<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 0-21449
STORM TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0239305
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1395 Charleston Road
Mountain View, CA 94043
(Address of principal executive office and zip code)
(650) 691-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of
September 30, 1997 was 10,493,972
This report, including exhibits, consists of 16 pages. The exhibit index
begins on page 14.
<PAGE>
STORM TECHNOLOGY, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
-----
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheet at September 30, 1997 and 3
December 31, 1996..................................................
Condensed Consolidated Statement of Operations for the three and
nine month periods ended September 30, 1997 and 1996............... 4
Condensed Consolidated Statement of Cash Flows for the nine months
ended September 30, 1997 and 1996.................................. 5
Notes to Unaudited Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 7
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 13
Item 2. Changes in Securities...................................... 13
Item 3. Defaults Upon Senior Securities............................ 13
Item 4. Submission of Matters to a Vote of Security Holders........ 13
Item 5. Other Information.......................................... 13
Item 6. Exhibits and Reports on Form 8-K........................... 13
Signatures.......................................................... 13
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 10,735 $ 7,335
Short-term investments................................ -- 6,466
Accounts receivable, net.............................. 9,245 8,158
Inventories........................................... 2,214 4,750
Other current assets.................................. 56 247
-------- --------
Total current assets............................... 22,250 26,956
Property and equipment, net............................. 1,320 692
Other assets............................................ 40 551
-------- --------
Total assets....................................... $ 23,610 $ 28,199
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 1,129 $ 2,567
Accrued liabilities................................... 2,519 1,834
Payable to related party.............................. 11,478 3,768
Line of credit........................................ 1,000 --
Current portion of long-term obligations.............. 145 --
-------- --------
Total current liabilities............................ 16,271 8,169
Long-term obligations................................... 435 --
-------- --------
Total liabilities................................... 16,706 8,169
-------- --------
Contingency (Note 4)
Stockholders' equity:
Common stock and additional paid-in capital........... 39,197 39,127
Deferred compensation................................. (89) (183)
Accumulated deficit................................... (32,204) (18,914)
-------- --------
Total stockholders' equity........................... 6,904 20,030
-------- --------
Total liabilities and stockholders' equity.......... $ 23,610 $ 28,199
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product.............................. $12,438 $ 7,853 $ 20,698 $15,486
Royalty and other.................... 112 361 501 749
------- ------- -------- -------
Total revenues................. 12,550 8,214 21,199 16,235
Cost of product revenues.............. 10,976 5,805 21,044 11,502
------- ------- -------- -------
Gross profit.......................... 1,574 2,409 155 4,733
------- ------- -------- -------
Operating expenses:
Research and development........... 1,206 865 3,611 1,990
Marketing and selling.............. 2,233 1,988 6,312 5,407
General and administrative......... 1,198 761 3,787 1,463
In-process research and development -- -- -- 5,000
------- ------- -------- -------
Total operating expenses....... 4,637 3,614 13,710 13,860
------- ------- -------- -------
Loss from operations.................. (3,063) (1,205) (13,555) (9,127)
Interest income (expense), net........ 85 (30) 265 3
------- ------- -------- -------
Net loss.............................. $(2,978) $(1,235) $(13,290) $(9,124)
======= ======= ======== =======
Net loss per common and common
equivalent share..................... $(0.28) $(0.15) $(1.27) $(1.12)
======= ======= ======== =======
Weighted average number of common
and common equivalent shares......... 10,473 8,334 10,434 8,143
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(13,290) $(9,124)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................... 414 244
Write-off of purchased in-process research and
development.................................... -- 5,000
Other non-cash charges.......................... 481 49
Changes in assets and liabilities:
Accounts receivable......................... (1,087) (1,796)
Inventories................................. 2,536 (2,134)
Other current assets........................ 191 (210)
Other long-term assets...................... 63 (122)
Accounts payable............................ (1,438) 1,738
Accrued liabilities......................... 685 (620)
Payable to related party.................... 7,710 2,635
-------- -------
Net cash used in operating activities........... (3,735) (4,340)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment.................. (1,042) (400)
Sales of short-term investments..................... 6,466 100
Other............................................... -- 268
-------- -------
Net cash provided by (used in) investing
activities..................................... 5,424 (32)
-------- -------
Cash flows from financing activities:
Net proceeds from line of credit.................... 1,000 1,860
Proceeds from secured equipment financings.......... 619 --
Repayment of secured equipment financings........... (39) --
Proceeds from issuance of common stock.............. 155 123
Proceeds from issuance of convertible preferred
stock and other.................................... (24) 1,490
-------- -------
Net cash provided by financing activities....... 1,711 3,473
-------- -------
Net increase (decrease) in cash and cash equivalents... 3,400 (899)
Cash and cash equivalents at the beginning of the
period................................................ 7,335 1,865
-------- -------
Cash and cash equivalents at the end of the period..... $ 10,735 $ 966
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION:
Storm Technology, Inc. (the "Company" or "Storm") creates personal scanners
that enable consumers to input, organize, store and use digital images easily
with their computers.
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1996, including notes
thereto, included in the Company's Form 10-K. The results of operations for the
interim periods included in these financial statements are not necessarily
indicative of the results to be expected for any future period or the entire
fiscal year.
NOTE 2--NET LOSS PER SHARE:
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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." The statement is
effective for the Company's annual fiscal year ending December 31, 1997 and is
not expected to have a material impact on the Company's reported earnings per
share disclosures.
NOTE 3--PRICE PROTECTION AND OTHER CHARGES:
During the quarter ended March 31, 1997, the Company recorded a provision for
price protection, totaling approximately $1.7 million, associated with the
Company's planned price reductions in the second quarter of 1997. Such
provision was charged as a reduction of first quarter net product revenues.
During the first quarter of 1997, the Company also recorded an approximate $1.1
million charge to cost of product revenues primarily relating to the write-down
of the Company's EasyPhoto Drive inventory for purposes of reconfiguration and
sale to OEM customers.
NOTE 4--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.
In July 1997, the court dismissed the plaintiff's complaint with leave to amend
certain causes of action. An amended complaint was filed in October 1997. The
Company believes that the allegations contained in the lawsuit are without merit
and intends to vigorously defend itself in such matter.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements which reflect the current
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 10-K, that could cause actual results to differ materially from
historical results or those currently anticipated.
OVERVIEW
The Company creates personal scanners that enable consumers to input,
organize, store and use digital images easily with their computers. 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.
During 1994, the Company began development of its EasyPhoto organizer software
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. In September 1994, the Company
entered into an agreement with Primax Electronics, Ltd. ("Primax") providing for
the OEM purchase by the Company of photo scanners manufactured by Primax to be
bundled with the Company's EasyPhoto software. The Company decided to enter into
the photo input business primarily to take advantage of a consumer need for an
integrated hardware/software solution that is easy to install and use and is
affordable at consumer price points. Sales of the EasyPhoto Reader product began
in February 1995.
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 was purchased
on an OEM basis from a third party. In August 1997, the Company began
distribution of its EasyPhoto SmartPage Pro product, Storm's initial release of
a second generation scanner with increased quality and consumer functionality.
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.
In October 1997, the Company began distribution of its EasyPhoto ImageWave
product, its first flatbed scanner. The EasyPhoto ImageWave hardware is
currently purchased on an OEM basis from a third party.
7
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain line items
from the Company's Condensed Consolidated Statement of Operations as a
percentage of the Company's total revenues:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product............................... 99.1% 95.6% 97.6% 95.4%
Royalty and other..................... 0.9 4.4 2.4 4.6
------ ------ ------ ------
Total revenues........................ 100.0 100.0 100.0 100.0
Cost of product revenues............... 87.5 70.7 99.3 70.8
------ ------ ------ ------
Gross profit........................... 12.5 29.3 0.7 29.2
------ ------ ------ ------
Operating expenses:
Research and development.............. 9.6 10.5 17.0 12.3
Marketing and selling................. 17.8 24.2 29.8 33.3
General and administrative............ 9.5 9.3 17.9 9.0
In-process research and development... -- -- -- 30.8
------ ------ ------ ------
Total operating expenses.............. 36.9 44.0 64.7 85.4
------ ------ ------ ------
Loss from operations................... (24.4) (14.7) (64.0) (56.2)
Interest income (expense), net......... 0.7 (0.3) 1.3 --
------ ------ ------ ------
Net loss............................... (23.7)% (15.0)% (62.7)% (56.2)%
====== ====== ====== ======
</TABLE>
Revenues
Product revenues were $12.4 million in the third quarter of 1997, an increase
of 58% from the $7.9 million reported in the third quarter of 1996. Product
revenues increased to $20.7 million for the nine months ended September 30, 1997
from $15.5 million in the comparable period of 1996. The increase in product
revenues was due primarily to an increase in OEM related revenues in 1997. This
increase was partially offset by the sale of discontinued product lines totaling
approximately $1.2 million in the first nine months of 1996 relating to the
acquisition of Primax's U.S. subsidiary. No such product sales occurred in
1997. The increase in product revenues for the nine month period ended
September 30, 1997 was further offset by a reserve provision of $1.7 million,
principally for price protection, recorded in the first quarter of 1997.
Royalty and other revenues decreased to $0.1 million in the third quarter of
1997 from $0.4 million in the third quarter of 1996. For the nine months ended
September 30, 1997, royalty and other revenues were $0.5 million compared to
$0.7 million in the comparable period of 1996. The Company anticipates that
royalty and other revenues will continue to comprise a relatively insignificant
portion of total revenues throughout fiscal 1997.
Cost of product revenues
Cost of product revenues increased to $11.0 million in the third quarter of
1997 from $5.8 million in the third quarter of 1996. Cost of product revenues
were $21.0 million and $11.5 million for the nine month periods ended September
30, 1997 and 1996, respectively. Cost of product revenues increased in dollar
amounts as the Company incurred higher costs primarily associated with its
increase in product sales. In the first quarter of 1997, the Company also
recorded an approximate $1.1 million charge to cost of product revenues
primarily related to the write-down of the Company's EasyPhoto Drive inventory
for purposes of reconfiguration and sale to OEM customers.
8
<PAGE>
Gross profit
Gross profit was $1.6 million for the third quarter of 1997, representing
12.5% of total revenues. For the third quarter of 1996, gross profit was $2.4
million, representing 29.3% of total revenues. Gross profit was $0.2 million
and $4.7 million, respectively, for the nine month periods ended September 30,
1997 and 1996, representing 0.7% and 29.2%, respectively, of total revenues for
such periods. The decrease in gross margin during the third quarter of 1997 was
primarily due to the higher percentage of lower margin OEM sales dollars in 1997
versus 1996 and to the sale of relatively higher cost-basis inventories during
the Company's transition to newly designed products at lower consumer price
points. Gross margin for the nine month period ended September 30, 1997 was
also adversely impacted by the provisions for price protection and inventory
write-downs in the first quarter of 1997, as described above.
Research and development
Research and development expenses increased to $1.2 million in the third
quarter of 1997 from $0.9 million in the third quarter of 1996. Research and
development expenses were $3.6 million and $2.0 million, respectively, for the
nine month periods ended September 30, 1997 and 1996. The increase in these
expenses in dollar amounts from 1996 to 1997 is primarily attributable to an
increase in research and development personnel to support the Company's new
product development and anticipated revenue growth. The Company intends to
continue to allocate substantial resources to research and development, but
research and development expenses may vary as a percentage of total revenues.
Marketing and selling
Marketing and selling expenses increased to $2.2 million in the third quarter
of 1997 from $2.0 million in the third quarter of 1996. For the nine month
periods ended September 30, 1997 and 1996, marketing and selling expenses were
$6.3 million and $5.4 million, respectively. The increase in these expenses in
dollar amounts is primarily the result of increased advertising and promotional
expenses incurred in the first quarter of 1997 compared to the first quarter of
1996. The Company believes that marketing and selling expenses will increase in
dollar amounts as the Company expands its sales and marketing staff and
promotional efforts to support the Company's anticipated revenue growth,
although marketing and selling expenses may vary as a percentage of total
revenues.
General and administrative
General and administrative expenses increased to $1.2 million in the third
quarter of 1997 from $0.8 million in the third quarter of 1996. For the nine
months ended September 30, 1997, general and administrative expenses increased
to $3.8 million from $1.5 million in the comparable period of 1996. The
increase in these expenses in dollar amounts and as a percentage of total
revenues from 1996 to 1997 is primarily attributable to an increase in
administrative personnel to support the Company's anticipated revenue growth,
the Company's status as a public company in fiscal 1997 and a $0.4 million
charge for the impairment of goodwill recorded in the first quarter of 1997. The
Company believes that such expenses will remain relatively constant in dollar
amounts through fiscal 1997, 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.
Interest income (expense), net
Interest income (expense), net consists primarily of interest earned on cash
equivalents and short-term investments and interest expense incurred in
connection with the Company's lines of credit. Interest income (expense), net
was less than $0.3 million in each of the four periods presented.
9
<PAGE>
Provision for income taxes
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through September 30, 1997.
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 the first nine months of 1997 the Company generated $3.4 million of
cash, primarily from the sale of short-term investments totaling $6.5 million
and borrowings under the Company's bank and equipment lines of credit totaling
$1.6 million. This was offset by cash used from operations of $3.7 million to
support operating activities for the nine months ended September 30, 1997.
As of September 30, 1997, the Company had approximately $10.7 million in cash
and cash equivalents. The Company also has a $6.5 million revolving accounts
receivable line of credit. The line of credit expires on October 28, 1998 and is
secured by the assets of the Company. At September 30, 1997, the Company had
$1.0 million of borrowings under this line of credit. In August 1997, the
Company entered into a $1.0 million equipment line of credit of which $0.6
million had been utilized as of September 30, 1997. As of September 30, 1997,
the Company's principal commitments consisted primarily of the above-mentioned
lines of credit and a lease for its office facilities. To date, the Company has
not invested in derivative securities or any other financial instruments that
involve a high level of complexity or risk. The Company expects that, in the
future, cash in excess of current requirements will be invested in investment
grade, interest-bearing securities.
The Company believes that its existing cash and investment balances and the
accounts receivable and equipment lines of credit will be sufficient to meet the
Company's capital and operating requirements for the next 12 months.
Nevertheless, the Company may be required to obtain additional financing to
expand its business. Management is currently exploring financing alternatives
to supplement the Company's cash position, although the Company has no
commitments to obtain any additional funding and there can be no assurance that
such financing will be available on acceptable terms, if at all. 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
The Company's quarterly and annual operating results are affected by a wide
variety of risks and uncertainties as discussed below and in the Company's Form
10-K. This Report on Form 10-Q should be read in conjunction with such Form 10-
K.
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.
10
<PAGE>
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. Furthermore, 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
and retailers, the capacity and 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/SmartPage Pro and
ImageWave 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
11
<PAGE>
from these suppliers or to increase manufacturing capacity from such suppliers
as required could have a material adverse effect on the Company's business,
results of operations and financial condition.
Since February 1995, most of the Company's sales have been made to
distributors, computer superstores, consumer electronic superstores, office
supply superstores, specialty computer stores, on-line companies, mass merchants
and OEMs and, to a lesser extent, mail order companies. Accordingly, the Company
is dependent upon the continued viability and financial stability of these
resellers. The Company's reseller customers offer products of several different
companies, including scanner products that are competitive with the Company's
products. Accordingly, these resellers may give higher priority to products of
suppliers other than the Company through increased shelf space or promotions,
thus reducing their efforts to sell the Company's product. In addition, as is
typical in the personal computer industry, the Company grants its distributors
and retailers price protection and certain rights of return with respect to
products purchased by them. The Company accrues for expected returns and
anticipated price reductions in amounts that the Company believes are
reasonable. However, there can be no assurance that these accruals will be
sufficient, especially in light of the rapid product obsolescence that often
occurs during product transitions. In order to respond to competitive pricing
actions, increase sales or expand the distribution of its products, the Company
may reduce the prices of its products, which could give rise to significant
price protection charges and which would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the difficulty in predicting future sales and the anticipated short product life
cycles of the Company's products due to frequent upgrades increase the risk that
new product introductions, price reductions by the Company or its competitors,
or other factors affecting the digital photo market could result in significant
product returns. Any price protection charges or product returns in excess of
recorded allowances would have a material adverse effect on the Company's
business, operating results and financial condition.
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 principally to
an anticipated increase in 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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
In July 1997, the court dismissed the plaintiff's complaint with leave to amend
certain causes of action. An amended complaint was filed in October 1997. The
Company believes that the allegations contained in the lawsuit are without merit
and intends to vigorously defend itself in such matter.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) No reports on Form 8-K were filed during the three month period ended
September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized:
Date: November 11, 1997.
STORM TECHNOLOGY, INC.
By: /s/Rick M. McConnell
---------------------
Rick M. McConnell
Chief Financial Officer
and Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
------ -------------
2.1* Form of Agreement and Plan of Merger between Storm Primax, Inc., a
California corporation (''Storm California''), and Storm Primax, Inc.,
a Delaware corporation (''Storm Delaware'').
3.1* Sixth Amended and Restated Articles of Incorporation of Storm
California.
3.2* Certificate of Incorporation of Storm Delaware.
3.3* Bylaws of Storm California.
3.4* Bylaws of Storm Delaware.
10.1* Form of Indemnity Agreement for officers and directors.
10.2* The Registrant's Amended and Restated Stock Option Plan.
10.4* The Registrant's 1996 Outside Directors Stock Option Plan.
10.5* The Registrant's 1996 Employee Stock Purchase Plan.
10.12* 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.
10.25* 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.
14
<PAGE>
EXHIBIT INDEX
(Continued)
Exhibit
Number Exhibit Title
------ -------------
10.27* Termination Agreement by and between Primax and Storm California
dated July 1, 1996.
10.28* Addendum One dated June 11, 1996 to the Manufacturing and Purchase
Agreement between Primax and Storm California.
10.30* Amendment One to the Distribution Agreement by and between Storm
California and Primax dated February 29, 1996.
27 Financial Data Schedule.
* Incorporated by reference from the exhibits with corresponding numbers from
the Company's Registration Statement (No. 333-06911), as amended on September
30, 1996.
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Condensed Consolidated
Financial Statements or notes thereto.
15
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