<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
[_] 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: 0-21449
STORM TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0239305
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
521 Almanor Avenue
Sunnyvale, CA 94086
(Address of principal executive office and zip code)
(408) 522-1200
(Registrant's telephone number, including area code)
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 the Registrant's Common Stock outstanding as of
October 4, 1996 was 10,424,875.
This report, including exhibits, consists of 19 pages. The exhibit index
begins on page 16.
<PAGE>
STORM TECHNOLOGY, INC.
INDEX
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet at September 30, 1996 and
December 31, 1995........................................................ 3
Condensed Consolidated Statement of Operations for the three months and
nine months ended September 30, 1996 and 1995............................ 4
Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 1996 and 1995.............................................. 5
Notes to Unaudited Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 8
PART II- OTHER INFORMATION
Item 1. Legal Proceedings................................................ 15
Item 2. Changes in Securities............................................ 15
Item 3. Defaults Upon Senior Securities.................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.............. 15
Item 5. Other Information................................................ 15
Item 6. Exhibits and Reports on Form 8-K................................. 15
Signatures................................................................ 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 966 $ 1,865
Accounts receivable, net.................... 6,274 2,676
Receivable from related party............... 623 --
Inventories................................. 5,798 1,212
Other current assets........................ 276 66
-------- -------
Total current assets...................... 13,937 5,819
Property and equipment, net................... 465 160
Goodwill...................................... 730 --
Other assets.................................. 122 --
-------- -------
Total assets........................... $ 15,254 $ 5,979
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................ $ 2,240 $ 342
Accrued liabilities......................... 1,696 314
Payable to related party.................... 10,876 2,590
Line of credit.............................. 1,860 --
-------- -------
Total current liabilities................. 16,672 3,246
-------- -------
Commitments (Note 4)
Stockholders' equity (deficit) :
Convertible preferred stock................. 7 2
Common stock................................ 1 1
Additional paid-in capital.................. 16,391 11,220
Deferred compensation....................... (203) --
Accumulated deficit......................... (17,614) (8,490)
-------- -------
Total stockholders' equity (deficit)...... (1,418) 2,733
-------- -------
Total liabilities and stockholders'
equity (deficit).................... $ 15,254 $ 5,979
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product.......................... $ 7,853 $ 795 $15,486 $ 2,337
Royalty and other................ 361 51 749 512
------- ------- ------- -------
Total revenues................ 8,214 846 16,235 2,849
Cost of product revenues................ 5,805 576 11,502 1,650
------- ------- ------- -------
Gross profit............................ 2,409 270 4,733 1,199
------- ------- ------- -------
Operating expenses:
Research and development......... 865 358 1,990 1,107
Marketing and selling............ 1,988 890 5,407 2,279
General and administrative....... 761 145 1,463 486
In-process research and -- -- 5,000 --
development..................... ------- ------- ------- -------
Total operating expenses...... 3,614 1,393 13,860 3,872
------- ------- ------- -------
Loss from operations.................... (1,205) (1,123) (9,127) (2,673)
Interest income (expense), net.......... (30) 8 3 33
------- ------- ------- -------
Net loss................................ $(1,235) $(1,115) $(9,124) $(2,640)
======= ======= ======= =======
Pro forma net loss per common and
common equivalent share................ $ (0.15) $ (0.15) $ (1.12) $ (0.35)
======= ======= ======= =======
Pro forma weighted average number of
common and common equivalent shares 8,334 7,528 8,143 7,491
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................... $(9,124) $(2,640)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization...... 244 110
Write-off of purchased
in-process research and
development....................... 5,000 --
Other non-cash charges............. 49 --
Changes in assets and
liabilities:
Accounts receivable............. (1,796) (239)
Inventories..................... (2,134) (658)
Other current assets............ (210) 148
Other long-term assets.......... (122) --
Accounts payable................ 1,738 1,066
Accrued liabilities............. (620) (171)
Payable to related party........ 2,635 --
------- -------
Net cash used in operating
activities................... (4,340) (2,384)
------- -------
Cash flows from investing activities:
Purchase of property and equipment..... (400) (48)
Sales of short-term investments........ 100 1,747
Other.................................. 268 (100)
------- -------
Net cash provided by (used in)
investing activities......... (32) 1,599
------- -------
Cash flows from financing activities:
Net proceeds from line of credit....... 1,860 --
Proceeds from issuance of
convertible preferred stock, net...... 1,490 1,681
Proceeds from issuance of common
stock................................. 123 8
------- -------
Net cash provided by financing
activities................... 3,473 1,689
------- -------
Net increase (decrease) in cash and
cash equivalents......................... (899) 904
Cash and cash equivalents at the
beginning of the period.................. 1,865 542
------- -------
Cash and cash equivalents at the end of
the period............................... $ 966 $ 1,446
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION:
Storm Technology, Inc. (the "Company") is a leading provider of digital photo
solutions that enable consumers and small businesses to input, store, organize,
enhance and use photos easily on their personal computers.
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1995, including notes
thereto, included in the Company's Form S-1 Registration Statement, as amended
September 30, 1996. The results of operations for the interim periods included
in these financial statements are not necessarily indicative of the results to
be expected for any future period or the entire fiscal year.
On March 18, 1996, the Company acquired all outstanding shares of Primax
Electronics (USA), Inc. ("Primax USA") and certain technologies from Primax
Electronics, Ltd. ("Primax Taiwan"). The condensed consolidated financial
statements for the nine month period ended September 30, 1996 include the
results of Primax USA for the period subsequent to the acquisition date through
September 30, 1996. All significant intercompany accounts and transactions have
been eliminated.
On October 1, 1996, the Company completed an initial public offering of its
common stock, selling 3,277,500 shares (including 850,000 shares sold by selling
stockholders) at $10.50 per share. Net proceeds to the Company were
approximately $23 million after deducting related issuance costs. The
accompanying condensed consolidated financial statements do not reflect the
impact of such offering as it occurred subsequent to September 30, 1996.
NOTE 2--PRO FORMA NET LOSS PER SHARE:
Pro forma net loss per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the if-converted
method) and stock options (using the treasury stock method). Common equivalent
shares are excluded from the computation if their effect is anti-dilutive,
except that, pursuant to a Securities and Exchange Commission Staff Accounting
Bulletin, shares of common stock, convertible preferred stock (using the if-
converted method) and common stock options and warrants (using the treasury
stock method and the initial public offering price of $10.50) issued within 12
months prior to the Company's initial public offering have been included in the
computation as if they were outstanding for each period presented.
6
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3--ACQUISITION:
On March 18, 1996, the Company acquired all outstanding shares of Primax USA
and certain technologies from Primax Taiwan in exchange for 4,214,329 shares of
the Company's Series E Convertible Preferred Stock. The transaction was
accounted for under the purchase method of accounting. Approximately $5 million
of the purchase price was allocated to in-process research and development.
Because such technology was in-process hardware research and development, the
value of which was determined by an independent appraiser, the amount was
immediately charged to operations.
The following table presents the unaudited pro forma consolidated results of
operations for the nine months ended September 30, 1996 and 1995 as if the
transaction completed in 1996 had been completed on January 1, 1995, with the
pro forma adjustments giving effect principally to the elimination of service
revenues recognized by Primax USA related to services performed for the Company,
the elimination of the non recurring charge for in-process research and
development acquired from Primax Taiwan and the amortization of goodwill:
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1996 1995
--------- --------
<S> <C> <C>
Total revenues....................... $18,339 $ 8,289
Net loss............................. (4,603) (3,571)
Pro forma net loss per common and
common equivalent share............. $ (0.57) $ (0.48)
</TABLE>
NOTE 4--COMMITMENTS:
The Company has entered into a patent cross license agreement with a third
party which provides for a lump sum payment by the Company and potential ongoing
royalty payments after two years relating to an ancillary feature of certain of
the Company's products for which payments Primax Taiwan has agreed to reimburse
the Company pursuant to indemnification obligations entered into in connection
with the sale of technology to the Company in March 1996. The Company believes
that this agreement will not have a material adverse effect on the Company's
business, operating results or financial condition.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains forward-looking statements which reflect the current
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views of the Company with respect to future events that will have an effect on
- ------------------------------------------------------------------------------
its future financial performance. These statements include the words "expects,"
- ------------------------------------------------------------------------------
"believes" and similar expressions. These forward-looking statements are subject
- --------------------------------------------------------------------------------
to various risks and uncertainties, including those referred to under "Factors
- ------------------------------------------------------------------------------
That May Affect Future Results" and elsewhere herein and contained in the
- -------------------------------------------------------------------------
Company's Form S-1 Registration Statement, that could cause actual results to
- -----------------------------------------------------------------------------
differ materially from historical results or those currently anticipated.
- ------------------------------------------------------------------------
Overview
The Company is a leading provider of digital photo solutions that enable
consumers and small businesses to input, store, organize, enhance and use photos
easily on their PCs. The Company was founded in 1990 to pioneer Joint
Photographic Experts Group ("JPEG") image compression technology. During its
initial years, the Company began its recruitment of an experienced management
team and developed and licensed its image compression hardware and software
technology to leading desktop publishing companies on an OEM basis as a source
of cash flow to fund the Company. In 1993, the Company released its PhotoFlash
image editing software which was distributed by the Company exclusively to Apple
Computer, Inc. in exchange for an advance and ongoing royalties.
During 1994, the Company began development of its EasyPhoto software, a
powerful consumer-friendly environment for using digital photos, and began its
transition from being focused solely on OEM technology licensing to being a
provider of consumer-oriented digital photo solutions sold at retail and on an
OEM basis. This resulted in a shift in the Company's financial model to higher
sales growth at a lower gross margin.
In September 1994, the Company entered into an agreement with Primax Taiwan
providing for the OEM purchase by the Company of photo scanners manufactured by
Primax Taiwan to be bundled with the Company's EasyPhoto software environment.
The Company decided to enter into the photo input business primarily to take
advantage of a consumer need for an integrated hardware/software solution that
is easy to install and use and is affordable at consumer price points. Sales of
the EasyPhoto Reader product began in February 1995, and the Company expanded
retail distribution of the product throughout 1995 and the first nine months of
1996.
In March 1996, the Company acquired from Primax Taiwan the technology for the
hardware component of the EasyPhoto Reader product, in-process technology of
other photo scanner products and Primax Taiwan's U.S. subsidiary, which was
primarily a sales distribution company for Primax Taiwan products in North
America. This acquisition, which was accounted for as a purchase, resulted in a
$5.0 million write-off by the Company of acquired in-process research and
development during the first quarter of 1996. In addition, the Company recorded
$0.8 million of goodwill to be amortized over a four-year period.
In June 1996, the Company began distribution of its EasyPhoto SmartPage
product, a full page sheetfed color scanner capable of scanning wallet sized to
full-page photos and documents. The EasyPhoto SmartPage hardware is currently
purchased on an OEM basis from a third party.
In August 1996, the Company initiated shipment of its EasyPhoto Drive product.
The EasyPhoto Drive is a retail version of the Company's PhotoDrive product sold
on an OEM basis to PC suppliers.
8
<PAGE>
Results of Operations
The following table sets forth for the periods indicated certain line items
from the Company's Condensed Consolidated Statement of Operations as a
percentage of the Company's total revenues:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product 95.6% 94.0% 95.4% 82.0%
Royalty and other 4.4 6.0 4.6 18.0
------ ------- ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of product revenues 70.7 68.1 70.8 57.9
------ ------- ------ ------
Gross profit 29.3 31.9 29.2 42.1
Operating Expenses:
Research and development 10.5 42.3 12.3 38.9
Marketing and selling 24.2 105.2 33.3 80.0
General and administrative 9.3 17.1 9.0 17.0
In-process research and development -- -- 30.8 --
------ ------- ------ ------
Total operating expenses 44.0 164.6 85.4 135.9
------ ------- ------ ------
Loss from operations (14.7) (132.7) (56.2) (93.8)
Interest income (expense), net (0.3) 0.9 -- 1.1
------ ------- ------ ------
Net loss (15.0)% (131.8)% (56.2)% (92.7)%
====== ======= ====== ======
</TABLE>
Revenues
--------
Product revenues were $7.9 million in the third quarter of 1996, a significant
increase from the $0.8 million reported in the third quarter of 1995. Product
revenues increased to $15.5 million for the nine months ended September 30, 1996
from $2.3 million for the comparable period in 1995. The significant growth in
product revenues was due primarily to higher unit sales of the Company's
EasyPhoto Reader product and the introduction of the Company's EasyPhoto
SmartPage and EasyPhoto Drive products in June and August 1996, respectively.
Royalty and other revenues increased to $0.4 million in the third quarter of
1996 from $0.1 million in the third quarter of 1995. For the nine months ended
September 30, 1996, royalty and other revenues increased to $0.7 million from
$0.5 million in the nine month period ended September 30, 1995. The increase in
royalty and other revenues is primarily due to the OEM licensing of certain
photo scanner technologies, which principally began in the second quarter of
1996.
Cost of product revenues
------------------------
Cost of product revenues increased to $5.8 million (70.7% of revenues) in the
third quarter of 1996 from $0.6 million (68.1% of revenues) in the third quarter
of 1995. Cost of product revenues were $11.5 million (70.8% of revenues) and
$1.7 million (57.9% of revenues) for the nine month periods ended September 30,
1996 and 1995, respectively. Cost of product revenues increased in dollar
amounts as the Company incurred higher costs associated with higher unit sales
of the EasyPhoto Reader product and the introduction of the EasyPhoto SmartPage
and EasyPhoto Drive products.
9
<PAGE>
Gross profit
------------
Gross profit was $2.4 million and $0.3 million, respectively, for the third
quarter of 1996 and 1995, representing 29.3% and 31.9%, respectively, of total
revenues for such periods. Gross profit was $4.7 million and $1.2 million,
respectively, for the nine month periods ended September 30, 1996 and 1995,
representing 29.2% and 42.1%, respectively, of total revenues for such periods.
The decrease in gross margin was due to the Company's transition from being
engaged primarily in the high margin OEM licensing business to providing lower
margin hardware and software solutions primarily on a retail basis.
Additionally, during 1996 the Company earned lower margins on product lines
acquired from Primax USA that the Company is in the process of phasing out.
Research and development
------------------------
Research and development expenses increased to $0.9 million (10.5% of
revenues) in the third quarter of 1996 from $0.4 million (42.3% of revenues) in
the third quarter of 1995. Research and development expenses were $2.0 million
(12.3% of revenues) and $1.1 million (38.9% of revenues) respectively, for the
nine months ended September 30, 1996 and 1995. The increase in these expenses in
dollar amounts from 1995 to 1996 is primarily attributable to an increase in
research and development personnel to support the Company's continued growth.
The decrease in research and development expenses as a percentage of total
revenues from 1995 to 1996 is attributable to the rapid growth of the Company's
revenues in 1996. The Company intends to continue to allocate substantial
resources to research and development, but research and development expenses may
vary as a percentage of total revenues.
Marketing and selling
---------------------
Marketing and selling expenses increased to $2.0 million (24.2% of revenues)
in the third quarter of 1996 from $0.9 million (105.2% of revenues) in the third
quarter of 1995. For the nine months ended September 30, 1996 and 1995,
marketing and selling expenses were $5.4 million (33.3% of revenues) and $2.3
million (80.0% of revenues), respectively. The increase in these expenses in
dollar amounts from 1995 to 1996 is primarily the result of increased marketing,
advertising and promotional expenses associated with new and existing retail
products and an increase in the number of sales personnel. The decrease in
marketing and selling expenses as a percentage of total revenues from 1995 to
1996 is attributable to the rapid growth of the Company's revenues in 1996. The
Company believes that such expenses will increase in dollar amounts as the
Company expands its sales and marketing staff and promotional efforts to support
the Company's continued growth, although marketing and selling expenses may vary
as a percentage of total revenues.
General and administrative
--------------------------
General and administrative expenses increased to $0.8 million (9.3% of
revenues) in the third quarter of 1996 from $0.1 million (17.1% of revenues) in
the third quarter of 1995. For the nine months ended September 30, 1996 and
1995, general and administrative expenses were $1.5 million (9.0% of revenues)
and $0.5 million (17.0% of revenues), respectively. The increase in these
expenses in dollar amounts from 1995 to 1996 is primarily attributable to an
increase in administrative personnel to support the Company's continued growth.
As part of the Primax USA acquisition transaction, in March 1996, the Company
recorded $0.8 million of goodwill, which the Company is amortizing over a four-
year period as part of its general and administrative expenses. The decrease in
general and administrative expenses as a percentage of total revenues from 1995
to 1996 is attributable to the rapid growth of the Company's revenues in 1996.
The Company believes that such expenses will increase in dollar amounts as the
Company increases its staffing to support the Company's continued growth and as
the Company experiences higher costs associated with being a public company,
although general and administrative expenses may vary as a percentage of total
revenues.
10
<PAGE>
In-process research and development
-----------------------------------
In March 1996, the Company acquired certain in-process photo scanner
technologies from Primax Taiwan in a transaction accounted for as a purchase.
The Company recorded a one-time write-off of $5.0 million to acquired in-process
research and development as a result of the acquisition.
Interest income (expense), net
------------------------------
Interest income (expense), net consists primarily of interest earned on cash
equivalents and short-term investments and interest expense incurred in
connection with the Company's line of credit. Interest income (expense), net was
less than $0.1 million in each of the periods presented. During the third
quarter of 1996 the Company began to borrow funds under its existing line of
credit, primarily to support growth in the Company's working capital
requirements.
Provision for income taxes
--------------------------
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its working capital and capital
expenditure requirements primarily through the private sale of equity securities
totaling approximately $12.8 million. During the first nine months of 1996 the
Company generated $3.5 million from financing activities, including $1.9 million
from borrowings under the Company's line of credit and $1.6 million from the
sale of equity securities. These funds were principally used to support
operating activities, which used cash of $4.3 million for the nine months ended
September 30, 1996.
As of September 30, 1996, the Company had approximately $1.0 million in cash
and cash equivalents. On May 16, 1996, the Company entered into a loan and
security agreement for a $3.5 million revolving line of credit and a $6.5
million accounts receivable line of credit. The lines of credit are secured by
the assets of the Company. All obligations up to an amount of $3.5 million under
the revolving line of credit are guaranteed by Primax Taiwan. At September 30,
1996, the outstanding borrowings under the bank lines of credit totaled $1.9
million. As of September 30, 1996, the Company's principal commitments consisted
primarily of the above-mentioned lines of credit and a lease for its office
facilities. To date, the Company has not invested in derivative securities or
any other financial instruments that involve a high level of complexity or risk.
The Company expects that, in the future, cash in excess of current requirements
will be invested in investment grade, interest-bearing securities.
On October 1, 1996, the Company completed a public offering of its common
stock, selling 3,277,500 shares (including 850,000 shares sold by selling
stockholders) at $10.50 per share. Net proceeds to the Company were
approximately $23 million after deducting related issuance costs. The
accompanying condensed consolidated financial statements do not reflect the
impact of such offering as it occurred subsequent to September 30, 1996.
The Company believes that the net proceeds from its initial public
offering, existing cash balances, the bank lines of credit and funds generated
from operations will be sufficient to meet the Company's capital and operating
requirements for the next 12 months. Although operating activities may provide
cash in certain periods, to the extent that the Company experiences growth in
the future, the Company anticipates that its operating and investing activities
may use cash. Consequently, any such growth may require the Company to obtain
additional equity or debt financing. In addition, although there are no present
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies, the Company from time
to time evaluates potential acquisitions of businesses, products and
technologies and may in the future require additional equity or debt financings
to consummate such potential acquisitions.
11
<PAGE>
Factors That May Affect Future Results
The Company's quarterly and annual operating results are affected by a wide
---------------------------------------------------------------------------
variety of risks and uncertainties as discussed below and in the Company's
- --------------------------------------------------------------------------
Registration Statement on Form S-1. This Report on Form 10-Q should be read in
- ------------------------------------------------------------------------------
conjunction with such Form S-1, particularly the "Risk Factors" contained
- -------------------------------------------------------------------------
therein.
- -------
The Company, which was founded in January 1990, commenced shipment of its
initial EasyPhoto product in the first quarter of 1995. Accordingly, the Company
has a limited operating history upon which an evaluation of the Company and its
prospects can be based. The Company has incurred net losses in every period
since inception. There can be no assurance that it will attain profitability,
or, if profitability is attained, that the Company will sustain profitability on
a quarterly or an annual basis.
The market for digital photo products and, in particular, for the Company's
EasyPhoto line of scanners and software products, is new and rapidly evolving.
The Company currently derives substantially all of its revenues from its
EasyPhoto photo scanners and software products and expects that revenues from
these products will continue to account for substantially all of its revenues
for the foreseeable future. There can be no assurance that the market for
digital photos will develop as anticipated by the Company, or that the Company's
products will be broadly accepted. The Company recently began volume shipments
of two new products, EasyPhoto SmartPage and EasyPhoto Drive, in June and August
of 1996, respectively, and expects to receive a significant percentage of its
revenues from the sale of these products in the fourth quarter of this year.
There can be no assurance that these products will achieve broad market
acceptance or that they will be successfully marketed or sold on a profitable
basis. Furthermore, while the Company currently competes directly with a
relatively small number of competitors, it faces indirect competition from a
number of sources and expects to experience increased competition in the future.
Many of the Company's existing and potential competitors have longer operating
histories and significantly greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and larger customer bases,
than the Company. As a result, these competitors may be able to respond more
effectively to new or emerging technologies and changes in customer
requirements, withstand significant price decreases or devote greater resources
to the development, promotion, sale and support of their products than the
Company. There can be no assurance that the Company will be able to compete
successfully in the future or that competition will not have a material adverse
effect on the Company's business, operating results and financial condition.
The Company has experienced and will continue to experience significant
fluctuations in revenues and operating results from quarter to quarter and from
year to year due to a combination of factors, many of which are outside of the
Company's direct control. These factors include development of consumer demand
for digital photos on PCs in general and for the Company's products in
particular, the Company's success in developing, introducing and shipping new
products and product enhancements in a timely manner, the purchasing patterns
and potential product returns from the Company's retail distribution, the
potential for reduced revenue due to price protection granted to distributors,
the performance of the Company's contract manufacturers and component suppliers,
the Company's ability to respond to new product introductions and price
reductions by its competitors, the timing, cancellation or rescheduling of
significant orders from OEMs or distributors, the availability of key components
and changes in the cost of materials for the Company's products, the level of
demand for PCs, the Company's ability to attract, retain and motivate qualified
personnel, the timing and amount of research and development, marketing and
selling and general and administrative expenditures, and general economic
conditions. In addition, the Company has experienced seasonality in its
operating results. The Company believes that the seasonality of its revenues
results primarily from the purchasing habits of consumers and the timing of the
Company's fiscal year end. The Company currently believes that such patterns
will generally continue.
12
<PAGE>
Revenues and operating results in any quarter depend on the volume, timing and
ability to fulfill customer orders, the receipt of which is difficult to
forecast. A significant portion of the Company's operating expenses is
relatively fixed in advance, based in large part on the Company's forecasts of
future sales. If sales are below expectations in any given period, the adverse
effect of a shortfall in sales on the Company's operating results may be
magnified by the Company's inability to adjust operating expenses in the short
term to compensate for such shortfall. Accordingly, any significant shortfall in
revenues relative to the Company's expectations would have an immediate material
adverse impact on the Company's operating results and financial condition. The
Company may also be required to reduce prices in response to competition or
increase spending to pursue new product or market opportunities. In the event of
significant price competition in the market for the Company's products, the
Company would be required to decrease costs at least proportionately in order to
maintain profit margins and would be at a significant disadvantage compared to
competitors with substantially greater resources, which could more readily
withstand an extended period of downward pricing pressure.
Due to the foregoing and other factors, it is likely that in some future
period the Company's operating results will be below results for the prior or
comparable period or below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected. Accordingly, the Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by early-stage companies participating in new and rapidly evolving
markets. There can be no assurance that the Company will be successful in
addressing such risks.
Primax Taiwan and a third party are currently the sole manufacturing sources
for the hardware component of the Company's EasyPhoto Reader/Drive and SmartPage
products, respectively. The Company expects that it will continue to rely in the
foreseeable future on these suppliers for substantially all of its materials
procurement, assembly, system integration, testing and quality assurance. There
can be no assurance that such suppliers will be able to meet the Company's
requirements for quality manufactured products at competitive prices. Any
inability to obtain hardware components at competitive prices from these
suppliers or to increase manufacturing capacity from such suppliers as required
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Since February 1995, most of the Company's sales have been made to
distributors, computer superstores, consumer electronic superstores, office
supply superstores, specialty computer stores, on-line companies, mass merchants
and OEMs and, to a lesser extent, mail order companies. Accordingly, the Company
is dependent upon the continued viability and financial stability of these
resellers. The Company's reseller customers offer products of several different
companies, including scanner products that are competitive with the Company's
products. Accordingly, these resellers may give higher priority to products of
suppliers other than the Company through increased shelf space or promotions,
thus reducing their efforts to sell the Company's product. In addition, as is
typical in the personal computer industry, the Company grants its distributors
price protection and certain rights of return with respect to products purchased
by them. The Company accrues for expected returns and anticipated price
reductions in amounts that the Company believes are reasonable. However, there
can be no assurance that these accruals will be sufficient, especially in light
of the rapid product obsolescence that often occurs during product transitions.
In order to respond to competitive pricing actions, increase sales or expand the
distribution of its products, the Company may reduce the prices of its products,
which could give rise to significant price protection charges and which would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the difficulty in predicting future
sales and the anticipated short product life cycles of the Company's products
due to frequent upgrades increase the risk that new product introductions, price
reductions by the Company or its competitors, or other factors affecting the
digital photo market could result in significant product returns. Any price
protection charges or product returns in excess of recorded allowances would
have a material adverse effect on the Company's business, operating results and
financial condition.
13
<PAGE>
The Company has recently experienced and may continue to experience growth in
the number of employees, the scope of its operating and financial systems and
the geographic distribution of its operations and customers due to an
anticipated increase in sales and the recent acquisition transaction with Primax
Taiwan. The Company's ability to compete effectively and to manage future
growth, if any, will require the Company to continue to assimilate such new
personnel and to implement and improve its financial and management controls,
reporting systems and procedures on a timely basis and expand, train and manage
its employee work force. There can be no assurance that the Company will be able
to do so successfully.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
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.
(b) No reports on Form 8-K were filed during the three month period ended
September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized:
Date: November 13, 1996.
STORM TECHNOLOGY, INC.
By: /s/ RICK M. MCCONNELL
---------------------
Rick M. McConnell
Chief Financial Officer
and Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ ------------------------------------------------------------------------
2.1* Form of Agreement and Plan of Merger between Storm Primax, Inc., a
California corporation ("Storm California"), and Storm Primax, Inc., a
Delaware corporation ("Storm Delaware").
3.1* Sixth Amended and Restated Articles of Incorporation of Storm
California.
3.2* Certificate of Incorporation of Storm Delaware.
3.3* Bylaws of Storm California.
3.4* Bylaws of Storm Delaware.
10.1* Form of Indemnity Agreement for officers and directors.
10.2* The Registrant's Amended and Restated Stock Option Plan.
10.4* The Registrant's 1996 Outside Directors Stock Option Plan.
10.5* The Registrant's 1996 Employee Stock Purchase Plan.
10.9* Series D Preferred Stock Purchase Agreement dated July 27, 1995.
10.10* Series F Preferred Stock Purchase Agreement dated June 11, 1996.
10.11* Fourth Amended and Restated Rights Agreement dated June 11, 1996, as
amended.
10.12* Agreement and Plan of Reorganization by and among Storm Software,
Inc., Storm Acquisition Corporation, Primax Electronics (U.S.A.) Inc.,
and Primax Electronics, Ltd. ("Primax") dated February 24, 1996.
10.13* Manufacturing and Purchase Agreement by and between Storm California
and Primax dated February 24, 1996.
10.14* Asset Transfer Agreement by and between Storm California and Primax
dated February 24, 1996.
10.15* International Distribution Agreement by and between Storm California
and Primax dated February 29, 1996.
10.16* International Distribution Agreement by and between Storm California
and Primax Electronics Europe B.V. dated February 29, 1996.
10.17* Distribution Agreement by and between Storm California and Primax
dated February 29, 1996.
10.18* Sales Representative Agreement by and between Storm California and
Primax dated February 29, 1996.
10.19* Agreement by and between Intel Corporation and Storm California dated
May 22, 1996.
10.20* Warrant to purchase Stock of Storm California issued to Intel
Corporation dated May 16, 1996 (incorporated by reference to Exhibit D to
Exhibit 10.19).
10.21* Warrant to purchase Series B Preferred Stock of Storm California
issued to Dominion Ventures, Inc. on May 15, 1992.
10.25* Amendment No. 1 dated July 24, 1996 to the Agreement by and between
Storm California and Intel, dated May 22, 1996.
10.26* Bundling Agreement by and between Storm California and Netscape
Communications Corporation dated July 24, 1996.
<PAGE>
EXHIBIT INDEX
(Continued)
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ ------------------------------------------------------------------------
10.27* Termination Agreement by and between Primax and Storm California
dated July 1, 1996.
10.28* Addendum One dated June 11, 1996 to the Manufacturing and Purchase
Agreement between Primax and Storm California.
10.29* Lease Agreement between BRE Properties, Inc. and Primax (USA).
10.30* Amendment One to the Distribution Agreement by and between Storm
California and Primax dated February 29, 1996.
11.1 Calculation of Pro Forma Net Loss Per Share.
27 Financial Data Schedule.
* Incorporated by reference from the exhibits with corresponding numbers from
the Company's Registration Statement (No. 333-06911), as amended on September
30, 1996.
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Condensed Consolidated
Financial Statements or notes thereto.
<PAGE>
EXHIBIT 11.1
CALCULATION OF PRO FORMA NET LOSS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted Average Common and Common
Equivalent Shares:
Series A Preferred Stock............... 750 750 750 750
Series B Preferred Stock............... 120 120 120 120
Series C Preferred Stock............... 818 818 818 818
Series D Preferred Stock............... 690 386 690 349
Series E Preferred Stock............... 4,214 3,877 4,116 3,877
Series F Preferred Stock............... 180 30 91 30
Common Stock........................... 1,245 1,230 1,241 1,230
Common Stock Options................... 305 305 305 305
Warrants............................... 12 12 12 12
------- ------- ------- -------
8,334 7,528 8,143 7,491
======= ======= ======= =======
Net Loss $(1,235) $(1,115) $(9,124) $(2,640)
======= ======= ======= =======
Pro forma net loss per common and
common equivalent share $ (0.15) $ (0.15) $ (1.12) $ (0.35)
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 966
<SECURITIES> 0
<RECEIVABLES> 6,947
<ALLOWANCES> 673
<INVENTORY> 5,798
<CURRENT-ASSETS> 13,937
<PP&E> 997
<DEPRECIATION> 532
<TOTAL-ASSETS> 15,254
<CURRENT-LIABILITIES> 16,672
<BONDS> 0
0
7
<COMMON> 1
<OTHER-SE> (203)
<TOTAL-LIABILITY-AND-EQUITY> 15,254
<SALES> 15,486
<TOTAL-REVENUES> 16,235
<CGS> 11,502
<TOTAL-COSTS> 11,502
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,124)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
