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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
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)
(415) 691-6600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
28, 1997 ($4.50) as reported on the Nasdaq National Market, was approximately
$25,295,000. Shares of Common Stock held by each officer and director and by
each person who owned 5% or more of the Registrant's outstanding Common Stock on
that date have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
February 28, 1997 was 10,424,331.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1996 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
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STORM TECHNOLOGY, INC.
TABLE OF CONTENTS
1996 FORM 10-K
PART I
Page
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Item 1. Business..................................................... 3
Item 2. Properties................................................... 9
Item 3. Legal Proceedings............................................ 9
Item 4. Submission of Matters to a
Vote of Security Holders..................................... 9
PART II
Item 5. Market for the Registrant's
Common Stock and Related Stockholder
Matters...................................................... 10
Item 6. Selected Consolidated
Financial Data................................................ 10
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations......... .............................. 11
Item 8. Financial Statements and
Supplementary Data........................................... 17
Item 9. Changes in and Disagreements
with Accountants on Accounting and
Financial Disclosure......................................... 30
PART III
Item 10. Directors and Executive
Officers of the Registrant.................. ................ 31
Item 11. Executive Compensation....................................... 32
Item 12. Security Ownership of Certain
Beneficial Owners and Management............................. 32
Item 13. Certain Relationships and
Related Transactions......................................... 32
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K............................ 32
Signatures............................................................ 35
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PART I
Forward looking statements in this Annual Report on Form 10-K are made
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pursuant to the safe harbor provisions of the Private Securities Litigation
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Reform Act of 1995. Stockholders are cautioned that all forward-looking
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statements pertaining to the Company involve risks and uncertainties, including,
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without limitation, those contained in Item 7 of this report under the caption
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entitled "Management's Discussion and Analysis of Financial Condition and
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Results of Operations-Factors That May Affect Future Results" and other risks
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detailed from time to time in the Company's periodic reports and other
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information filed with the Securities and Exchange Commission.
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ITEM 1. BUSINESS
Storm Technology, Inc. ("Storm" or 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
("PCs"). The Company's vision is to empower consumers to use digital photos to
create more personal, memorable and effective communications. The Company
believes that the $16 billion worldwide chemical photography market is evolving
to a market that will increasingly include digital photos due in part to the
increasing availability of photo capture devices and software which enable
people to use digital photos with their computers. This transition, coupled with
the recent proliferation of powerful multimedia home PCs, is leading to the
emergence of digital photos as a new and rapidly growing product category for
consumers. To capitalize on this emerging market opportunity, Storm develops and
markets software-differentiated, consumer-branded products that are easy to use,
result in high image quality and provide consumers and small businesses with a
comprehensive digital photo solution.
PRODUCTS
The products currently offered by Storm as of February 28, 1997 are shown in
the following table:
<TABLE>
<CAPTION>
PRIMARY TARGET
DISTRIBUTION RETAIL FIRST SHIPMENT
PRODUCT CATEGORY/NAME DESCRIPTION CHANNEL STREET PRICE DATE(S)
- ----------------------------- --------------------------- --------------------------- ------------ -------------------------
<S> <C> <C> <C> <C>
1. PHOTO ORGANIZER SOFTWARE
EasyPhoto Photo organizer software OEM or bundled N/A Version 1.0 February 1995
and core technology to with EasyPhoto Version 2.0 October 1995
input, store, organize, branded photo Version 2.5 August 1996
enhance, and use digital scanners
photos; includes localized
foreign language versions
2. PHOTO INPUT SOLUTIONS
EasyPhoto Reader External photo reader (up Retail $199 Version 1.0 February 1995
to 5" x 7" photos) Version 2.0 October 1995
Version 2.5 August 1996
EasyPhoto SmartPage External large form factor Retail $299 Version 1.0 June 1996
photo/document reader (up Version 1.5 November 1996
to 8" x 14" photos)
EasyPhoto Drive Internal photo reader (up Retail $199 Version 1.0 August 1996
to 5"x 7" photos)
PhotoDrives (OEM) Internal photo readers (up OEM N/A April 1996
to 5" x 7" photos)
designed to be
incorporated into 5" PC
drive bays
PhotoReaders (OEM) External photo readers (up OEM N/A January 1996
to 5" x 7" photos) with
unique industrial designs
for specific OEMs
3. PHOTO-CENTRIC APPLICATION SOFTWARE
EasyPhoto Phone Software application to OEM or bundled with N/A September 1996
share photos over certain EasyPhoto
telephone lines branded photo scanners
EasyPhoto DesignWorks Software application to Bundled with certain N/A November 1996
enable page layout and EasyPhoto branded
use of text and sound for photo scanners
photo-based projects to
send on-line or print out
</TABLE>
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EASYPHOTO SOFTWARE
The EasyPhoto organizer software provides a user friendly, easy to install
environment for consumers to input, organize, store, enhance and use photos on
their PCs. EasyPhoto enables users to build galleries of photos using a familiar
film strip metaphor for display and to perform photo adjustment and improvement
functions such as editing, cropping and resizing of photos. In addition to being
integrated with the Company's own line of photo scanners, EasyPhoto software has
been distributed broadly through OEM partners, including Acer, Epson, HP, Intel,
Netcom, Netscape, Nikon, Polaroid and Sharp, in conjunction with PCs, scanners,
printers and digital cameras.
EasyPhoto creates a powerfully simple "digital shoebox" for photos, utilizing
the following key elements of the Company's technology:
ADVANCED OLE CAPABILITIES: EasyPhoto is designed to capitalize on Microsoft's
OLE standard to facilitate using photos with other applications. The Company
believes that EasyPhoto is one of the most fully-featured OLE servers
available today, enabling users to "drag and drop" images into text documents,
to resize and manipulate the images and, in certain applications, to retain
control over printing and adjustment of the photo within the third party
software application.
VIRTUAL MEMORY: The Company's proprietary virtual memory technology
substantially reduces the processing and storage requirements associated with
digital images, enabling consumers to enjoy advanced digital photo
functionality using consumer-oriented PC configurations, such as 486 and lower
speed Pentium class computers with as little as 8 MB of RAM. The Company's
unique "tiling" system, which breaks images into large, independent sectors
rather than numerous linear strips, dramatically increases the speed with
which images can be manipulated on screen, without degrading image quality. In
addition, the Company's image compression technology minimizes the amount of
disk space dedicated to image storage and limits time-consuming hard disk
access.
ADVANCED PHOTO DATABASE FUNCTIONALITY: Central to the EasyPhoto software
environment is a fully-featured database with visual photo access that is
optimized for image management and retrieval. The database is organized around
a film strip metaphor and allows users to organize and find images by visual
content, subject or caption text. In addition, the photo database is designed
to store compressed "thumbnail" copies of digital images in multiple film
strips without duplicating the full images, thereby reducing storage
requirements and increasing overall speed.
IMAGING ALGORITHMS: The EasyPhoto environment incorporates a number of easy-
to-use image enhancement tools based on sophisticated imaging algorithms.
EasyPhoto's "magic filter" tools automatically detect and digitally correct
surface flaws such as scratches in the input image and enable users to correct
"red eye" in flash photographs. EasyPhoto's ClearScan technology offers unique
algorithms to identify and automatically brighten dark areas. Finally,
EasyPhoto's ClearPrint technology utilizes intelligence regarding the
capabilities of various output devices to optimize the printed image.
EasyPhoto is now available in six languages, including US English, UK English,
Japanese, German, French and Spanish, and the Company estimates that it has an
installed base of over one million units as of February 28, 1997.
EASYPHOTO READER
In February 1995, the Company introduced the EasyPhoto Reader, which was the
first consumer-oriented photo scanner designed specifically to read photo prints
of up to 5" x 7" into a personal computer. Smaller than a standard mousepad, the
device was designed with the consumer in mind to occupy limited desk space.
Installation is easy, with no interface boards required. The device plugs
directly into the parallel port of a computer with a pass-through connector that
enables printers to utilize the same port. The EasyPhoto Reader includes a
motorized feeder and photo guides to read photos automatically at the push of a
single button and to ensure consistently high quality. When detached from the
feeder, the EasyPhoto Reader may be used to scan photos out of bound materials
such as books or magazines. It also reads over 16.7 million colors and its
standard optical resolution, compatible with typical consumer output devices, is
200 dots per inch (dpi), with software interpolation enabling resolutions of up
to 1200 dpi. The Company presently believes the EasyPhoto Reader to be the
highest quality, easiest to use photo scanning device at its present target
street price of $199.
EASYPHOTO SMARTPAGE
The EasyPhoto SmartPage is a full-page, sheetfed color scanner capable of
scanning wallet-sized to full-page photos and documents (up to 8" x 14").
While alternative products exist in the larger size sheetfed category, the
EasyPhoto SmartPage is uniquely positioned beyond the capabilities of text-based
document scanners toward the more demanding requirements of color rich photo-
centric usage. The EasyPhoto SmartPage, which began shipping in June 1996, also
plugs directly into the parallel port of a computer and scans photos at a 300
dpi optical resolution, with software interpolation enabling resolutions of up
to 1200 dpi. Documents, which may include a combination of photos, text and
graphics, may be stored either in bitmapped form for applications such as
electronic faxing or in text form for use in computer data files via the bundled
OCR software from TextBridge. Additionally, bundled document management
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software from DocuMagix allows scanned documents to be organized, stored and
retrieved via an intuitive electronic file cabinet. The EasyPhoto SmartPage is
sold at a targeted street price of $299. The EasyPhoto SmartPage hardware is
currently purchased on an OEM basis from a third party.
EASYPHOTO DRIVE
The EasyPhoto Drive performs the same photo reading functions as the EasyPhoto
Reader but is embedded within a 5" drive bay of a PC, permitting consumers to
incorporate photo reading capabilities inside their PCs rather than having to
utilize an external device. A unique feature of the EasyPhoto Drive is the
automatic nature of the photo scanning process. Simply inserting a photo into
the EasyPhoto Drive launches the EasyPhoto software on the PC and scans the
photo into the computer, displaying the scan on the screen in real time as it is
completed. The photo is then available for manipulation, storage, organization
and retrieval through the EasyPhoto software environment. The EasyPhoto Drive
was released in August 1996 at a targeted street price of $199. The EasyPhoto
Drive is capable of up to a 400 dpi optical resolution and 1200 dpi effective
resolution through software interpolation. The product includes an ISA interface
board to be installed with the drive.
PHOTODRIVE (OEM)
The PhotoDrive product first began shipping in April 1996 and is an OEM-only
version of the EasyPhoto Drive with equivalent specifications and capabilities.
Through October 1996, HP was the exclusive OEM of the PhotoDrive product and
bundles it with certain models of the HP Pavilion line of PCs. In January 1997,
Gateway also began bundling the PhotoDrive product into certain models of its
Destination Big Screen PC/TV line. The PhotoDrive is generally offered to PC
suppliers with a customized front bezel in order to integrate seamlessly into
the supplier's personal computer casing from a design perspective.
PHOTO READER (OEM)
The Company also sells custom industrial design photo readers on an OEM basis.
The first such OEM is Polaroid with its PhotoPad product. The Company's OEM
distribution of its Photo Reader products is intended, in part, to address
certain non-consumer markets to which the Company does not directly market its
retail products, such as vertical markets in real estate, construction or
insurance.
PHOTO-CENTRIC APPLICATION SOFTWARE
While the EasyPhoto organizer software enables organization of digital photos,
photo-centric application software enables the consumer to use digital photos in
interesting and creative ways. The Company expects such applications to be
developed primarily by third parties. In February 1997, the Company announced a
strategic agreement with Adobe which allows Storm to bundle Adobe's PhotoDeluxe
software with its EasyPhoto scanners. The Company anticipates bundling Adobe's
photo-editing software with its retail photo scanners beginning in the second
quarter of 1997.
Additionally, the Company has developed two other photo-centric applications,
EasyPhoto Phone and EasyPhoto DesignWorks. EasyPhoto Phone, released in
September 1996, was originally developed by Intel and enables easy sharing of
photos over normal analog phone lines, with simultaneous voice in the event that
digital simultaneous voice and data (DSVD) modems are available. EasyPhoto
DesignWorks, developed by the Company and released in November 1996, enables
page layout and the use of text and sound to create photo-based projects. Both
EasyPhoto Phone and EasyPhoto DesignWorks are tightly integrated with the
EasyPhoto organizer software through its embedded OLE capabilities, and are
distributed with certain models of the Company's EasyPhoto branded scanners.
PRODUCT WARRANTY
The Company's products are sold with a 30-day money-back guarantee directly
from the Company (in addition to any return policies available from the
retailer) as well as a 12-month hardware warranty.
MARKETING AND SALES
The Company pursues a two-pronged approach to marketing and sales. The first
focuses on aftermarket sales to existing PC users through leading computer
retail channels. Sales are promoted in this category through proactive consumer
marketing efforts designed to increase end user awareness of and demand for
EasyPhoto products. The second focuses on establishing relationships with
leading personal computer manufacturers, digital camera providers, scanner
manufacturers, software developers and other OEMs that distribute the Company's
products pre-installed in new PCs and bundled with third party peripherals and
software. Strategic marketing alliances with a variety of select companies
within the computer industry serve to further broaden the distribution channel
for the Company's products and to establish the EasyPhoto brand.
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MARKETING
The Company's marketing group is responsible for positioning and promoting the
Company's products on a worldwide basis. It employs a variety of consumer
marketing techniques to broaden end-user awareness of and demand for EasyPhoto
products. First among these is its effort to generate broad-based press
coverage, including in part product reviews, application stories and visual
product demonstrations in trade and consumer media. A small sampling of past
press coverage encompasses such publications and media as wide ranging as The
Wall Street Journal, The Today Show, CNN, PC Magazine, MacWorld, Family PC,
Brides Magazine and Rolling Stone.
While press coverage has been an essential component in building demand for
its EasyPhoto products, additional key elements include consumer advertising,
sampling, direct marketing, retail promotions and trade show participation. The
Company also seeks to reach a wide array of consumers through its World Wide Web
("web") site located at http://www.easyphoto.com/storm/. Information contained
in the Company's web site shall not be deemed part of this Form 10-K.
STRATEGIC MARKETING ALLIANCES
The Company believes that broadening the awareness and distribution of its
products through strategic alliances with a variety of companies within the
computer industry is an important element in establishing its products as market
leaders and its EasyPhoto software as a defacto industry standard. The Company
has established OEM arrangements with both HP and Gateway for the incorporation
of the Company's PhotoDrives into certain models of these OEMs' lines of home
computers, as well as with Polaroid for a private label external photo reader
device. The Company's EasyPhoto software is distributed broadly by numerous
partners, including HP, Gateway and Acer with their home PCs, Polaroid with its
photo scanner product, Netscape and Netcom with certain internet software
products and Epson, Nikon and Sharp with digital cameras. The Company has
entered into an agreement with Intel Corp. providing for the right to offer to
sell the Company's EasyPhoto software environment by Intel to its motherboard
customers. The Intel agreement has a five-year term and is automatically renewed
for two successive two-year terms unless either party provides written notice of
termination. In addition, the Company has entered into an agreement for the
bundling of its EasyPhoto organizer software with Adobe's PhotoDeluxe photo-
editing software.
RETAIL DISTRIBUTION
Retail distribution for the Company's products includes computer superstores,
consumer electronic superstores, office supply superstores and specialty
computer stores. In addition, the Company's retail distribution includes on-line
companies (such as America Online) and Internet stores, mail order catalogs and
direct consumer order fulfillment. The Company also has distribution
relationships with several North American distributors, resulting in a broad
distribution of the Company's products through smaller regional, local and
independent computer resellers and VARs. Overall, the Company's products are
sold through many of the leading retailers and distributors of computer products
in North America, including the following:
<TABLE>
<CAPTION>
RETAIL CHAINS/CATALOGS DISTRIBUTORS
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<S> <C> <C> <C>
America Online Fry's Electronics PC Connection, Inc. D&H Distributing
Best Buy Lechmere Sam's Club Ingram
Circuit City MicroCenter Sears Ingram-Canada
CompUSA MicroWarehouse Staples Tech Data Corp.
Computer City Montgomery Ward The Good Guys
Computer Discount Warehouse OfficeMax
</TABLE>
CUSTOMER CONCENTRATION
Historically, a relatively small number of customers have accounted for a
significant percentage of the Company's total revenues, and the Company expects
that it will continue to experience significant customer concentration for the
foreseeable future. In the year ended December 31, 1996, sales to Ingram Micro,
Inc., America Online, Inc., Circuit City Stores, Inc. and Best Buy Company, Inc.
accounted for 20%, 15%, 14% and 14%, respectively, of total revenues. The
Company does not expect that these customer percentages for 1996 will
necessarily be representative of customer concentration for any future period.
There can be no assurance that such customers or any other customers will in the
future continue to license or purchase products or services from the Company at
levels that equal or exceed those of prior periods, if at all.
INTERNATIONAL
The Company entered into international distribution agreements dated as of
February 29, 1996 with Primax Electronics, Ltd. ("Primax") and with Primax's
wholly-owned subsidiary. These agreements, as amended, provide for the exclusive
distribution of certain of the Company's products in Japan (OEM customers only),
Taiwan, Korea, Hong
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Kong, China, India and ASEAN countries (Singapore, Philippines, Thailand,
Malaysia, Vietnam and Indonesia) for up to four years and nonexclusive
distribution in Europe, Australia, New Zealand, the Middle East and Africa.
Primax's exclusive distribution rights are subject to certain quotas. Upon
failure to meet such quotas, the respective exclusive distribution license will
convert to a nonexclusive license.
RIGHTS OF RETURN AND PRICE PROTECTION
As is common practice in the industry, in the event of a price decrease the
Company generally gives its distributors and resellers credit equal to the
difference between the price originally paid and the new price on units
remaining in the customers' inventories on the date of the price decrease. When
a price decrease is anticipated, the Company establishes reserves for amounts
estimated to be reimbursed to qualifying customers. In addition, resellers and
distributors generally have the right to return excess inventory within
specified time periods. There can be no assurance that the Company's reserves
for price protection and product returns will be sufficient or that any future
returns will not have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The market for the Company's products is relatively new and emerging. Although
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. One source of competition
includes a group of established manufacturers of text-oriented or flatbed
scanners such as Logitech, Microtek, Mustek, PlusTek, UMAX and Visioneer. A
source of potential increased future competition may arise from other current
significant participants in the digital photo market. Certain companies,
including Epson, HP, Kodak and Polaroid, some of which are OEM customers of the
Company, have already shipped photo input devices. In addition, competition with
the Company's EasyPhoto organizer software may emanate from developers of photo-
oriented software such as Fractal Design, Microsoft, and a significant number of
small companies now developing such software. This latter group of companies may
in the future compete with the Company by developing advanced software
capabilities to be offered on a stand-alone basis, bundled with hardware, or
integrated as part of an operating system. The Company believes that as the
digital photo market evolves, it will face competition from a variety of
sources, including those identified above.
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 believes that the principal competitive factors in its market are
integration of hardware and software design, ease of use, product performance,
feature functionality and reliability, price, availability of third-party
applications, timeliness of new product introductions, service, support and size
of installed base, as well as ability to enter into successful strategic
marketing alliances. Although the Company believes that it is competitive with
respect to most of these factors, there can be no assurance that it will remain
competitive in the future.
MANUFACTURING
The Company and Primax entered into a Manufacturing and Purchase Agreement
dated as of February 24, 1996, which provides that, among other rights and
obligations, Primax is the exclusive manufacturer of certain of the Company's
photo scanner products for a minimum 85% of its unit volume subject to Primax's
ability to provide competitive pricing, quality and availability. In addition to
Primax's manufacturing obligations, Primax will in certain circumstances deliver
products it manufactures directly to the Company's international and OEM
customers. The Company will pay Primax directly for all retail products. With
regard to shipments directly from Primax to the Company's OEM customers, Primax
will receive payments directly from these customers and then forward a portion
of such payments to the Company as a royalty.
The Company currently relies on Primax for a majority of its manufacturing
needs, including materials procurement, assembly, system integration, testing
and quality assurance. There can be no assurance that Primax 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
Primax or to increase manufacturing capacity from Primax as required could have
a material adverse effect on the Company's business, results of operations and
financial condition. In the event that Primax is unable to provide competitive
pricing, quality or availability, the Company has the right to obtain an
alternative manufacturing source. However, there can be no assurance that the
Company will be able to obtain such alternative manufacturing source on
favorable terms, if at all. Moreover, commencement of production of products at
new facilities involves certain start-up risks and delays, such as those
associated with the procurement of materials and training of production
personnel.
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In addition, the Company is dependent on sole or limited source suppliers for
certain key components used in its products. These key components include an
ASIC within the EasyPhoto Reader product and the hardware for its EasyPhoto
SmartPage product. The Company has no long term agreements with any of these
suppliers for the purchase of these components. There can be no assurance that
such limited source suppliers will be able to meet the Company's requirements
for certain key components. If the Company or Primax were unable to obtain
sufficient supplies from their current suppliers or develop alternative sources
of these components in a timely manner, the resultant shortage or delay could
have a material adverse impact on the Company's results of operations.
PRODUCT DEVELOPMENT
The Company's research and development team is located at the Company's
headquarters in Sunnyvale, California, and, as of December 31, 1996, employed 24
software and hardware design engineers, technicians and support staff. The
primary activities of these employees are new product development, enhancement
of existing products, product testing and technical documentation development.
A principal focus of the Company's development activities is to integrate its
hardware and software systems with an intelligent user interface. To achieve
this, software development activities play a significant role in designing a
user-friendly interface, incorporating advanced user features and developing an
open environment accessible to third-party developers.
The Company believes that continued investment in research and development is
critical to the Company's future success. The Company is focusing on the
development of enhanced versions of the EasyPhoto organizer software, new photo
capture solutions and ongoing enhancements of existing photo scanner products.
During the years ended December 31, 1996, 1995 and 1994 the Company's research
and development expenses were approximately $2.9 million, $1.5 million and $2.1
million, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PROPRIETARY RIGHTS
The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary technology. Although the Company continues to
implement protective measures and intends to defend its proprietary rights,
there can be no assurance that these measures will be successful. The Company
relies on a combination of patent, copyright and trade secret protection,
nondisclosure agreements and cross-licensing arrangements to establish and
protect its proprietary rights. The Company has several patent applications
pending in the United States and abroad and intends to file additional
applications as appropriate for patents covering its products. There can be no
assurance that patents will issue from any of these pending applications or, if
patents do issue, that claims allowed will be sufficiently broad to protect the
Company's technology. There can also be no assurance that any patents issued to
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection to the Company. In
addition, the laws of certain foreign countries may not protect the Company's
proprietary rights to the same extent as do the laws of the United States. The
Company believes, however, that its success does not depend primarily on its
ownership of patents or other intellectual property rights, but instead depends
primarily upon innovative management, technical expertise and sales and
marketing skills.
The Company has from time to time received, and may receive in the future,
communications from third parties asserting that the Company's products,
trademarks or trade names infringe on the proprietary rights of third parties or
seeking indemnification against such infringement. In response to such
communications, the Company consults with its counsel to assess the basis for
any claims of infringement by the Company's products.
The Company is not aware of any pending or threatened claims of infringement
of the proprietary rights of others with respect to the Company's current or
planned products. However, there can be no assurance that third parties will not
assert such claims or that any such claims will not require the Company to enter
into license agreements or result in costly protracted litigation, regardless of
the merits of such claims. No assurance can be given that any necessary licenses
will be available or that, if available, such licenses will be obtainable on
commercially reasonable terms.
EMPLOYEES
As of December 31, 1996, the Company had a total of 70 employees. Of this
total, 24 were engaged in research, product development and engineering, 23 were
engaged in sales and marketing, and 23 were engaged in finance, operations,
customer support and administrative activities. Competition for employees in the
Company's industry is intense. None of the Company's employees are represented
by a labor union. The Company has not experienced any work stoppages and
considers its relations with its employees to be good.
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ITEM 2. PROPERTIES
Substantially all of the Company's operations are currently located in one
facility of leased office space located in Sunnyvale, California. In February
1997, the Company entered into a lease for an approximately 64,000 square foot
office facility in Mountain View, California and plans to move into such
facility in the second quarter of 1997. This lease will expire in May 2000. The
Company believes that this facility will be adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1996, the Company is not a party to any material pending
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been trading on the Nasdaq National Market
under the symbol "EASY" since October 1, 1996. As of February 28, 1997, there
were approximately 127 holders of record of Storm Technology, Inc. Common Stock.
The following table sets forth the high and low sales prices for the Common
Stock during the quarter indicated.
FISCAL 1996 HIGH LOW
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Fourth quarter $17.00 $4.38
The Company has never declared or paid cash dividends on its Common Stock and
is currently restricted from paying such dividends under its existing line of
credit. The Company currently anticipates that it will retain all future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.
<TABLE>
<CAPTION>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product....................................................... $ 23,440 $ 5,245 $ 655 $ 1,211 $ 2,373
Royalty and other............................................. 1,097 549 2,545 1,772 215
-------- ------- ------- ------- -------
Total revenues............................................. 24,537 5,794 3,200 2,983 2,588
Cost of product revenues........................................ 17,119 3,735 178 276 1,048
-------- ------- ------- ------- -------
Gross profit.................................................... 7,418 2,059 3,022 2,707 1,540
-------- ------- ------- ------- -------
Operating expenses:
Research and development...................................... 2,901 1,494 2,102 1,845 1,219
Marketing and selling......................................... 7,837 3,384 1,981 1,604 922
General and administrative.................................... 2,333 633 628 625 500
In-process research and development........................... 5,000 -- 500 -- --
-------- ------- ------- ------- -------
Total operating expenses................................... 18,071 5,511 5,211 4,074 2,641
-------- ------- ------- ------- -------
Loss from operations............................................ (10,653) (3,452) (2,189) (1,367) (1,101)
Interest income, net............................................ 229 56 96 42 69
-------- ------- ------- ------- -------
Net loss........................................................ $(10,424) $(3,396) $(2,093) $(1,325) $(1,032)
======== ======= ======= ======= =======
Pro forma net loss per common and common
equivalent share/(1)/.......................................... $ (1.20) $ (0.45)
======== =======
Pro forma weighted average number of
common and common equivalent shares
outstanding/(1)/............................................... 8,711 7,588
======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................................... $ 13,801 $ 1,865 $ 2,289 $ 1,663 $ 1,696
Working capital................................................. 18,787 2,573 2,396 422 1,870
Total assets.................................................... 28,199 5,979 3,026 2,261 2,355
Long-term liability............................................. -- -- 100 -- --
Total stockholders' equity...................................... 20,030 2,733 2,541 727 2,013
</TABLE>
/(1)/ See Note 2 of Notes to Consolidated Financial Statements.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements which reflect the current
- ---------------------------------------------------------------------------
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 providing
for the OEM purchase by the Company of photo scanners manufactured by Primax to
be bundled with the Company's EasyPhoto software environment. The Company
decided to enter into the photo capture 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 1996.
In March 1996, the Company acquired from Primax the technology for the
hardware component of the EasyPhoto Reader product, in-process technology of
other photo scanner products and Primax's U.S. subsidiary, which was primarily a
sales distribution company for Primax 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 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.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain line items
from the Company's Consolidated Statement of Operations as a percentage of the
Company's total revenues:
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
Revenues:
Product............................... 95.5% 90.5% 20.5%
Royalty and other..................... 4.5 9.5 79.5
------ ------ ------
Total revenues..................... 100.0 100.0 100.0
Cost of product revenues................ 69.8 64.5 5.6
------ ------ ------
Gross profit............................ 30.2 35.5 94.4
------ ------ ------
Operating expenses:
Research and development.............. 11.8 25.8 65.7
Marketing and selling................. 31.9 58.4 61.9
General and administrative............ 9.5 10.9 19.6
In-process research and development... 20.4 -- 15.6
------ ------ ------
Total operating expenses........... 73.6 95.1 162.8
------ ------ ------
Loss from operations.................... (43.4) (59.6) (68.4)
Interest income, net.................... 0.9 1.0 3.0
------ ------ ------
Net loss................................ (42.5)% (58.6)% (65.4)%
====== ====== ======
COMPARISON OF 1996, 1995 AND 1994 OPERATING RESULTS
REVENUES
Product revenues were $23.4 million in 1996, a significant increase from the
$5.2 million and $0.7 million reported in 1995 and 1994, respectively. 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 totaled $1.1 million, $0.5 million and $2.5 million
in 1996, 1995 and 1994, respectively. The increase in royalty and other revenues
in 1996 from 1995 is primarily due to the OEM licensing of certain photo scanner
technologies, which principally began in the second quarter of 1996. The
decrease in royalty and other revenues from 1994 reflects the Company's relative
focus on the OEM licensing of certain hardware and software products on a
royalty basis during that year.
Annual revenue growth exceeded 300% from 1995 to 1996. Revenues grew
sequentially from the first quarter of 1996 through the fourth quarter of 1996,
although revenues were essentially flat in the fourth quarter of the year. The
Company currently anticipates continued year-to-year revenue growth in 1997.
However, the quarter-to-quarter change in total revenues may fluctuate including
an anticipated decrease in total revenues in the first quarter of 1997 from the
fourth quarter of 1996.
Product revenues from customers are generally recognized when the product is
shipped, provided collectibility is probable. Product revenues from distributors
and authorized resellers are subject to agreements allowing price protection and
certain rights of return. Accordingly, reserves for estimated future returns and
credits for price protection are provided for upon revenue recognition. Such
reserves are estimated based on historical rates of returns and allowances,
distributor inventory levels and other factors. However, there can be no
assurance that these accruals will be sufficient or that any future returns or
price protection charges will not have a material adverse effect on the
Company's business and operating results, especially in light of the rapid
product obsolescence that often occurs during product transitions. Royalty and
other revenues under certain product royalty agreements are generally recognized
upon shipment of related products to customers.
12
<PAGE>
COST OF PRODUCT REVENUES
Cost of product revenues increased to $17.1 million (69.8% of total revenues)
in 1996 from $3.7 million (64.5% of total revenues) and $0.2 million (5.6% of
total revenues) in 1995 and 1994, 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.
GROSS PROFIT
Gross profit was $7.4 million, $2.1 million and $3.0 million, respectively,
for 1996, 1995 and 1994, representing 30.2%, 35.5% and 94.4%, respectively, of
total revenues for such periods. The decrease in gross margin percentage during
1996 and 1995 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 phased out during the year.
The Company currently anticipates gross margins during the second half of 1997
to be relatively comparable with those achieved during 1996, subject to
fluctuations resulting from changes in the mix of retail and OEM product sales
and certain other factors. However, the Company expects gross margins and gross
profits to be adversely affected in the first half of 1997 due principally to
the expected sale of existing retail PhotoDrive inventory to certain OEM
customers during such period.
RESEARCH AND DEVELOPMENT
Research and development expenses totaled $2.9 million, $1.5 million and $2.1
million (11.8%, 25.8% and 65.7% of total revenues) in 1996, 1995 and 1994,
respectively. 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 in absolute dollars in 1995 as compared to 1994 was
primarily due to a decrease in engineering headcount through attrition, combined
with an increase in relative focus on marketing and selling expenses to support
the release of the EasyPhoto Reader product. 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 1995 and 1996. The
Company intends to continue to allocate substantial resources to research and
development, including a significant increase in dollar amounts from 1996 to
1997. However, research and development expenses may vary as a percentage of
total revenues.
MARKETING AND SELLING
Marketing and selling expenses increased to $7.8 million (31.9% of total
revenues) in 1996 from $3.4 million and $2.0 million (58.4% and 61.9% of total
revenues) in 1995 and 1994, respectively. The increase in these expenses in
dollar amounts from 1994 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 1994 to
1996 is attributable to the rapid growth of the Company's revenues in 1995 and
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 $2.3 million (9.5% of total
revenues) in 1996 from $0.6 million (10.9% and 19.6% of total revenues) in both
1995 and 1994. 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. Additionally, as part of the Primax USA
acquisition transaction, in March 1996, the Company recorded $0.6 million of
goodwill, which the Company is amortizing over approximately three years as part
of its general and administrative expenses. The decrease in general and
administrative expenses as a percentage of total revenues from 1994 to 1996 is
attributable to the rapid growth of the Company's revenues in 1995 and 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.
IN-PROCESS RESEARCH AND DEVELOPMENT
In March 1996, the Company acquired certain in-process photo scanner
technologies from Primax 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. In 1994, the Company
acquired certain products and in-process technology of a consumer application
software business, which resulted in a write-off of acquired in-process research
and development.
13
<PAGE>
INTEREST INCOME, NET
Interest income, 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 in the third quarter of 1996. Interest income, net
increased to $0.2 million in 1996 from $0.1 million in both 1995 and 1994,
primarily due to the significant increase in interest bearing cash equivalents
and short-term investments in the fourth quarter of 1996 resulting from the
Company's initial public offering.
PROVISION FOR INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1996. As of
December 31, 1996, the Company has net operating loss carryforwards of
approximately $11.0 million for federal income tax purposes, which can be used
to reduce future taxable income. These net operating loss carryforwards begin to
expire in 2007.
LIQUIDITY AND CAPITAL RESOURCES
From inception through the third quarter of 1996, the Company financed its
working capital and capital expenditure requirements primarily through the
private sale of equity 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 $22.7 million after deducting related issuance costs.
During 1996 the Company generated $24.3 million from financing activities,
primarily from the sale of equity securities. These funds were principally used
to support operating activities, which used cash of $12.1 million for the year
ended December 31, 1996, and the purchase of short-term investments totaling
$6.4 million. Cash used for operating activities included the payment to Primax
of $5.7 million of liabilities acquired in the Primax USA acquisition and the
funding of working capital required to support the Company's rapid growth during
1996. During 1995 and 1994 the Company generated $3.6 million and $3.9 million,
respectively, from the sale of equity securities. These funds were principally
used to support operating activities, which used cash of $3.9 million and $2.8
million in 1995 and 1994, respectively.
As of December 31, 1996, the Company had approximately $13.8 million in cash,
cash equivalents and short-term investments. On May 16, 1996, the Company
entered into a $3.5 million and a $6.5 million revolving line of credit. The
lines of credit are secured by the assets of the Company. The $3.5 million
revolving line of credit is guaranteed by Primax. At December 31, 1996, the
Company had no borrowings under these lines of credit. As of December 31, 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 continue to be invested in
investment grade, interest-bearing securities.
The Company believes that its existing cash and investment balances and the
bank lines of credit 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Investors in the Company should be aware of the following risks and
- ---------------------------------------------------------------------
uncertainties that could materially and adversely affect the Company and the
- ----------------------------------------------------------------------------
market for the Company's securities.
- ------------------------------------
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.
14
<PAGE>
The Company recently began volume shipments of two new products, EasyPhoto
SmartPage and EasyPhoto Drive, in June and August of 1996, respectively. 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 increasing competition from a number of
sources. 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 seasonality
will generally continue.
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.
Primax 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. There can be no assurance that such suppliers will be
able to meet the Company's requirements for quality manufactured products at
competitive prices. Furthermore, obtaining products from an alternative
manufacturing source involves certain production start-up risks and delays, such
as those associated with the procurement of materials and training of production
personnel. Therefore, any inability to obtain quality 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 products. 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
15
<PAGE>
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.
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 annual sales. 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.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Storm Technology, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) on page 32 present fairly, in all material
respects, the financial position of Storm Technology, Inc. at December 31, 1995
and 1996 and the results of its operations and cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
January 23, 1997, except as to Note 9, which is as of March 25, 1997
17
<PAGE>
STORM TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 7,335 $ 1,865
Short-term investments................................ 6,466 --
Accounts receivable, net (Note 4)..................... 7,199 2,676
Receivable from related party......................... 959 --
Inventories........................................... 4,750 1,212
Other current assets.................................. 247 66
-------- -------
Total current assets............................... 26,956 5,819
Property and equipment, net (Note 4).................... 692 160
Goodwill................................................ 448 --
Other assets............................................ 103 --
-------- -------
Total assets..................................... $ 28,199 $ 5,979
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 2,567 $ 342
Accrued liabilities (Note 4).......................... 1,834 314
Payable to related party.............................. 3,768 2,590
-------- -------
Total current liabilities.......................... 8,169 3,246
-------- -------
Commitments and contingency (Notes 8 and 9)
Stockholders' equity (Note 6):
Convertible preferred stock, $0.001
par value, 500,000 and 10,000,000
shares authorized; 0 and 2,377,896 shares
issued and outstanding............................... -- 2
Common stock, $0.001 par value,
30,000,000 and 10,000,000 shares
authorized; 10,424,331 and 938,741 shares
issued and outstanding............................... 10 1
Additional paid-in capital............................ 39,117 11,220
Deferred compensation................................. (183) --
Accumulated deficit................................... (18,914) (8,490)
-------- -------
Total stockholders' equity......................... 20,030 2,733
-------- -------
Total liabilities and
stockholders' equity............................ $ 28,199 $ 5,979
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
STORM TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Revenues:
Product............................ $ 23,440 $ 5,245 $ 655
Royalty and other.................. 1,097 549 2,545
-------- ------- -------
Total revenues................... 24,537 5,794 3,200
Cost of product revenues................ 17,119 3,735 178
-------- ------- -------
Gross profit............................ 7,418 2,059 3,022
-------- ------- -------
Operating expenses:
Research and development........... 2,901 1,494 2,102
Marketing and selling.............. 7,837 3,384 1,981
General and administrative......... 2,333 633 628
In-process research and development 5,000 -- 500
-------- ------- -------
Total operating expenses......... 18,071 5,511 5,211
-------- ------- -------
Loss from operations.................... (10,653) (3,452) (2,189)
Interest income, net.................... 229 56 96
-------- ------- -------
Net loss................................ $(10,424) $(3,396) $(2,093)
======== ======= =======
Pro forma net loss per common and
common equivalent share (Note 2)....... $ (1.20) $ (0.45)
======== =======
Pro forma weighted average number of
common and common equivalent shares 8,711 7,588
(Note 2)............................... ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
STORM TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
--------------------- -------------------- PAID-IN COMPEN- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION DEFICIT TOTAL
----------- ------- ----------- ------ ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993. 869,789 $ 1 878,722 $ 1 $ 3,726 $ -- $ (3,001) $ 727
Issuance of common stock
under stock option plan..... -- -- 21,749 -- 10 -- -- 10
Repurchase of common stock... -- -- (20,990) -- (10) -- -- (10)
Issuance of Series C
convertible preferred stock
for cash, net of issuance
costs of $20................ 818,215 1 -- -- 3,906 -- -- 3,907
Net loss..................... -- -- -- -- -- -- (2,093) (2,093)
---------- --- ---------- --- ------- --------- -------- --------
BALANCE AT DECEMBER 31, 1994. 1,688,004 2 879,481 1 7,632 -- (5,094) 2,541
Issuance of common stock
under stock option plan..... -- -- 59,260 -- 24 -- -- 24
Issuance of Series D
convertible preferred
stock for cash, net of
issuance costs of $23....... 689,892 -- -- -- 3,564 -- -- 3,564
Net loss..................... -- -- -- -- -- -- (3,396) (3,396)
---------- --- ---------- --- ------- --------- -------- --------
BALANCE AT DECEMBER 31, 1995. 2,377,896 2 938,741 1 11,220 -- (8,490) 2,733
Issuance of common stock
under stock option plan..... -- -- 307,630 -- 123 -- -- 123
Repurchase of common stock... -- -- (17,586) -- (7) -- -- (7)
Issuance of Series E
convertible preferred stock
for acquired business and
technology, net of issuance
costs of $128............... 4,214,329 5 -- -- 3,238 -- -- 3,243
Issuance of Series F
convertible preferred stock
for cash, net of issuance
costs of $10................ 171,428 -- -- -- 1,490 -- -- 1,490
Deferred stock compensation
related to the issuance of
certain stock options....... -- -- -- -- 233 (233) -- --
Issuance of common stock in
initial public offering, net
of issuance costs of $2,749. -- -- 2,427,500 2 22,737 -- -- 22,739
Conversion of convertible
preferred stock into
common stock................ (6,763,653) (7) 6,763,653 7 -- -- -- --
Other........................ -- -- 4,393 -- 83 50 -- 133
Net loss..................... -- -- -- -- -- -- (10,424) (10,424)
---------- --- ---------- --- ------- --------- -------- --------
BALANCE AT DECEMBER 31, 1996. -- $-- 10,424,331 $10 $39,117 $ (183) $(18,914) $ 20,030
========== === ========== === ======= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
STORM TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Year ended December 31,
----------------------------------
1996 1995 1994
---------- --------- ---------
Cash flows from operating activities:
Net loss........................... $(10,424) $(3,396) $(2,093)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 384 142 143
Write-off of purchased in-process
research & development.............. 5,000 -- 500
Other non-cash charges............... 69 -- --
Changes in assets and liabilities:
Accounts receivable, net............ (2,661) (2,445) (58)
Receivable from related party....... (396) -- --
Inventories......................... (1,086) (1,181) 7
Other current assets................ (181) 164 (139)
Other long-term assets.............. (103) -- --
Accounts payable.................... 2,065 2,833 (125)
Accrued liabilities................. (256) 28 (1,024)
Payable to related party............ (4,473) -- --
-------- ------- -------
Net cash used in operating
activities........................ (12,062) (3,855) (2,789)
-------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment.... (715) (57) (147)
Sales (purchases) of short-term
investments, net..................... (6,366) 1,747 (451)
Other................................. 268 (100) (345)
-------- ------- -------
Net cash (used in) provided by
investing activities.............. (6,813) 1,590 (943)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred stock, net................. 1,490 3,564 3,907
Proceeds from issuance of common stock 22,862 24 10
Repurchase of common stock............ (7) -- (10)
-------- ------- -------
Net cash provided by financing
activities........................ 24,345 3,588 3,907
-------- ------- -------
Net increase in cash and cash
equivalents............................ 5,470 1,323 175
Cash and cash equivalents at the
beginning of the period................ 1,865 542 367
-------- ------- -------
Cash and cash equivalents at the end of
the period............................. $ 7,335 $ 1,865 $ 542
======== ======= =======
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Storm Technology, Inc. (the "Company") was incorporated in California on
January 17, 1990. The Company is a leading provider of digital photo solutions
which enable consumers and small businesses to input, store, organize, enhance
and use photos on their personal computers.
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 financial statements for the year ended
December 31, 1996 include the results of Primax USA for the period subsequent to
the acquisition date through December 31, 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 $22,739
after deducting related issuance costs. In connection with the initial public
offering, all convertible preferred shares of stock were converted into common
stock.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of the Company's significant accounting policies:
REVENUE RECOGNITION
Revenue from product sales to customers is generally recognized when the
product is shipped, provided collectibility is probable. Revenues from sales to
distributors and authorized resellers are subject to agreements allowing price
protection and certain rights of return. Accordingly, reserves for estimated
future returns and credits for price protection are provided for upon revenue
recognition. Such reserves are estimated based on historical rates of returns
and allowances, distributor inventory levels and other factors.
Revenue from royalty fees under certain product royalty agreements is
generally recognized upon shipment of related products to customers.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents and investments with original maturity dates of greater than three
months to be short-term investments. All of the Company's short-term
investments, comprised primarily of debt instruments with contractual maturities
of less than one year, have been classified as available-for-sale. At December
31, 1996, the fair value of the Company's investments approximated cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including short-
term investments, accounts receivable, receivable from related party and payable
to related party, approximate fair values.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents, short-
term investments and accounts receivable. Cash equivalents and short-term
investments, which are primarily comprised of investments in money market funds
and institutional debt instruments, are maintained with high quality
institutions and the composition and maturities are regularly monitored by
management. The Company's accounts receivable are derived from revenues earned
from customers located primarily in the U.S. The Company performs ongoing
evaluations of its customers' financial condition and maintains an allowance for
doubtful accounts based upon the expected collectibility.
22
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes the revenues from customers in excess of 10% of
total revenues for each applicable period:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- ------
Ingram Micro Inc............ 20% -- --
America Online Inc.......... 15% -- --
Circuit City Stores, Inc.... 14% 27% --
Best Buy Company, Inc....... 14% 11% --
Apple Computer, Inc......... -- -- 41%
Radius Inc.................. -- -- 39%
At December 31, 1996, Ingram Micro Inc., America Online Inc., Circuit City
Stores, Inc. and Best Buy Company, Inc. accounted for 20%, 18%, 13% and 20% of
total accounts receivable, respectively. At December 31, 1995, Circuit City
Stores, Inc. and Best Buy Company, Inc. accounted for 34% and 25% of total
accounts receivable, respectively. At December 31, 1994, Radius Inc. accounted
for 67% of total accounts receivable.
INVENTORIES
Inventories, which consist principally of finished goods, are stated at the
lower of cost, determined using the first-in, first-out method, or market.
The Company currently buys most of its photo readers from two suppliers.
Although there are a limited number of manufacturers of the photo readers,
management believes that other suppliers could provide similar photo readers on
comparable terms. A change in suppliers, however, could cause a disruption in
the availability of products, which may adversely affect Company sales and
operating results.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based upon the estimated useful lives of the assets ranging
from two to five years.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred prior to establishment of technological
feasibility are expensed as incurred. The Company defines establishment of
technological feasibility as the completion of a working model. Software
development costs incurred subsequent to the establishment of technological
feasibility through the period of general market availability of products will
be capitalized, if material. To date, all software development costs have been
expensed.
GOODWILL
Goodwill represents cost in excess of net assets acquired from Primax Taiwan
on March 18, 1996 (see Note 3). Such goodwill is being amortized over a period
of approximately three years and amortization expense totaled $156 for the year
ended December 31, 1996. The Company periodically reviews the value of its
goodwill to determine if an impairment has occurred. The Company measures the
potential impairment of recorded goodwill by comparing the undiscounted expected
future operating cash flows in relation to its net investment. Based on its
review, the Company does not believe that an impairment of its goodwill has
occurred.
23
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ADVERTISING EXPENSE
Advertising is expensed as incurred and amounted to $993, $423 and $69 for the
years ended December 31, 1996, 1995 and 1994, respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability approach. The
asset and liability approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities.
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 during the
period from April 1995 to September 1996 have been included in the computation
as if they were outstanding for all periods through September 1996.
Historical net loss per share for 1994 has not been presented since such
amount is not deemed to be meaningful due to the significant change in the
Company's capital structure which occurred in connection with the Company's
initial public offering.
STOCK-BASED COMPENSATION
The Company adopted Statement of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") in the year ending December 31, 1996. The
Company has elected to continue to account for employee stock options in
accordance with Accounting Principles Board Opinion No. 25 and to adopt the
"disclosure only" alternative described in SFAS 123 (see Note 6).
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 3--ACQUISITIONS:
On March 18, 1996, the Company acquired all outstanding shares of Primax USA
and certain technologies from Primax 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. The value
assigned to in-process research and development was determined by an independent
appraiser and was immediately charged to operations.
In conjunction with the acquisition, liabilities were assumed as follows:
Tangible assets........................ $ 5,287
In-process research and development.... 5,000
Goodwill............................... 604
Series E Preferred Stock issued, net... (3,243)
-------
Liabilities assumed.................... $(7,648)
=======
24
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The Company's consolidated financial statements for the year ended December
31, 1996 include Primax USA for the period subsequent to the acquisition date.
The following table presents the unaudited pro forma consolidated results of
operations for the years ended December 31, 1996 and 1995 as if the transaction
completed in 1996 had been completed at the beginning of the periods presented,
with the pro forma adjustments giving effect principally to the elimination of
service revenues recognized by Primax USA related to services performed for
Storm, the elimination of the non-recurring charge for in-process research and
development acquired from Primax Taiwan and the amortization of goodwill:
YEAR ENDED DECEMBER 31,
-------------------------
(UNAUDITED)
1996 1995
----------- -----------
Total revenues.......................... $26,641 $13,895
Net loss................................ (5,903) (4,746)
Pro forma net loss per common and
common equivalent share (see Note 2)... $ (0.68) $ (0.63)
In connection with the acquisition, the Company also entered into a series of
distribution agreements with Primax Taiwan. The agreements provide Primax Taiwan
with an exclusive license to manufacture and distribute certain products owned
by the Company in both domestic and international markets for a term of four
years, subject to Primax Taiwan providing competitive pricing, quality and
availability.
In 1994, the Company acquired certain assets of CyberPuppy Software, Inc.
("CyberPuppy") for a total purchase price of $550, which included minimum
guaranteed royalties totaling $200. Of the purchase price, $500 was allocated to
in-process research and development, and charged to expense during 1994. During
1995, the Company terminated their rights to the acquired intellectual property
and returned the remaining assets of the CyberPuppy business in exchange for
cancellation of the remaining minimum guaranteed royalties commitment.
NOTE 4--BALANCE SHEET COMPONENTS:
DECEMBER 31,
-------------------
1996 1995
-------- --------
ACCOUNTS RECEIVABLE, NET CONSISTED OF:
Accounts receivable..................... $7,950 $2,832
Allowance for sales returns and other (342) (137)
credits................................
Allowance for doubtful accounts......... (409) (19)
------ ------
$7,199 $2,676
====== ======
PROPERTY AND EQUIPMENT, NET CONSISTED
OF:
Computer equipment...................... $1,194 $ 521
Furniture and fixtures.................. 118 46
------ ------
1,312 567
Less: accumulated depreciation.......... (620) (407)
------ ------
$ 692 $ 160
====== ======
ACCRUED LIABILITIES CONSISTED OF:
Accrued employee benefits............... $ 366 $ 92
Marketing costs......................... 750 132
Other................................... 718 90
------ ------
$1,834 $ 314
====== ======
25
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5--RELATED PARTY TRANSACTIONS:
During the years ended December 31, 1996 and 1995, Storm purchased inventories
from Primax Taiwan totaling $10,375 and $4,665, respectively. During the year
ended December 31, 1996 Storm earned royalty and other revenues from Primax
Taiwan totaling approximately $950.
The receivable from related party at December 31, 1996 of $959 is due from
Primax Taiwan and consists of royalty and other income and certain expenditures
made by Storm on behalf of Primax Taiwan. The payable to related party in the
amount of $3,768 and $2,590 at December 31, 1996 and 1995, respectively,
primarily consists of the amounts payable to Primax Taiwan for purchased
inventories.
NOTE 6--STOCKHOLDERS' EQUITY:
DELAWARE REINCORPORATION AND REVERSE STOCK SPLIT
In September 1996, the Company completed a reincorporation in the State of
Delaware, including a one for four reverse stock split of the outstanding shares
of the Company's common stock. All share and per share data have been
retroactively adjusted to reflect this reincorporation.
WARRANTS FOR COMMON STOCK
On May 22, 1996, in connection with a strategic marketing agreement, the
Company issued a warrant, as amended, to Intel to purchase 39,680 shares of
Common Stock at a price of $8.75 per share. In connection with the issuance of
such warrant and the related sale of Series F Convertible Preferred stock to
Intel, the Company entered into an agreement whereby it is required to notify
Intel of any proposed transaction that would result in a change of control or a
sale of substantially all of the Company's assets. In the event of such a
proposed transaction, Intel has the right to propose a competitive offer that
the Company's Board of Directors must consider in good faith.
AMENDED AND RESTATED STOCK OPTION PLAN
The Amended and Restated Stock Option Plan (the "Option Plan") allows for the
issuance of incentive and nonqualified stock options for the purchase of the
Company's Common Stock by employees and consultants of the Company. The Option
Plan provides for the issuance of up to approximately 1,100,000 stock options as
of December 31, 1996 and provides for an annual increase in the shares reserved
for grant equal to 4% of the Company's outstanding common stock at the end of
the immediately preceding fiscal year.
Initial options granted under the Option Plan generally vest 25% after the
first year and ratably each month over the remaining thirty six month period.
Options granted subsequent to the initial grant vest ratably over four years.
Options granted under the Option Plan are immediately exercisable and subject to
a repurchase option which expires over the four year vesting period. As of
December 31, 1996, 187,000 shares of Common Stock, subject to repurchase by the
Company, have been issued upon exercise of options granted under the Option
Plan.
Options granted under the Option Plan are generally for periods not to exceed
ten years, and generally must be issued at prices not less than 100% and 85% for
incentive and nonqualified stock options, respectively, of the fair market value
of the stock on the date of grant. Options granted to stockholders who own
greater than 10% of the outstanding stock are for periods not to exceed five
years, and must be issued at prices not less than 110% of the fair market value
of the stock on the date of grant.
26
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes activity under the Option Plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES OPTIONS EXERCISE PRICE EXERCISE PRICE
AVAILABLE OUTSTANDING PER SHARE PER SHARE
---------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993... 160,455 200,873 $ 0.40 $0.40
Shares repurchased............. 20,990 -- -- --
Options granted................ (117,750) 117,750 0.40 0.40
Options exercised.............. -- (21,749) 0.40 0.40
Options canceled............... 67,318 (67,318) 0.40 0.40
-------- --------
BALANCE AT DECEMBER 31, 1994... 131,013 229,556 0.40 0.40
Options granted................ (36,705) 36,705 0.40 0.40
Options exercised.............. -- (59,260) 0.40 0.40
Options canceled............... 87,896 (87,896) 0.40 0.40
-------- --------
BALANCE AT DECEMBER 31, 1995... 182,204 119,105 0.40 0.40
Additional shares authorized... 597,577 -- -- --
Shares repurchased............. 17,586 -- -- --
Options granted................ (753,817) 753,817 0.40-12.63 3.92
Options exercised.............. -- (307,630) 0.40-5.00 0.41
Options canceled............... 96,518 (96,518) 0.40-8.00 5.16
-------- --------
BALANCE AT DECEMBER 31, 1996... 140,068 468,774 0.40-12.63 5.01
======== ========
</TABLE>
1996 EMPLOYEE STOCK PURCHASE PLAN
In June 1996, the Board approved the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan permits eligible employees to purchase
Common Stock at a discount through accumulated payroll deductions. The price at
which shares are purchased under the Purchase Plan is equal to 85% of the fair
market value of a share of Common Stock on the first day of the offering period
or the last day of the purchase period, whichever is lower. A total of 75,000
shares of Common Stock have been reserved for issuance under the Purchase Plan.
1996 OUTSIDE DIRECTORS STOCK OPTION PLAN
In June 1996, the Company commenced the 1996 Outside Directors Stock Option
Plan (the "Directors Plan"). The Directors Plan provides for the automatic grant
of nonstatutory stock options to directors of the Company who are not employees
of the Company or Primax Taiwan ("Outside Directors"). The exercise price per
share of options granted under the Directors Plan will be equal to the fair
market value of a share of Common Stock on the date of grant. Shares subject to
an option granted under the Directors Plan vest over two years and options
granted under the Directors Plan must be exercised within ten years from the
date of grant. Each Outside Director was initially granted an option to purchase
11,250 shares of Common Stock at a price of $4.00 per share. A total of 112,500
shares of Common Stock have been reserved for issuance under the Director's
Plan, including 33,750 options granted prior to December 31, 1996.
27
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes information about employee and director stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES
-------------------------------------------------
<S> <C> <C> <C> <C>
$ 0.40 $4.00-6.00 $8.00-12.63 $0.40-12.63
-------- ---------- ----------- -----------
Options outstanding:
Number outstanding................. 158,541 124,250 219,733 502,524
Weighted average remaining
contractual life.................. 8.44 9.42 9.69 9.23
Weighted average exercise price.... $0.40 $5.05 $8.15 $4.94
Options vested:
Number vested...................... 104,323 51,093 12,515 167,931
Weighted average exercise price.... $0.40 $4.79 $8.03 $2.30
</TABLE>
FAIR VALUE DISCLOSURE
Had compensation cost for the Company's option plans been determined based on
fair value at the grant dates, as prescribed in SFAS 123, the Company's 1996 net
loss and net loss per share would have been $(10,516) and $(1.21), respectively.
The related pro forma impact to the reported 1995 results of operations is
immaterial. Additionally, the fair value of the shares granted under the
Purchase Plan is considered to have an immaterial impact on this calculation.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following assumptions: zero dividend yield;
risk-free interest rate of approximately 6%; a weighted average expected option
term of approximately 3.5 years; and an expected volatility rate of
approximately 67% for options granted during the period October 1, 1996 to
December 31, 1996. The weighted average fair value of options granted during the
year ended December 31, 1996 and 1995 was $0.71 and $0.07, respectively. The
above pro forma amounts include compensation expense based on the fair value of
stock options granted and vested during the years ended December 31, 1996 and
1995, and exclude the effects of stock options granted prior to January 1, 1995.
Furthermore, the determination of the fair value of all future option grants
will include an expected volatility factor in addition to the factors described
above. Accordingly, the above pro forma disclosures are not representative of
the pro forma effects of reported net income for future years.
NOTE 7--INCOME TAXES:
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1996. As of
December 31, 1996, the Company has net operating loss carryforwards of
approximately $11,000 for federal income tax purposes, which can be used to
reduce future taxable income. These net operating loss carryforwards begin to
expire in 2007.
Deferred income tax assets (liabilities) consist of the following:
DECEMBER 31,
-------------------
1996 1995
-------- --------
Deferred tax assets:
Federal and state loss carryforwards
and credits......................... $ 4,256 $ 1,893
Reserves, accruals and purchased
technology.......................... 1,405 180
Deferred tax asset valuation
allowance........................... (5,661) (2,073)
------- -------
Net deferred tax assets................. $ -- $ --
======= =======
28
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the reliability of
the deferred tax assets such that a full valuation allowance has been recorded.
Under the Tax Reform Act of 1986, the annual benefit from net operating loss
carryforwards is restricted by cumulative ownership changes of 50 percent over a
three-year period, as defined. The acquisition of Primax USA and certain
technologies from Primax Taiwan in March 1996 triggered such an ownership change
thus restricting the potential benefits from utilization of tax net operating
loss carryforwards generated through the date of acquisition to usage of
approximately $300 to $400 per year. Accordingly, the balance of net operating
loss carryforwards at December 31, 1996 has been adjusted to reflect the
limitation.
The Internal Revenue Service ("IRS") is examining Primax USA's federal income
tax returns. In January 1996, Primax USA received an IRS tax assessment for the
tax years ended December 31, 1991, 1992 and 1993. Primax Taiwan has agreed to
indemnify the Company with respect to this matter.
NOTE 8--COMMITMENTS:
LEASES
The company has entered into a noncancelable operating lease for office space
and certain equipment leases which expire at various dates through 2000. As of
December 31, 1996, future minimum noncancelable lease commitments under the
Company's leases are as follows:
Year ending December 31,
1997......................................... $255
1998......................................... 255
1999......................................... 255
2000......................................... 86
-----
$851
====
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $399,
$315 and $303, respectively. In February 1997, the Company entered into a
noncancelable lease for additional office space which expires in the year 2000
(unaudited).
LINES OF CREDIT
On May 16, 1996, the Company entered into a loan and security agreement with a
bank, providing for $3,500 and $6,500 revolving lines of credit. The lines of
credit bear interest at the bank's prime rate and are secured by the Company's
cash, cash equivalents, investments, accounts receivable, inventories, property
and equipment and all intellectual property. All obligations under the $3,500
revolving line of credit are guaranteed by Primax Taiwan. The lines of credit
contain certain covenants limiting any dividend payments as well as maintenance
of financial ratios, future profitability and minimum tangible net worth. The
lines of credit expire on May 15, 1997 and November 15, 1997, respectively.
NOTE 9--CONTINGENCY:
In March 1997, a suit was filed in the Superior Court of California naming
Storm, certain of the Company's officers, and certain other entities as
defendants in a purported class action lawsuit. The lawsuit alleges certain
violations of state and federal securities laws in connection with the Company's
operating results for the fourth quarter of 1996, and seeks unspecified damages.
The Company believes that the allegations are without merit and intends to
vigorously defend itself in such matter.
29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents the Company's unaudited operating results for
each of the eight quarters in the period ended December 31, 1996 and certain
items as a percentage of total revenues for the respective periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
---------- --------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Consolidated Statement of
Operations Data:
Revenues:
Product..................... $ 285 $ 1,257 $ 795 $ 2,908 $ 2,435 $ 5,198 $ 7,853 $ 7,954
Royalty and other........... 405 56 51 37 94 294 361 348
-------- ------- -------- ------- -------- ------- ------- -------
Total revenues............. 690 1,313 846 2,945 2,529 5,492 8,214 8,302
Cost of product revenues...... 178 896 576 2,085 1,981 3,716 5,805 5,617
-------- ------- -------- ------- -------- ------- ------- -------
Gross profit.................. 512 417 270 860 548 1,776 2,409 2,685
-------- ------- -------- ------- -------- ------- ------- -------
Operating expenses:
Research and development.... 455 294 358 387 459 666 865 911
Marketing and selling....... 626 763 890 1,105 1,402 2,017 1,988 2,430
General and administrative.. 188 153 145 147 225 477 761 870
In-process research and
development................. -- -- -- -- 5,000 -- -- --
-------- ------- -------- ------- -------- ------- ------- -------
Total operating expenses... 1,269 1,210 1,393 1,639 7,086 3,160 3,614 4,211
-------- ------- -------- ------- -------- ------- ------- -------
Loss from operations.......... (757) (793) (1,123) (779) (6,538) (1,384) (1,205) (1,526)
Interest income, net.......... 16 9 8 23 19 14 (30) 226
-------- ------- -------- ------- -------- ------- ------- -------
Net loss...................... $ (741) $ (784) $ (1,115) $ (756) $ (6,519) $(1,370) $(1,235) $(1,300)
======== ======= ======== ======= ======== ======= ======= =======
As a percentage of total revenues:
Revenues:
Product..................... 41.3% 95.7% 94.0% 98.7% 96.3% 94.6% 95.6% 95.8%
Royalty and other........... 58.7 4.3 6.0 1.3 3.7 5.4 4.4 4.2
-------- ------- -------- ------- -------- ------- ------- -------
Total revenues............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of product revenues...... 25.8 68.2 68.1 70.8 78.3 67.7 70.7 67.7
-------- ------- -------- ------- -------- ------- ------- -------
Gross profit.................. 74.2 31.8 31.9 29.2 21.7 32.3 29.3 32.3
-------- ------- -------- ------- -------- ------- ------- -------
Operating expenses:
Research and development.... 66.0 22.4 42.3 13.1 18.2 12.1 10.5 10.9
Marketing and selling....... 90.7 58.1 105.2 37.5 55.4 36.7 24.2 29.3
General and administrative.. 27.2 11.7 17.1 5.0 8.9 8.7 9.3 10.5
In-process research and
development................. -- -- -- -- 197.7 -- -- --
-------- ------- -------- ------- -------- ------- ------- -------
Total Operating expense.... 183.9 92.2 164.6 55.6 280.2 57.5 44.0 50.7
-------- ------- -------- ------- -------- ------- ------- -------
Loss from operations.......... (109.7) (60.4) (132.7) (26.4) (258.5) (25.2) (14.7) (18.4)
Interest income, net.......... 2.3 0.7 0.9 0.7 0.7 0.3 (0.3) 2.7
-------- ------- -------- ------- -------- ------- ------- -------
Net loss...................... (107.4)% (59.7)% (131.8)% (25.7)% (257.8)% (24.9)% (15.0)% (15.7)%
======== ======= ======== ======= ======== ======= ======= =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
<PAGE>
PART III
Certain information required by Part III is omitted from this Annual Report on
Form 10-K because the Company will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") within 120 days after the end of the
fiscal year covered by this Report, and certain information included in the
Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information concerning the Company's directors required by this item is
incorporated by reference to the information under the heading "Election of
Directors" in the Company's Proxy Statement.
(b) Executive Officers of the Registrant
The names, ages and positions of the executive officers of the Company, as
of February 28, 1997, are as follows:
NAME AGE POSITION
- ----------------------------- --- ------------------------------------------
L. William Krause 54 President, Chief Executive Officer and
Director
Adriaan Ligtenberg 41 Chief Technical Officer, Vice President,
Engineering and Director
Rick M. McConnell 31 Chief Financial Officer and Vice
President, Finance and Administration
Barbara K. Windham 38 Vice President, Marketing
Robert F. Preston 39 Vice President, Sales
Joseph G. Finegold 46 Vice President, Operations
L. William Krause has served as President and Chief Executive Officer of the
Company since joining the Company in October 1991. Prior to joining the Company,
Mr. Krause spent ten years at 3Com Corporation, a manufacturer of global data
networking systems, where he was President and Chief Executive Officer until he
retired in September 1990. He continued as Chairman of the Board for 3Com
Corporation until 1993. Previously, Mr. Krause served in various marketing and
general management executive positions at Hewlett-Packard, a manufacturer of
computer hardware and software. Mr. Krause currently serves as a director of
Sybase, Inc. and Aureal Semiconductor, Inc.
Adriaan Ligtenberg founded the Company and has served as Director since its
inception, as Chief Technical Officer and Vice President, Engineering since
October 1991, and was its first Chief Executive Officer. Prior to Storm, Mr.
Ligtenberg co-founded C-Cube Microsystems Inc., a manufacturer of video
compression hardware, and served as Vice President from May 1989 until December
1989. Prior to that, Mr. Ligtenberg was employed for five years by AT&T Bell
Laboratories Inc., a researcher for the communications industry, where he served
as Head of the Image Systems Group. He has been a core member of the JPEG and
MPEG image compression standards committees of the ISO/CCITT and holds a Ph.D.
from the Swiss Federal Institute of Technology.
Rick M. McConnell has served as Chief Financial Officer and Vice President,
Finance and Administration of the Company since January 1994. Prior to that, Mr.
McConnell was Director of Finance and Administration from June 1992 until
January 1994, after receiving his Masters in Business Administration from the
Stanford Graduate School of Business. From July 1987 to June 1990, Mr. McConnell
was employed as a financial engineer by The First Boston Corporation,
predecessor to CS First Boston, a financial services firm.
Barbara K. Windham has served as Vice President, Marketing of the Company
since November 1994. Ms. Windham served as a Director of Marketing for
Electronic Arts, a marketer of entertainment software, from January 1988 to
April 1994. Previously, Ms. Windham worked at Worlds of Wonder Inc. and spent
five years at Procter & Gamble Co. in various marketing management positions.
Robert F. Preston has served as Vice President, Sales of the Company since
February 1996. From July 1993 to January 1996, Mr. Preston was Vice President of
Sales of Xircom, Inc., a manufacturer of network access products. In January
1989, Mr. Preston founded Robert Preston & Associates, a full service sales and
marketing consulting firm, and served as its President from January 1989 to July
1993. Prior to 1989, Mr. Preston served in various sales and marketing positions
at Personal Computer Products, Inc., AST Research, Inc. and International
Business Machine Corp.
Joseph G. Finegold has served as Vice President, Operations of the Company
since June 1996. From November 1995 to June 1996, Mr. Finegold served as
Director of Production at Silicon Graphics, Inc., a manufacturer of engineering
workstations. From October 1994 to November 1995, Mr. Finegold was Vice
President of FAFCO, Inc., a solar heating and thermal energy storage company.
From December 1991 to October 1994, Mr. Finegold served as a product marketing
manager and a manufacturing manager for Quantum Corporation, a disk drive
company. From June 1985 to December 1991, Mr. Finegold served in the positions
of manufacturing manager and product manager for Hewlett-Packard.
31
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K:
1. FINANCIAL STATEMENTS: PAGE
----
Report of Independent Accountants.......................... 17
Consolidated Balance Sheet................................. 18
Consolidated Statement of Operations....................... 19
Consolidated Statement of Stockholders' Equity............. 20
Consolidated Statement of Cash Flows....................... 21
Notes to Consolidated Financial Statements................. 22
2. FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted because the information called
for is not required or is shown in the Consolidated Financial Statements or
Notes thereto.
32
<PAGE>
3. EXHIBITS:
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.
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.
33
<PAGE>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
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.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the fourth quarter of the year ended
December 31, 1996.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant, Storm Technology, Inc., a corporation organized and
existing under the laws of the State of Delaware, has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Sunnyvale, State of California, on March 25, 1997.
STORM TECHNOLOGY, INC.
By: /S/RICK M. MCCONNELL
--------------------
RICK M. MCCONNELL
CHIEF FINANCIAL OFFICER
AND VICE PRESIDENT, FINANCE AND ADMINISTRATION
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
POWER OF ATTORNEY
Each of the officers and directors of Storm Technology, Inc. whose signature
appears below hereby constitutes and appoints L. William Krause and Rick
McConnell and each of them, their true and lawful attorneys-in-fact and agents,
with full power of substitution, each with power to act alone, to sign and
execute on behalf of the undersigned any amendment or amendments to this Report
on Form 10-K, and to perform any acts necessary to be done in order to file such
an amendment, and each of the undersigned does hereby ratify and confirm all
that said attorneys-in-fact and agents, or their and his substitutes, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed below on March 25, 1997 by the following
persons in the capacities indicated.
SIGNATURE TITLE
- ----------------------------- -----------------------------------------------
/S/ L. WILLIAM KRAUSE Chief Executive Officer, President and
- ----------------------------- Director (Principal Executive Officer)
L. William Krause
/S/ ADRIAAN LIGTENBERG Chief Technical Officer, Vice President,
- ----------------------------- and Director
Adriaan Ligtenberg
/S/ RICK M. MCCONNELL Chief Financial Officer and Vice President,
- ----------------------------- Finance and Administration (Principal
Rick M. McConnell Financial and Accounting Officer)
/S/ RICHARD C. ALBERDING Director
- -----------------------------
Richard C. Alberding
Director
- ------------------------------
Mary Jane Elmore
Director
- -----------------------------
Raymond Liang
/S/ ANDREW S. RAPPAPORT Director
- -----------------------------
Andrew S. Rappaport
35
<PAGE>
EXHIBIT 11.1
STORM TECHNOLOGY, INC.
CALCULATION OF PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
------------ ----------
Weighted Average Common and Common
Equivalent Shares:
Series A Preferred Stock............... 563 750
Series B Preferred Stock............... 90 120
Series C Preferred Stock............... 614 818
Series D Preferred Stock............... 518 446
Series E Preferred Stock............... 3,087 3,877
Series F Preferred Stock............... 68 30
Common Stock........................... 3,533 1,230
Common Stock Options................... 229 305
Warrants............................... 9 12
-------- -------
8,711 7,588
======== =======
Net Loss................................ $(10,424) $(3,396)
======== =======
Pro forma net loss per common and $ (1.20) $ (0.45)
common equivalent share................ ======== =======
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,335
<SECURITIES> 6,466
<RECEIVABLES> 7,950
<ALLOWANCES> 751
<INVENTORY> 4,750
<CURRENT-ASSETS> 26,956
<PP&E> 1,312
<DEPRECIATION> 620
<TOTAL-ASSETS> 28,199
<CURRENT-LIABILITIES> 8,169
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> (183)
<TOTAL-LIABILITY-AND-EQUITY> 28,199
<SALES> 23,440
<TOTAL-REVENUES> 24,537
<CGS> 17,119
<TOTAL-COSTS> 17,119
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,424)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,424)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,424)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
