================================
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See Notes to Consolidated Financial Statements.
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STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
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<CAPTION>
Three Months Ended
MARCH 31, 1999 March 31, 1998
<S> <C> <C>
Revenue $2,679,673 $7,016,310
Product Cost 1,596,802 3,488,521
---------------------------------- --------------------------------
Gross margin 1,082,871 3,527,789
---------------------------------- --------------------------------
Operating expenses:
Research and development 869,891 883,513
Selling and marketing 1,394,179 1,835,016
General and administrative 607,986 361,575
---------------------------------- --------------------------------
Total 2,872,056 3,080,104
---------------------------------- --------------------------------
Operating income ($1,789,185) $447,685
---------------------------------- --------------------------------
Other income (expense):
Interest expense, net (216,702) (128,618)
Other income 32,554 158,420
---------------------------------- --------------------------------
(184,148) 29,802
---------------------------------- --------------------------------
Income before income taxes (1,973,333) 477,487
Provision for income taxes - 167,000
---------------------------------- --------------------------------
Net income ($1,973,333) $310,487
================================== ================================
Net income per basic share $0.17 $0.03
Net income per diluted share $0.17 $0.03
Basic shares 11,353,823 11,183,416
Diluted shares 11,353,823 11,944,213
</TABLE>
See Notes to Consolidated Financial Statements.
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STORAGE COMPUTER CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
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<CAPTION>
Three Months Ended
MARCH 31, 1999 March 31, 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($1,973,333) $310,487
Reconciliation to operating cash flows:
Depreciation and amortization 116,838 112,675
Deferred tax (benefit) - -
(Gain) or loss on foreign currency translation
adjustment - -
Changes in operating assets and liabilities:
Accounts receivable 1,886,003 3,124,130
Income tax refund receivable 200,210 -
Inventories (283,210) (367,694)
Other current assets (107,109) 139,487
Accounts payable and accrued expenses 117,835 (2,391,273)
---------------------------------- --------------------------------
NET CASH PROVIDED (USED) IN OPERATIONS (42,766) 927,812
---------------------------------- --------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment - (144,598)
Other assets (19,543) 211,588
---------------------------------- --------------------------------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (19,543) 66,990
---------------------------------- --------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in credit line 366,678 (772,816)
Issuance of common stock 9,721 76,880
---------------------------------- --------------------------------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES 376,399 (695,936)
---------------------------------- --------------------------------
Net increase in cash and cash equivalents 314,090 298,866
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 925,259 1,113,379
---------------------------------- --------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,239,349 $1,412,245
================================== ================================
Supplemental disclosures of cash flow information
Cash payments for:
Interest $216,702 $128,618
Taxes - $430,415
</TABLE>
During the three months ended March 31, 1999, the Company transferred equipment
amounting to $470,697 to inventory.
See Notes to Consolidated Financial Statements.
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STORAGE COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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., 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. and a 50.1% investment in Storage Computer France S.A.
which are 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 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 months ended March 31, 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
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, 1999 was $2,679,673 compared
to revenue of $7,016,310 in the corresponding period of 1998. First quarter
revenue was impacted by both lower international and domestic sales, some of
which is attributable to delays in shipments of new 36 gigabyte 3.5" disks. For
the three months ended March 31, 1999, U.S. domestic product sales and
international product sales were 33.1% and 66.9% respectively of total revenue.
In the 1998 period such percentages were 47.5% and 52.5% respectively.
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.
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PRODUCT COST
Product cost for the three month periods ended March 31, 1999 and 1998 were
$1,596,802 and $3,488,521, respectively, or 60% and 50% of revenue. The increase
in product cost percentage between 1998 and 1999 of approximately 10% was the
result of relatively fixed factory overheads and technical service expenditures
on lower sales volume, 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,
1999 and 1998 were $869,891 and $883,513, respectively, or approximately 33% and
13% of revenue in each period. The increase in percentage expenditures between
the three month periods ended March 31, 1999 and 1998 of approximately 20%
resulted from lower sales volumes. The dollar decrease of $13,622 is
attributable to fluctuations in billings by outside consultants.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the three month periods ended March 31, 1999
and 1998 were $1,394,179 and $1,835,016, respectively, or 52% versus 26% of
revenue in the prior period as a result of lower sales volume. The decrease in
expenses between the three month periods ended March 31, 1998 and the comparable
period of 1998 of approximately $441,000, was principally due to lower head
count in corporate marketing and the field sales organization.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month periods ended March 31,
1999 and 1998 were $607,986 and $361,575, respectively, or 23% and 5% of
revenue. The absolute dollar increase in general and administrative expenses
between the three month periods ended March 31, 1999 and 1998 of approximately
$246,411 resulted primarily from increases in legal, accounting, and insurance
costs.
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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 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. Management believes the credit facility will
accommodate all of its working capital requirements for the 1999 year.
ACCOUNTS RECEIVABLE
The decrease in accounts receivable from December 31, 1998 to March 31, 1999 of
approximately $1,886,000 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 $754,000 from December 31, 1998 to March 31,
1999of which $470,697 was transferred from fixed assets. 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.
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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.
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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
On January 12, 1999 Mr. James Louney, Chief Financial Officer and Treasurer,
resigned his position and terminated his employment with the company.
On February 10, 1999 Mr. James Valentino was promoted to Vice President of
Research and Development.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 27, Financial Data Schedule
B. REPORTS ON FORM 8-K
None
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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 20 , 1999 /s/ Theodore J. Goodlander
------------------------------ ---------------------------------
Theodore J. Goodlander
Chairman of the Board of Directors
(Principal Executive Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,239,349
<SECURITIES> 0
<RECEIVABLES> 3,301,348
<ALLOWANCES> 0
<INVENTORY> 9,016,947
<CURRENT-ASSETS> 16,332,054
<PP&E> 4,399,465
<DEPRECIATION> 2,244,748
<TOTAL-ASSETS> 21,420,803
<CURRENT-LIABILITIES> 14,328,777
<BONDS> 0
0
0
<COMMON> 11,360
<OTHER-SE> 6,370,666
<TOTAL-LIABILITY-AND-EQUITY> 21,420,803
<SALES> 2,679,673
<TOTAL-REVENUES> 2,679,673
<CGS> 1,596,802
<TOTAL-COSTS> 2,872,056
<OTHER-EXPENSES> (184,148)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,973,333)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,973,333)
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
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