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Tuesday, December 30, 1997

Storage Computer Corp.
(AMEX: SOS)
Phone: 603-880-3005
Website: http://www.storage.com
Price (12/29/97): $5 1/4


HOW DID IT FIND TROUBLE?

With a stock symbol like SOS, this manufacturer of souped up computer storage systems was obviously prepared for trouble. In charting the stock's course since it came public in 1995, it becomes clear that shareholders have taken their share of baths. The latest washout followed a disappointing third quarter.

Storage Computer began the year with news of a stellar fourth quarter when earnings per share rose 350% on just 29% higher sales. It was the third consecutive quarter of rising profit margins. Yet after a brief rally to $19 5/8, the stock price drifted ever lower, temporarily buoyed a bit along the way by near-triple digit earnings growth in the first two quarters of FY97.

Yet the October market turmoil caused the stock to dip into single digits for the first time all year. It stayed there after third quarter sales came in nearly flat, and higher selling, interest, and R&D expenses sank earnings to just a penny per share versus six cents a year ago.

The company blamed a soft European market, customers taking longer to evaluate its high-end products, and a delay in getting it new performance-enhancing software out. Add in the second wave of Asian contagion high-tech panic inspired by Oracle's (Nasdaq: ORCL) meltdown plus tax-loss selling, and these shares started to take on some serious water.

BUSINESS DESCRIPTION

This Nashua, New Hampshire company makes a line of high-performance, scalable data storage solutions, with capacities ranging from 36 gigabytes to 4 terabytes. Its products are used by more than 800 customers in a variety of industries, including financial services, transportation, distribution, and education. In 1996, 47% of revenues came from the U.S. and 23% from Europe, with the Far East accounting for most of the remaining 30% of sales.

Storage Computer's systems combine industry standard hardware with its own patented version of RAID (Redundant Array of Inexpensive Disks) technology. In general, RAID systems link together several standard disk drives into a single large drive through a combination of hardware and software.

The result is a system with fast data transfer rates, high levels of redundancy, and huge storage capacity at a relatively low cost. RAID systems generated over $20 billion in revenue in 1996, according to International Data Corp.

In addition to its StorageSuite software, the company recently introduced its OmniRAID Cluster Array for the Windows NT client/server market. OmniRAID helps companies move core business applications and data from mainframe-class UNIX servers to the increasingly popular NT servers without losing performance or incurring more storage management costs.

Competitors include giants such as IBM, EMC, Digital Equipment, Sun Microsystems, and Hewlett-Packard. Insiders own over 70% of the stock, with CEO/Chair Ted Goodlander and family holding a controlling a 59% stake.

FINANCIAL FACTS

Income Statement
12-month sales: $35.95 million
12-month income: $5.4 million
12-month EPS: $0.46
Profit Margin: 15%
Market Cap: $62.8 million

Balance Sheet
Cash: $1.5 million
Current Assets: $19.7 million
Current Liabilities: $9.5 million
Long-term Debt: $0.7 million

Ratios
Price-to-earnings: 11.4
Price-to-sales: 1.7

HOW COULD YOU HAVE SEEN IT COMING?

Despite its limited history as a public company, Storage Computer had turned in solid results, particularly over the three quarters leading up to the recent shortfall. In the second quarter, sales rose 32% and net income rose by 80%. It really didn't look overvalued at 20 times trailing earnings.

Then again, the company is a small player in a competitive market where purchasers may often decide to delay an order to get a better handle on how the available technology suits their needs. Just a few customer delays can wreck a small company's quarter.

WHERE TO FROM HERE?

Storage Computer may have left shareholders with a sinking feeling, but it hasn't actually hit an iceberg despite its titanic collapse. Does a company that has delivered a 37% return on equity in the last year deserve this fate?

CEO Goodlander has made some organizational moves, including promoting Greg Scorziello, an EMC veteran, to head global sales. He has also added personnel in technical services and systems integration. This might just add to unnecessary overhead except that at the end of September, Storage had a record amount of equipment at customer locations being evaluated. Hopefully, the new staffers are a sign that these deals are getting done.

A legitimate reason for caution, though, may be the Far East, which accounted for about a quarter of the firm's revenues last year. Storage doesn't break out that figure by country, so it's hard to even guess how such sales will fare in the near term. Clearly, though, the fear is that a weak Europe and weaker Asia could serve up some quarterly losses for the company.

Looking aft, investors usually come to the rescue when the company issues an SOS. Still, weakness overseas could leave Storage Computer riding in steerage for a while. An investor hunting for bargains among the submerged microcaps should probably wait for the fourth quarter results to see if the business shapes up or ships out.

-- Louis Corrigan
(TMFSeymor@aol.com)


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