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 September 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, address, 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
November 1, 1999 was 11,418,388.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page(s)
Consolidated Financial Position -- September 30, 1999
and December 31, 1998 3
Statement of Consolidated Operations -- Three and nine months
ended September 30, 1999 and 1998 4
Statement of Consolidated Cash Flows -- Nine months
ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements -- September 30, 1999 6
Item 2. Management's Discussion and Analysis 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Shareholders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
<PAGE>
PART I. FINANCIAL INFORMATION
Storage Computer Corporation
Consolidated Financial Position (Unaudited)
<TABLE>
<CAPTION>
September 30, 1999
December 31, 1998
<S>
<C>
<C>
Assets
Current assets
Cash and cash equivalents
$1,533,671
$925,259
Accounts receivable (net)
1,833,401
5,187,351
Income tax refund receivable
- -
2,160,211
Inventories
7,635,327
8,263,040
Other current assets
905,758
707,300
Total current assets
11,908,157
17,243,161
Property and equipment, net of accumulated depr.
1,782,410
2,742,252
Deferred tax asset
2,194,000
2,194,000
Other assets
740,032
720,489
$16,624,599
$22,899,902
Liabilities and Stockholders' Equity
Current liabilities
Note payable
$7,092,945
$9,336,377
Accounts payable
1,363,620
2,298,655
Accrued expenses
2,163,504
2,209,232
Total current liabilities
10,620,069
13,844,264
Long-term debt
1,060,000
710,000
Total liabilities
11,680,069
14,554,264
Stockholders' equity
Common Stock
11,393
11,348
Additional paid-in capital
13,769,687
13,721,021
Retained earnings
(8,836,550)
(5,386,731)
Total stockholders' equity
4,944,530
8,345,638
$16,624,599
$22,899,902
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Storage Computer Corporation
Statement of Consolidated Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30,
1999
September 30,
1998
September 30,
1999
September 30,
1998
<S>
<C>
<C>
<C>
<C>
Revenue
$2,479,868
$3,198,182
$8,216,891
$13,490,131
Product Cost
1,240,888
2,768,875
4,660,939
8,388,829
Gross margin
1,238,980
429,307
3,555,952
5,101,302
Operating expenses:
Research and development
331,715
1,016,409
1,660,194
3,027,095
Selling and marketing
763,723
1,781,838
3,076,737
5,547,025
General and administrative
529,945
686,646
1,967,663
1,635,970
Total
1,625,383
3,484,893
6,704,594
10,210,090
Operating income (loss)
($386,403)
($3,055,586)
($3,148,642)
($5,108,788)
Other income (expense):
Interest expense, net
(206,456)
(130,295)
(608,230)
(397,486)
Other income
1,831
(20,828)
106,746
90,386
(204,625)
(151,123)
(501,484)
(307,100)
Income (loss) before income
taxes
(591,028)
(3,206,709)
(3,650,126)
(5,415,888)
Provision for income taxes
65
(1,126,000)
(200,307)
(1,896,000)
Net income (loss)
($591,093)
($2,080,709)
($3,449,819)
($3,519,888)
Net income (loss) / basic share
($.05)
($0.18)
($.30)
($0.31)
Net income (loss) / diluted share
($.05)
($0.18)
($.30)
($0.31)
Basic shares
11,380,267
11,283,948
11,366,374
11,231,165
Diluted shares
11,380,267
11,283,948
11,366,374
11,231,165
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Storage Computer Corporation
Statement of Consolidated Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
September 30, 1998
<S>
<C>
<C>
Cash flows from Operating Activities:
Net income (loss)
($3,449,819)
($3,519,888)
Reconciliation to operation cash flows:
Depreciation and amortization
429,931
338,944
Changes in operating assets and liabilities:
Accounts receivable
3,353,950
5,054,316
Income tax refund receivable
2,160,211
- -
Inventories
1,157,624
(1,206,254)
Other current assets
(198,458)
(95,503)
Accounts payable and accrued expenses
(980,763)
(2,945,102)
Net cash provided (used) in operations
2,472,676
(2,373,487)
Cash flows from investing activities:
Purchases of property & equipment
- -
(345,805)
Other assets
(19,543)
(130,142)
Net cash provided (used) in investing activities
(19,543)
(475,947)
Cash flow from financing activities:
Increase (decrease) in credit line
(2,243,432)
2,959,928
Increase in long-term debt
350,000
Issuance of common stock
48,711
180,797
Net cash provided (used) in financing activities
(1,844,721)
3,140,725
Net increase (decrease) in cash and cash equivalents
608,412
291,291
Cash and cash equivalents at beginning of period
925,259
1,113,379
Cash and cash equivalents at end of period
$1,533,671
$1,404,670
Supplemental disclosures of cash flow information
Cash payments for:
Interest
$735,993
$346,899
Taxes
- -
$390,448
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Storage Computer Corporation
Notes To Consolidated Financial Statements
September 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 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 nine months ended September 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.
<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 September 30, 1999 was $2,479,868
compared to revenue of $3,198,182 in the corresponding period in 1998.
For the nine months ended September 30, 1999 revenue was $8,216,891
compared to revenue of $13,490,131 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, Germany, France,
and Australia are conducted in the local functional currency.
Product Cost
Product cost for the three-month periods ended September 30, 1999 and
1998 was $1,240,888 and $2,768,875 respectively, or 50% and 87% of net
revenue in each period. Product cost for the nine-month periods ended
September 30, 1999 and 1998 was $4,660,939 and $8,388,829
respectively, or 57% and 62% of revenue. The decrease in product cost
percentage between the 9 month periods ending September 30, 1999 and
1998 of approximately 5% was primarily the result of lower production
overheads.
<PAGE>
Research and Development
Research and development expenses for the quarter ended September 30,
1999 and the corresponding 1998 period were $331,715 and $1,016,409.
For the nine months ended September 30, 1999 and 1998 such expenses
were $1,660,194 and $3,027,095. 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.
Selling and Marketing Expenses
Selling and marketing expenses for the quarters ended September 30, 1999
and 1998 were $763,723 and $1,781,838, respectively. Selling and
marketing expenses for the nine months ended September 30, 1999 and
1998 were $3,076,737 and $5,547,025, respectively. The decrease in
selling and marketing expenses between the nine-month period ended
September 30, 1999 and the comparable period in 1998 of approximately
$2,470,288 was principally due to reduced sales volume commissions in
the United States and International sales organizations and attrition in the
field sales and marketing department headcount.
General and Administrative Expenses
General and administrative expenses for the three-month periods ended
September 30, 1999 and 1998 were $529,945 and $686,646, respectively.
For the nine-month periods ended September 30, 1999 and 1998 general
and administrative expenses were $1,967,663 and $1,635,970. The
absolute dollar increase in general and administrative expenses between the
nine-month periods ended September 30, 1999 and 1998 of approximately
$331,693 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 September 1999, the Company reached agreement with its bank on new
terms amending the Company's loan agreement, decreasing the
commitment from $8,700,000 to $4,550,000. 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, 2001.
Management believes the credit facility and other financing programs can
accommodate working capital requirements and other cash requirements
for the 1999 year and into year 2000.
<PAGE>
Accounts Receivable
The reduction in accounts receivable from December 31, 1998 to
September 30, 1999 of approximately $3,354,000 is due to the decrease in
product sales and improved asset management. The Company did not
change its standard credit terms during the period and there has been a
material improvement in the aging of accounts receivable during the period
from 111 days outstanding at December 31, 1998 to 61 days outstanding at
September 30, 1999.
Inventory
Inventory decrease was approximately $628,000 from December 31, 1998
to September 30, 1999. During the three months ended March 31, 1999,
the Company transferred equipment amounting to $471,000 to inventory.
The total inventory decrease of about $1,099,000 is principally a result of
programs implemented by the Company 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 British
pound, the German mark, the French franc, 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>
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 12:00 am 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 other limitations of financial and
operating systems functionally or that the Company will not incur
significant costs to avoid such interruptions or limitations.
<PAGE>
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.
<PAGE>
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 future costs include but are not limited to the success
of the Company's customers and suppliers in addressing the Year 2000
issue.
<PAGE>
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 Bankrptcy 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 4. Submission of Matters to a Vote of Shareholders
At the Company's Annual Meeting of Shareholders held on May 17, 1999
the following individuals were elected to the Board of Directors:
Votes For Votes Withheld
Theodore J. Goodlander 10,273,437 62,272
Shigeho Inaoka 10,273,437 62,272
Steven S. Chen 10,273,437 62,272
The vote for the selection of BDO Seidman, LLP as the Company's auditors
for the year ending December 31, 1999 was:
Votes For Votes Withheld
10,297,537 8,713
The vote to approve the 1999 Employee Stock Option Plan was:
Votes For Votes Withheld
8,134,162 112,278
<PAGE>
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.
<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: November 4, 1999 /s/ Theodore J. Goodlander
Theodore J. Goodlander
Chief Executive Officer & President
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,533,671
<SECURITIES> 0
<RECEIVABLES> 1,833,401
<ALLOWANCES> 0
<INVENTORY> 7,635,327
<CURRENT-ASSETS> 11,908,157
<PP&E> 4,283,088
<DEPRECIATION> 2,500,678
<TOTAL-ASSETS> 16,624,599
<CURRENT-LIABILITIES> 10,620,069
<BONDS> 0
0
0
<COMMON> 11,393
<OTHER-SE> 4,933,137
<TOTAL-LIABILITY-AND-EQUITY> 16,624,599
<SALES> 8,216,891
<TOTAL-REVENUES> 8,216,891
<CGS> 4,660,939
<TOTAL-COSTS> 6,704,594
<OTHER-EXPENSES> (501,484)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,650,126)
<INCOME-TAX> (200,307)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,449,819)
<EPS-BASIC> (.30)
<EPS-DILUTED> (.30)
</TABLE>
