-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G/HR6OZJUjjZ44evfV9rDCj242bZZcDBdZVgJaxf9lTrhnIy7hl41e4BSfoV+FjT +VlMvW/QQM4FI8N8Bzut5A== /in/edgar/work/20000614/0001095811-00-001718/0001095811-00-001718.txt : 20000919 0001095811-00-001718.hdr.sgml : 20000919 ACCESSION NUMBER: 0001095811-00-001718 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000430 FILED AS OF DATE: 20000614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROCOM TECHNOLOGY INC CENTRAL INDEX KEY: 0001025711 STANDARD INDUSTRIAL CLASSIFICATION: [3577 ] IRS NUMBER: 330268063 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21653 FILM NUMBER: 655101 BUSINESS ADDRESS: STREET 1: 1821 EAST DYER ROAD CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 9497944257 MAIL ADDRESS: STREET 1: 2181 DUPONT DRIVE CITY: IRVINE STATE: CA ZIP: 92715 10-Q 1 0001.txt FORM 10-Q FOR PERIOD ENDED APRIL 30, 2000 1 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended APRIL 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _______________ Commission file number 0-21053 PROCOM TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) California 33-0268063 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1821 East Dyer Road, Santa Ana, CA 92705 (Address of principal executive office) (Zip Code) (949) 852-1000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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, $.01 par value, outstanding on June 1, 2000, was 11,416,778. 2 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements. PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS ASSETS
APRIL 30, JULY 31, 2000 1999 ------------ ------------ (UNAUDITED) Current assets: Cash .................................................. $ 805,000 $ 227,000 Short-term marketable securities, held to maturity..... 15,168,000 22,206,000 Accounts receivable, less allowance for doubtful accounts and sales returns of $4,542,000 and $2,461,000, respectively ............................ 5,067,000 8,648,000 Inventories, net ...................................... 9,608,000 9,973,000 Income tax receivable ................................. 2,711,000 2,859,000 Deferred income taxes ................................. 1,509,000 1,833,000 Prepaid expenses ...................................... 665,000 515,000 Other current assets .................................. 244,000 286,000 ------------ ------------ Total current assets .......................... 35,777,000 46,547,000 Property and equipment, net ............................. 12,525,000 9,473,000 Other assets ............................................ 957,000 1,068,000 ------------ ------------ Total assets .................................. $ 49,259,000 $ 57,088,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit ........................................ $ 70,000 $ 254,000 Accounts payable ...................................... 8,771,000 10,812,000 Accrued expenses and other current liabilities ........ 2,186,000 2,162,000 Accrued compensation .................................. 1,144,000 1,212,000 Deferred service revenues ............................. 487,000 844,000 Loan payable .......................................... 8,500,000 -- Income taxes payable .................................. -- 18,000 ------------ ------------ Total current liabilities ..................... 21,158,000 15,302,000 ------------ ------------ Loan payable .......................................... -- 7,500,000 Total liabilities ............................. 21,158,000 22,802,000 ------------ ------------ Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding ....................... -- -- Common stock, $.01 par value; 65,000,000 shares authorized, 11,416,778 and 11,227,041, shares issued and outstanding, respectively ........................................ 114,000 112,000 Additional paid in capital ............................ 18,990,000 18,198,000 Retained earnings ..................................... 9,253,000 15,991,000 Accum. other comprehensive loss ....................... (256,000) (15,000) ------------ ------------ Total shareholders' equity .................... 28,101,000 34,286,000 ------------ ------------ Total liabilities and shareholders' equity ........ $ 49,259,000 $ 57,088,000 ============ ============
The accompanying notes are an integral part of these consolidated condensed balance sheets. 2 3 PROCOM TECHNOLOGY, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
QUARTERS ENDED NINE MONTHS ENDED -------------- ----------------- APRIL 30, APRIL 30, APRIL 30, APRIL 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Net sales ......................... $ 13,811,000 $ 22,726,000 $ 49,047,000 $ 77,056,000 Cost of sales ..................... 10,478,000 17,183,000 36,667,000 54,418,000 ------------ ------------ ------------ ------------ Gross profit ................. 3,333,000 5,543,000 12,380,000 22,638,000 Selling, general and Administrative expenses ......... 5,145,000 6,861,000 17,405,000 19,810,000 Research and development Expenses ........................ 1,819,000 1,441,000 5,207,000 4,006,000 Impairment and Restructuring charge ............ -- 1,626,000 -- 1,626,000 ------------ ------------ ------------ ------------ Operating loss ............... (3,631,000) (4,385,000) (10,232,000) (2,804,000) Other income (expense) Interest income .................. (246,000) (288,000) (811,000) (954,000) Interest (expense) ............... -- 9,000 6,000 39,000 ------------ ------------ ------------ ------------ Loss before income taxes .......... (3,385,000) (4,106,000) (9,427,000) (1,889,000) Benefit from income taxes ......... (904,000) (1,116,000) (2,689,000) (351,000) ------------ ------------ ------------ ------------ Net loss ..................... $ (2,481,000) $ (2,990,000) $ (6,738,000) $ (1,538,000) ============ ============ ============ ============ Net loss per share: Basic ............................ $ (0.22) $ (0.27) $ (0.60) $ (0.14) ============ ============ ============ ============ Diluted .......................... $ (0.22) $ (0.27) $ (0.60) $ (0.14) ============ ============ ============ ============ Shares used in per share computation: Basic ............................ 11,321,000 11,254,000 11,260,000 11,247,000 ============ ============ ============ ============ Diluted .......................... 11,321,000 11,254,000 11,260,000 11,247,000 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 4 PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ------------------------- PAID IN RETAINED CURRENCY SHARES AMOUNT CAPITAL EARNINGS ADJUST. TOTAL ----------- --------- ------------ ------------ --------- ------------ Balance at July 31, 1997 ............ 11,024,562 $ 110,000 $ 16,467,000 $ 13,490,000 $ -- $ 30,067,000 Comprehensive income: Net income ........................ -- -- -- 5,376,000 -- 5,376,000 Foreign currency translation ...... -- -- -- -- 3,000 3,000 ------------ Comprehensive income .............. 5,379,000 Exercise of employee stock options and related tax benefit.............. 50,036 1,000 143,000 -- -- 144,000 Tax benefit from exercise of stock options................. -- -- 242,000 -- -- 242,000 Acquisition of Megabyte ........... 104,144 1,000 899,000 -- -- 900,000 ----------- --------- ------------ ------------ --------- ------------ Balance at July 31, 1998 ............ 11,178,742 112,000 17,751,000 18,866,000 3,000 36,732,000 Comprehensive loss: Net loss .......................... -- -- -- (2,875,000) -- (2,875,000) Foreign currency translation ...... -- -- -- -- (18,000) (18,000) ------------ Comprehensive loss ................ (2,893,000) Exercise of employee stock options and related tax benefit ............. 41,013 -- 152,000 -- -- 152,000 Issuance of stock to employees .................... 5,531 -- 39,000 -- -- 39,000 Tax benefit from exercise of stock options.................... -- -- 71,000 -- -- 71,000 Stock repurchases ................. (77,845) (1,000) (400,000) -- -- (401,000) Acquisitions ...................... 79,600 1,000 585,000 -- -- 586,000 ----------- --------- ------------ ------------ --------- ------------ Balance at July 31, 1999 ............ 11,227,041 112,000 18,198,000 15,991,000 (15,000) 34,286,000 Comprehensive loss: Net loss .......................... -- -- -- (6,738,000) -- (6,738,000) Foreign currency translation ...... -- -- -- -- (241,000) (241,000) ------------ Comprehensive loss ................ (6,979,000) Exercise of employee stock options and related tax benefit ............. 172,361 2,000 650,000 -- -- 652,000 Issuance of stock to employees .................... 17,376 -- 142,000 -- -- 142,000 ----------- --------- ------------ ------------ --------- ------------ Balance at April 30, 2000 ........... 11,416,778 $ 114,000 $ 18,990,000 $ 9,253,000 $(256,000) $ 28,101,000 =========== ========= ============ ============ ========= ============
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 5 PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED ----------------- APRIL 30, APRIL 30, 2000 1999 ------------ ------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss .............................................. $ (6,738,000) $ (1,538,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ....................... 667,000 1,620,000 Changes in assets and liabilities: Accounts receivable ............................ 3,581,000 3,858,000 Inventories .................................... 365,000 542,000 Deferred income taxes .......................... 472,000 (2,152,000) Prepaid expenses ............................... (150,000) 163,000 Other current assets ........................... 42,000 7,000 Other assets ................................... (36,000) 84,000 Accounts payable ............................... (2,041,000) (715,000) Accrued expenses ............................... 24,000 (369,000) Accrued compensation ........................... (68,000) (446,000) Deferred service revenue ....................... (357,000) (706,000) Income taxes payable ........................... (18,000) 248,000 ------------ ------------ Net cash provided by (used in) operating activities ............... (4,257,000) 596,000 ------------ ------------ Cash flows from investing activities: Acquisitions, net of cash acquired .................... -- 30,000 Purchase of property and equipment .................... (3,572,000) (7,672,000) ------------ ------------ Net cash used in investing activities ...... (3,572,000) (7,642,000) ------------ ------------ Cash flows from financing activities: Long-term loan ........................................ 1,000,000 7,500,000 Borrowings on line of credit .......................... -- 53,000 Payments made on line of credit ....................... (184,000) -- Repurchases of common stock ........................... -- (366,000) Issuance of common stock .............................. 142,000 -- Stock options, exercises, and related tax benefits ................................ 652,000 145,000 ------------ ------------ Net cash provided by financing activities ...................... 1,610,000 7,332,000 ------------ ------------ Effect of exchange rate changes ..................... (241,000) 19,000 ------------ ------------ Increase (decrease) in cash ......................... (6,460,000) 305,000 ------------ ------------ Cash and marketable commercial paper at beginning of period ............................... 22,433,000 23,362,000 ------------ ------------ Cash and marketable commercial paper at end of period ..................................... $ 15,973,000 $ 23,667,000 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the periods for: Interest ............................................ $ 6,000 $ 39,000 Income taxes ........................................ $ -- $ 2,425,000
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 6 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED APRIL 30, 2000 AND APRIL 30, 1999 NOTE 1. GENERAL. The accompanying financial information is unaudited, but in the opinion of management, reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of Procom Technology, Inc. and its consolidated subsidiaries (the "Company") as of the dates indicated and the results of operations for the periods then ended. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. While the Company believes that the disclosures are adequate to make the information presented not misleading, the financial information should be read in conjunction with the audited financial statements, and notes thereto for the three years ended July 31, 1999 included in the Company's Report on Form 10-K for fiscal 1999. Results for the interim periods presented are not necessarily indicative of the results for the entire year. NOTE 2. ACQUISITION RESTATEMENT AND ADJUSTMENTS. In the financial statements included in the Report on Form 10-Q for the quarter and nine month periods ended April 30, 1999, the Company reported the acquisition of Gigatek as a pooling of interest, and therefore presented consolidated results that included results of operations for periods prior to the date of acquisition. At July 31, 1999, the Company determined it was appropriate to treat the Gigatek acquisition as a purchase, and therefore, the quarterly results, including those for the periods presented in the April 30, 1999 Report on Form 10-Q were adjusted to give effect to the change in treatment. Accordingly, results for the three and nine months ended April 30, 1999 have been restated to conform to such adjustments. The Company does not believe that the adjustments, taken as a whole, have a material impact on the company's results of operations or financial condition for any period presented. NOTE 3. INVENTORIES. Inventories are summarized as follows:
April 30, 2000 July 31, 1999 -------------- ------------- Raw materials $ 4,497,000 $ 4,253,000 Work-in process 503,000 315,000 Finished goods 4,608,000 5,405,000 ------------ ------------ Total $ 9,608,000 $ 9,973,000 ============ ============
NOTE 4. NET LOSS PER SHARE. Net loss per share has been computed in accordance with Statement of Financial Accounting Standards Board No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings 6 7 per share excludes any dilutive effects of options and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. For the periods presented, basic and diluted net loss per share was based on the weighted average number of shares of common stock outstanding during the period. At April 30, 2000 and 1999, options to purchase 1,503,000 and 779,000 shares of common stock, respectively, were not included in the computation of net loss per share as the effect would have been antidilutive. NOTE 5. COMPREHENSIVE INCOME (LOSS). For the quarters ended April 30, 2000 and 1999, the only differences between reported net income (loss) and comprehensive income (loss) were foreign currency translation adjustments of $(100,000) and $(43,000), respectively. For the nine-month periods ended April 30, 2000 and 1999, the only differences between reported net income (loss) and comprehensive income (loss) were foreign currency translation adjustments of $(241,000) and $19,000, respectively. NOTE 6. BUSINESS SEGMENT INFORMATION. The Company operates in one industry segment: the design, manufacture and marketing of data storage devices. The Company has two major distinct product families: network attached storage products ("NAS Products") and other data storage and access products. NAS Products include some type of data storage devices. Net sales of network attached storage (NAS) products represented approximately 35.4% and 21.5% of total product net sales for the quarter and nine months ended April 30, 2000 and 6.9% and 7.0% of total product net sales for the quarter and nine months ended April 30, 1999. International sales as a percentage of net sales amounted to 44.5% and 44.1% for the quarter and nine months ended April 30, 2000 and 34.6% and 30.6% for the quarter and nine months ended April 30, 2000. International sales were primarily to European customers and secondarily Middle Eastern, Latin American and Pacific Rim customers. Identifiable assets used in connection with the Company's foreign operations have not changed materially since July 31, 1999. NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments including derivative instruments embedded in other contracts and for hedging activities. Adoption of SFAS 133 is not expected to have a material impact on the Company's consolidated financial position, results of operations or liquidity. In December 1999, the United States Securities and Exchange Commission issued Staff Accounting Bulleting (SAB) No. 101, "Revenue Recognition in Financial Statements," as amended, which for the Company is effective April 1, 2000. SAB No. 101 summarizes certain of the SEC staff's views regarding the appropriate recognition of revenue in financial statements. The Company is currently reviewing SAB No. 101 and has not yet determined the potential impact on its financial statements. 7 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, but are not limited to, comments regarding the Company's revenue, revenue mix, product pricing, gross margins, increased promotional, advertising, research and development spending, the growth of the market for network attached storage products and the expanded marketing efforts of the Company. Actual results could differ materially from those projected in the forward-looking statements as a result of important factors including, without limitation, competitive product introductions, price competition, any failure or delay in the Company's ability to develop and introduce new products, the failure of any significant customer, the failure of the market for network attached storage products to expand rapidly, if at all, adverse economic conditions generally and other factors set forth in the Company's filings with the Securities and Exchange Commission, including the Company's Report on Form 10-K for the year ended July 31, 1999. Overview Our Company was formed in 1987. We develop, manufacture and market computer network attached storage ("NAS") appliances and other storage upgrade devices for a wide range of computer networks and operating systems. We are focused on the development of effective NAS appliances for cross-platform, high performance network storage. In addition, we sell disk drive storage upgrade systems, CD-ROM servers and arrays and tape backup products. In the last two years, we have significantly increased our focus on the development and sale of NAS appliances. These products provide for more efficient service of data through simplified data management with improved network performance at lower overall costs. We continue to develop more complex NAS products, and expect to continue to develop, market and ship an increasing percentage of NAS products in future periods. In early December 1999, we executed an agreement with Hewlett-Packard Company, under which we are supplying a customized version of our mid-range NAS appliance hardware and software. Under the agreement, which has a five year term, and which has no minimum quantity commitments, Hewlett-Packard will market and support the NAS appliances to its end users. We commenced shipments under the agreement in limited quantities in April, 2000. We generally record sales upon product shipment. We maintain agreements with many of our computer resellers, VARs and distributors that allow limited returns, including stock balancing, and price protection privileges. In the past we have experienced high return rates. We maintain reserves for anticipated returns, including stock balancing and price protection privileges. These reserves are adjusted at each financial reporting date to state fairly the anticipated returns, including stock balancing, and price protection claims relating to each reporting period. Generally, the reserves will increase as sales and corresponding returns increase. In addition, under a product evaluation program established by us, computer resellers, VARs, distributors and end users generally are able to purchase our products on a trial basis and return the products within a specified period if they are not satisfied. Evaluation units are not recorded as sales until the customer has paid for such units. 8 9 Historically, our gross margins have experienced significant volatility. Our gross margins vary significantly by product line, and, therefore, our overall gross margin varies with the mix of products sold by us. The markets in which we compete are characterized by intense competition and declining average unit selling prices as products mature over the course of the relatively short life cycle of individual products, which have often ranged from six to twelve months. In addition, our gross margins may be adversely affected by availability and price increases associated with key products and components from our suppliers, some of which have been in the past, and may in the future be in short supply, and inventory obsolescence resulting from older generation products or the unexpected discontinuance of third party components. Finally, our margins vary with the mix of its distribution channels and with general economic conditions. RESULTS OF OPERATIONS The following table sets forth the consolidated statements of operations as a percentage of net sales for each of the periods indicated:
THREE MONTHS NINE MONTHS ENDED ENDED APRIL 30, APRIL 30, -------------------- -------------------- 2000 1999 2000 1999 ------ ------ ------ ------ CONSOLIDATED STATEMENTS OF OPERATIONS: Total net sales ................................ 100.0 100.0 100.0 100.0 Cost of sales .................................. 75.9 75.6 74.8 70.6 ------ ------ ------ ------ Gross profit ................................... 24.1 24.4 25.2 29.4 ------ ------ ------ ------ Operating expenses: Selling, general and administrative .......... 37.2 30.2 35.5 25.7 Research and development ..................... 13.2 6.3 10.6 5.2 Impairment and restructuring charge .......... -- 7.2 -- 2.1 ------ ------ ------ ------ Total operating expenses .................. 50.4 43.7 46.1 33.0 Operating loss ................................. (26.3) (19.3) (20.9) (3.6) ------ ------ ------ ------ Interest income (expense), net ................. 1.8 1.2 1.7 1.1 ------ ------ ------ ------ Loss before income taxes ....................... (24.5) (18.1) (19.2) (2.5) Benefit from income taxes ...................... (6.5) (4.9) (5.5) (0.5) ------ ------ ------ ------ Net loss ....................................... (18.0)% (13.2)% (13.7)% (2.0)% ====== ====== ====== ======
9 10 THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 2000 COMPARED TO THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 1999 Net Sales. Net sales decreased by 36.3% to $49.0 million for the nine months ended April 30, 2000, from $77.1 million for the nine months ended April 30, 1999. Net sales decreased by 39.2% to $13.8 million for the three months ended April 30, 2000, from $22.7 million for the three months ended April 30, 1999. The decreases in both periods resulted from a significant decrease in unit sales of CD-ROM servers and arrays and disk drive storage upgrade systems, combined with the effect of significant price erosion of the average selling price of these products. We anticipate that demand for our disk drive storage upgrade systems and CD-ROM servers and arrays will continue to weaken in the future. Net sales related to our NAS appliances (disk drive or CD products which include a storage component) increased 95.4% to $10.6 million for the nine months ended April 30, 2000, from $5.4 million for the nine months ended April 30, 1999. This increase was primarily the result of increased unit sales of our NetFORCE 100, NetFORCE 1500 and other NAS appliances and, to a lesser extent, increased sales of our DataFORCE NAS appliances. Net sales related to our NAS appliances increased 211.5% to $4.9 million for the three months ended April 30, 2000, from $1.6 million for the three months ended April 30, 1999, as we commenced shipments of our NetFORCE 1500 products in the third quarter of fiscal 2000. International sales decreased 11.8% to $21.6 million, or 44.1% of our net sales, for the nine months ended April 30, 2000, from $24.5 million, or 30.6% of our net sales, in the nine months ended April 30, 1999. The decrease in absolute dollars was due to a reduced emphasis by our European subsidiaries on sales of commodity disk storage products, while the increase in international sales as a percentage of our net sales was due primarily to reduced U.S. sales of our CD-ROM servers and arrays. Gross Profit. Gross profit decreased 45.3% to $12.4 million for the nine months ended April 30, 2000, from $22.6 million for the nine months ended April 30, 1999. Gross margin decreased to 25.2% of net sales for the nine months ended April 30, 2000, from 29.4% of net sales for the nine months ended April 30, 1999. Gross profit decreased 39.9% to $3.3 million for the three months ended April 30, 2000, from $5.5 million for the three months ended April 30, 1999. Gross margin decreased to 24.1% of net sales for the three months ended April 30, 2000, from 24.4% of net sales for the three months ended April 30, 1999. The decrease in gross margin was primarily the result of the inclusion of the revenues of our recently acquired European subsidiaries, which have historically experienced lower margins, and to a lesser extent, reductions in sales of CD-ROM servers and arrays, which have historically experienced higher margins. In addition, we realized reduced margins on lower sales of disk drive upgrade systems due to competition and price erosion in the disk drive upgrade industry. We expect further reductions in our overall gross margin due to decreases in sales of some of our higher margin product lines, such as CD-ROM servers and arrays, until sales of our NAS appliances significantly increase as a percentage of our total sales. 10 11 Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 12.1% to $17.4 million in the nine months ended April 30, 2000, from $19.8 million in the nine months ended April 30, 1999, but increased as a percentage of net sales to 35.5% from 25.7%. Selling, general and administrative expenses decreased 25.0% to $5.1 million in the three months ended April 30, 2000, from $6.9 million in the three months ended April 30, 1999, but increased as a percentage of net sales to 37.3% from 30.2%. The dollar decrease in selling, general and administrative expenses in both the three and nine month periods was primarily the result of reduced sales commissions and salaries, occasioned by lower gross profit. In addition, we incurred reduced advertising and marketing costs, and reduced legal fees, offset somewhat by increases in the cost of personnel necessary to support our NAS sales and marketing efforts. In January and February, 2000, we identified and eliminated certain positions and functions not related to our core NAS activities. This caused a reduction in selling, general and administrative costs in the quarter ended April 30, 2000 and we expect a slight reduction from the previous levels in selling, general and administrative expenses in the next quarter or two. However, we expect overall selling, general and administrative expenses to increase in future periods because we plan to substantially increase spending on our efforts to market our NAS appliances. Research and Development Expenses. Research and development expenses increased 30.0% to $5.2 million for the nine months ended April 30, 2000, from $4.0 million for the nine months ended April 30, 1999. These expenses represented 10.6% of net sales for the nine months ended April 30, 2000 and 5.2% of net sales for the nine months ended April 30, 1999. Research and development expenses increased 26.2% to $1.8 million for the three months ended April 30, 2000, from $1.4 million for the three months ended April 30, 1999. These expenses represented 13.2% of net sales for the three months ended April 30, 2000 and 6.3% of net sales for the three months ended April 30, 1999. The increases in both the three and nine month periods were primarily due to compensation expense for additional NAS software programmers and hardware developers. We anticipate that our research and development expenses will continue to increase, both in absolute dollars and as a percentage of net sales, with the expected addition of dedicated NAS engineering resources. Impairment and Restructuring Charge. In fiscal 1998, we acquired a U.S. subsidiary. As a result of changes to our business operations, as well as operating losses of this subsidiary, we reviewed the long-lived assets purchased in this acquisition. After comparing the carrying value of the assets to the estimated future undiscounted cash flows from the assets, we determined in the third quarter of fiscal 1999 that the carrying values of most of the assets were impaired. In April 1999, we wrote off approximately $.8 million of goodwill remaining from the transaction, and wrote down the carrying value of this subsidiary's fixed assets by $.6 million. In addition, we elected to restructure much of this subsidiary's operations, and recorded a restructuring charge of $0.2 million for lease termination and employee severance costs related to this subsidiary's operations. Interest Income (Expense), Net. Net interest income decreased 15.0% to $811,000 for the nine months ended April 30, 2000, from $954,000 for the nine months ended April 30, 1999. During each of the nine-month periods, we invested the majority of our available cash in investment-grade commercial paper with maturities of less than 90 days. As a result of a decrease in our investable cash position, partially offset by slightly increased interest rates, net interest income decreased in the most recent period. Interest expense for each of the applicable periods includes relatively minor amounts of interest paid on lines of credit maintained by our foreign subsidiaries. Benefit from Income Taxes. Our effective tax benefit rate for the nine months ended April 30, 2000 was 28.5%, compared to an effective tax benefit rate of 18.6% for the same period in fiscal 1999. The fiscal 2000 benefit approximates the federal and state 11 12 statutory rates applied to our U.S. operating losses, reduced by unusable foreign operating losses, and adjusted for research and development credits. The corresponding fiscal 1999 effective tax rate reflects the statutory rates and unusable foreign losses, partially offset by research and development tax credits. LIQUIDITY AND CAPITAL RESOURCES As of April 30, 2000, we had cash and short-term marketable securities totaling $16.0 million. Net cash used in operating activities was $4.3 million in the first nine months of fiscal 2000, resulting from a net loss before non-cash charges of $6.7 million offset in part by a decrease in working capital. Net cash used in investing activities was $3.6 million in the first nine months of fiscal 2000, the result of purchases of equipment of $ .7 million with an additional $ 2.9 million used in the construction of our new corporate headquarters. Net cash provided by financing activities was $1.6 million in the first nine months of fiscal 2000, resulting primarily from a $1.0 million increase in our commercial paper loan and $800,000 from stock option exercises and employee stock purchases. We maintain a revolving line of credit facility with Finova Capital. This facility provides us with up to $20.0 million in working capital loans, based upon our accounts receivable and inventory levels. The line of credit accrues commitment fees, unused facility fees and interest on outstanding amounts at the lender's prime rate, which was 8.5% at April 30, 2000, plus 1.5%. Finova also makes available to us various flooring commitments under which we may finance the purchase of up to $13.0 million in inventory, less any amounts outstanding in working capital loans, from our vendors who have credit arrangements with Finova. At April 30, 2000, there was no balance outstanding under the credit facility, and $1.3 million outstanding under the flooring arrangements. The agreement governing the credit facility requires that we comply with financial covenants, including the maintenance of net working capital of at least $20.0 million, minimum levels of tangible net worth and minimum levels of liquidity. At April 30, 2000, our net working capital was approximately $13.8 million. As of April 30, 2000, we were in compliance with all covenants, except the net working capital covenant, of the Finova line of credit and Finova waived compliance of the net working capital covenant until August 31, 2000. The initial term of the line of credit expired on November 29, 1997, but automatically renews for successive one-year periods unless terminated by either party within a specified period in advance of the automatic renewal date. We also maintain small lines of credit for the operating cash needs of our European subsidiaries. In addition to the credit facilities noted above, we established, in March 1999, a line of credit secured by approximately $10.0 million of our cash and commercial paper. This line of credit was established to finance the majority of the cost to develop our new corporate headquarters described in the paragraph below. Under the terms of the line, which must be repaid on or before September 17, 2000, we may borrow up to 85.0% of the total commercial paper account balance. We borrowed $7.5 million in March 1999, which bears interest at 6.125%, and we borrowed an additional $1.0 million in January 2000, which bears interest at 6.75%. The interest expended under the line of credit is being capitalized as a cost of construction of our new headquarters facility. In March 1999, we purchased an 8.3 acre parcel of land for $7.3 million in Irvine, California, where we are currently developing a corporate headquarters facility. We currently anticipate that this facility will be ready for occupancy in late July 2000. The cost of the land, together with the currently estimated cost of constructing the facility, 12 13 including capitalized interest and other carrying costs, is approximately $15.7 million. We are currently considering various development and financing options including a long-term mortgage or sale-leaseback. The lease at our current headquarters location expires on June 30, 2000. The landlord has consented to allow us to remain at this location on a month-to-month basis thereafter. The landlord may, however, revoke its consent with a thirty day written notice. While we expect to complete our move in early August 2000, we can not assure you that the landlord will continue to consent to our occupancy of our current headquarters until the date that we are able to relocate to our new headquarters. We could experience a significant disruption in our business and results of operations would be negatively impacted if we were forced to relocate prior to the completion of our new headquarters. In September 1998, our board of directors approved an open market stock repurchase program. We are authorized to effect repurchases of up to $2.0 million in shares of our common stock. We expect to make these repurchases from time to time when we determine that these repurchases are the best available use of our available cash, given the price of our common stock and the interest income we would otherwise earn on our available cash. We intend to make any repurchases subject to an ongoing buyback program, and currently do not intend to repurchase more shares than the number of shares that are issued pursuant to employee stock option exercises or other employee stock purchase programs. We have repurchased a total of 77,845 shares at an average cost of $5.15 per share. No repurchases were made in the nine months ended April 30, 2000. As of April 30, 2000, we had cash and short-term marketable securities balances of $16.0 million and $10.9 million available under our line of credit, although $10.8 million of the short-term marketable securities are pledged as collateral for the real estate loan noted above. We intend to seek long-term financing to complete the development of our corporate headquarters. Since we also intend to acquire fixed assets and make additional expenditures to support our growth, we expect to seek additional financing to meet these anticipated cash requirements and to fund current operational losses. We cannot assure you that financing will be available on reasonable terms, or at all. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Risk. We transact business in various foreign currencies and, accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. To date, the net effect of changes in foreign currency exchange rates on revenues and operating expenses have not been material. Our net sales are primarily recorded in U.S. dollars. Operating expenses incurred by our European subsidiaries are denominated primarily in European currencies. During the past two years, we advanced approximately $2.0 million to two of our European subsidiaries for their working capital expenses, for which we do not intend to seek or effect immediate repayment. We currently do not use financial instruments to hedge currency exposures. We intend to assess the need to utilize financial instruments to hedge these risks on an ongoing basis. We have in the past, and we may in the future, incur foreign exchange valuation losses on the intercompany advances outstanding at any particular time. We do not use derivative financial instruments for speculative trading purposes. Interest Rate Risk. Our exposure to market risks from changes in interest rates relates primarily to our investment portfolio. We invest in high credit quality issuers and, by policy, limit the amount of the credit exposure to any one issuer. We do not use derivative financial instruments in our investment portfolio. Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting default, reinvestment and market risk. We mitigate default risk by investing in safe and high credit quality securities and by positioning our portfolio to respond appropriately 13 14 to a significant reduction in a credit rating of any issuer. The investment portfolio includes only marketable securities with active secondary or resale markets to ensure liquidity. We are also exposed to market risk from changes in interest rates on our debt obligations. To date, the effect of changes in interest rates on interest expense have not been material. We currently do not use financial instruments to hedge our interest rate exposure. We intend to assess the need to utilize financial instruments to hedge this risk on an ongoing basis. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments including derivative instruments embedded in other contracts and for hedging activities. Adoption of SFAS 133 is not expected to have a material impact on the Company's consolidated financial position, results of operations or liquidity. In December 1999, the United States Securities and Exchange Commission issued Staff Accounting Bulleting (SAB) No. 101, "Revenue Recognition in Financial Statements," as amended, which for the Company is effective April 1, 2000. SAB No. 101 summarizes certain of the SEC staff's views regarding the appropriate recognition of revenue in financial statements. The Company is currently reviewing SAB No. 101 and has not yet determined the potential impact on its financial statements. YEAR 2000 INFORMATION The Year 2000 issue is the result of computer programs, microprocessors, and embedded date reliant systems using two digits rather than four to define the applicable year. If such programs are not corrected, date data concerning the Year 2000 could cause many systems to fail, lock up or generate erroneous results. As of the date of this filing, we have not incurred any significant business disruptions nor any significant product issues as a result of the Year 2000 issue. We offer a limited Year 2000 warranty on our products, and we have had no claims that our products were not Year 2000 compliant. We do not believe that any of our internal accounting and operational systems have been affected in any way that caused us to incur unexpected expenses to remediate the problem. However, while we are not aware of any such occurrences as of the date of this filing, Year 2000 issues may not become apparent as of this date and, therefore, there is no assurance that we will not be affected by future disruptions. While we currently believe that the Year 2000 issue has not caused significant internal operational problems, our failure to fully identify all Year 2000 dependencies or issues in our systems, equipment or processes, or the systems, equipment or processes of our vendors, customers or financial institutions, could have material adverse consequences for us. 14 15 PART II OTHER INFORMATION Item 1. Legal Proceedings. The Company is from time to time involved in litigation related to its ordinary operations, such as collection actions and vendor disputes. The Company does not believe that the resolution of any existing claim or lawsuit will have a material adverse affect on the Company's business, results of operations or financial condition. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) See Exhibit Index. No Statement re Computation of Per Share Earnings is included, because the computation can be clearly determined from material contained in this Report. See the Consolidated Statements of Operations, and the Notes thereto. (b) No reports on Form 8-K were filed during the quarter ended April 30, 2000. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, County of Orange, State of California, on the 13th day of June, 2000. PROCOM TECHNOLOGY, INC. By: /s/ Alex Razmjoo ------------------------------- Alex Razmjoo Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report on Form 10-Q has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Alex Razmjoo Chairman of the Board, President June 13, 2000 - ----------------------------------- and Chief Executive Officer Alex Razmjoo (Principal Executive Officer) /s/ Alex Aydin Executive Vice President, Finance June 13, 2000 - ----------------------------------- and Administration (Principal Alex Aydin Financial Officer) /s/ Frederick Judd Vice President, Finance and June 13, 2000 - ----------------------------------- General Counsel (Principal Frederick Judd Accounting Officer)
16 17 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBER NUMBER DESCRIPTION PAGE ------ ----------- ------------ 3.1+ Amended and Restated Articles of Incorporation of the Company....................................... 3.2+ Amended and Restated Bylaws of the Company.......................................................... 10.1+ Form of Indemnity Agreement between the Company and each of its executive officers and directors.... 10.2+ Form of Amended and Restated Procom Technology, Inc. 1995 Stock Option Plan......................... 10.3+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Alex Razmjoo............................................................................ 10.4+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Frank Alaghband......................................................................... 10.5+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Alex Aydin.............................................................................. 10.6+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Nick Shahrestany........................................................................ 10.7+ Form of Registration Rights Agreement............................................................... 10.8+ Lease, dated February 10, 1992, between 2181 Dupont Associates and the Company, as amended.......... 10.9+ Loan and Security Agreement, dated November 18, 1994, by and between the Company and FINOVA Capital Corporation, as amended............................................................................. 11.1+ Statement re: Computation of Earnings Per Share..................................................... 21.1+ List of Subsidiaries................................................................................ 27.1 Financial Data Schedule.............................................................................
- ---------- + Previously filed 17 EX-27.1 2 0002.txt FINANCIAL DATA SCHEDULE
5 3-MOS JUL-31-2000 FEB-01-2000 APR-30-2000 805,000 15,168,000 9,609,000 4,541,000 9,608,000 35,777,000 16,135,000 3,610,000 49,258,000 21,157,000 8,500,000 0 0 114,000 27,987,000 49,258,000 13,811,000 13,811,000 10,477,000 10,477,000 6,963,000 0 0 (3,385,000) (904,000) 0 0 0 0 (2,481,000) (.22) (.22)
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