<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 March 31, 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)
(415) 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
April 28, 1997 was 10,382,672.
This report, including exhibits, consists of 16 pages. The exhibit index
begins on page 14.
<PAGE>
STORM TECHNOLOGY, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at March 31, 1997 and December 31, 1996..................... 3
Condensed Consolidated Statement of Operations for the three months ended
March 31, 1997 and 1996....................................................................... 4
Condensed Consolidated Statement of Cash Flows for the three months ended
March 31, 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>
March 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 5,033 $ 7,335
Short-term investments..................................................... 5,636 6,466
Accounts receivable, net................................................... 1,687 7,199
Receivable from related party.............................................. 365 959
Inventories................................................................ 5,998 4,750
Other current assets....................................................... 221 247
----------- -----------
Total current assets................................................... 18,940 26,956
Property and equipment, net..................................................... 746 692
Other assets.................................................................... 97 551
----------- -----------
Total assets...................................................... $ 19,783 $ 28,199
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 2,814 $ 2,567
Accrued liabilities........................................................ 1,902 1,834
Payable to related party................................................... 1,309 3,768
----------- -----------
Total current liabilities.............................................. 6,025 8,169
----------- -----------
Contingency (Note 4)
Stockholders' equity:
Common stock............................................................... 10 10
Additional paid-in capital................................................. 39,098 39,117
Deferred compensation...................................................... (170) (183)
Accumulated deficit........................................................ (25,180) (18,914)
----------- -----------
Total stockholders' equity............................................. 13,758 20,030
----------- -----------
Total liabilities and stockholders' equity........................ $ 19,783 $ 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
March 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Product...................................... $ 1,830 $ 2,435
Royalty and other............................ 217 94
----------- -----------
Total revenues........................... 2,047 2,529
Cost of product revenues.......................... 3,768 1,981
----------- -----------
Gross profit (loss)............................... (1,721) 548
------------ -----------
Operating expenses:
Research and development..................... 1,116 459
Marketing and selling........................ 2,088 1,402
General and administrative................... 1,431 225
In-process research and development.......... -- 5,000
----------- -----------
Total operating expenses................. 4,635 7,086
----------- -----------
Loss from operations.............................. (6,356) (6,538)
Interest income (expense), net.................... 90 19
----------- -----------
Net loss.......................................... $ (6,266) $ (6,519)
=========== ===========
Net loss per common and common equivalent share...
$ (0.60) $ (0.83)
=========== ===========
Weighted average number of common and common
equivalent shares.............................. 10,424 7,848
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................... $ (6,266) $ (6,519)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................... 101 33
Write-off of purchased in-process research and development............. -- 5,000
Other non-cash charges................................................. 461 --
Changes in assets and liabilities:
Accounts receivable............................................... 5,512 1,195
Receivable from related party..................................... 594 --
Inventories....................................................... (1,248) 272
Other current assets.............................................. 26 (77)
Other long-term assets............................................ 6 (35)
Accounts payable.................................................. 247 (139)
Accrued liabilities............................................... 68 226
Payable to related party.......................................... (2,459) (539)
--------- ---------
Net cash used in operating activities......................... (2,958) (583)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment......................................... (155) (18)
Sales (purchases) of short-term investments................................ 830 (832)
Other...................................................................... -- 268
--------- ---------
Net cash provided by (used in) investing activities........... 675 (582)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock..................................... -- 3
Other...................................................................... (19) --
--------- ---------
Net cash provided by (used in) financing activities........... (19) 3
--------- ---------
Net decrease in cash and cash equivalents....................................... (2,302) (1,162)
Cash and cash equivalents at the beginning of the period........................ 7,335 1,865
--------- ---------
Cash and cash equivalents at the end of the period.............................. $ 5,033 $ 703
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
STORM TECHNOLOGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION:
Storm Technology, Inc. (the "Company") is a leading provider of digital
photo solutions that enable consumers and small businesses to input, store,
organize, enhance and use photos easily on their personal computers.
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 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. 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 April 1997, the Company filed a demurrer requesting dismissal of such
lawsuit. A hearing on such demurrer is expected in July 1997. The Company
believes that the allegations contained in the lawsuit are without merit and
intends to vigorously defend itself in such matter.
6
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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 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.
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 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.
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
March 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Product......................................... 89.4% 96.3%
Royalty and other............................... 10.6 3.7
-------- --------
Total revenues.............................. 100.0 100.0
Cost of product revenues............................. 184.1 78.3
-------- --------
Gross profit (loss).................................. (84.1) 21.7
-------- --------
Operating expenses:
Research and development........................ 54.5 18.2
Marketing and selling........................... 102.0 55.4
General and administrative...................... 69.9 8.9
In-process research and development............. -- 197.7
-------- --------
Total operating expenses.................... 226.4 280.2
-------- --------
Loss from operations................................. (310.5) (258.5)
Interest income (expense), net....................... 4.4 0.7
-------- --------
Net loss............................................. (306.1)% (257.8)%
======== ========
</TABLE>
Revenues
--------
Product revenues were $1.8 million in the first quarter of 1997, a decrease
of $0.6 million from the $2.4 million reported in the first quarter of 1996. The
decrease in product revenues was due primarily to reserves established for price
protection totaling approximately $1.7 million, offset by increased total unit
sales of the Company's photo scanners including the EasyPhoto SmartPage and
PhotoDrive products which had not yet been introduced during the first quarter
of 1996.
Royalty and other revenues increased to $0.2 million in the first quarter
of 1997 from $0.1 million in the first quarter of 1996. The increase in royalty
and other revenues is primarily due to the OEM licensing of certain photo
scanner technologies, which principally began in the second quarter of 1996. The
Company believes that such royalty and other revenues will decrease as a
percentage of revenues as the Company continues its transition of selling its
PhotoDrive and Reader products directly to OEM customers that were previously
sold under OEM licensing arrangements.
Cost of product revenues
------------------------
Cost of product revenues increased to $3.8 million in the first quarter of
1997 from $2.0 million in the first quarter of 1996. Cost of product revenues
increased in dollar amounts as the Company incurred higher costs associated with
higher unit sales of its EasyPhoto SmartPage and PhotoDrive products. 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.
8
<PAGE>
Gross profit (loss)
-------------------
Gross loss was $1.7 million for the first quarter of 1997, representing 84.1%
of total revenues for such period. For the first quarter of 1996, gross profit
was $0.5 million, representing 21.7% of total revenues for such period. The
significant decrease in gross margin was primarily due to the provisions for
price protection and inventory write-downs described above.
Research and development
------------------------
Research and development expenses increased to $1.1 million in the first
quarter of 1997 from $0.5 million in the first quarter of 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
anticipated revenue growth. The increase in these expenses as a percentage of
revenues from 1996 to 1997 is primarily attributable to the increase in dollar
expenditures combined with the reduction in first quarter 1997 net revenues
associated with the above-mentioned reserve for price protection. 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 $2.1 million in the first
quarter of 1997 from $1.4 million in the first quarter of 1996. The increase in
these expenses in dollar amounts from 1996 to 1997 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 increase in these expenses as a percentage of revenues from 1996 to 1997 is
primarily attributable to the increase in dollar expenditures combined with the
reduction in first quarter 1997 net revenues associated with the above-mentioned
reserve for price protection. 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 $1.4 million in the first
quarter of 1997 from $0.2 million in the first quarter of 1996. The increase in
these expenses in dollar amounts from 1996 to 1997 is primarily attributable to
an increase in administrative personnel to support the Company's anticipated
revenue growth and a $0.4 million charge for the impairment of goodwill recorded
in the first quarter of 1997. The increase in these expenses as a percentage of
revenues from 1996 to 1997 is primarily attributable to the increase in dollar
expenditures combined with the reduction in first quarter 1997 net revenues
associated with the above-mentioned reserve for price protection. The Company
believes that such expenses will remain constant or grow modestly in dollar
amounts through fiscal 1997 (after adjusting for the impact of the non-recurring
charge for the impairment of goodwill), 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. Interest income (expense), net was
less than $0.1 million in each of the periods presented.
Provision for income taxes
--------------------------
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through March 31, 1997.
9
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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.
As of March 31, 1997, the Company had approximately $10.7 million in cash,
cash equivalents and short-term investments. During the first three months of
1997 the Company used $2.3 million of cash, primarily to support operating
activities, which used cash of $3.0 million for this period.
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 and
expires in May 1997. At March 31, 1997, the Company had no borrowings under
these lines of credit. As of March 31, 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
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
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.
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, while the Company currently
competes directly with a relatively small number of competitors, it faces
indirect 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
10
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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 product. In
11
<PAGE>
addition, as is typical in the personal computer industry, the Company grants
its distributors price protection and certain rights of return with respect to
products purchased by them. The Company accrues for expected returns and
anticipated price reductions in amounts that the Company believes are
reasonable. However, there can be no assurance that these accruals will be
sufficient, especially in light of the rapid product obsolescence that often
occurs during product transitions. In order to respond to competitive pricing
actions, increase sales or expand the distribution of its products, the Company
may reduce the prices of its products, which could give rise to significant
price protection charges and which would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the difficulty in predicting future sales and the anticipated short product life
cycles of the Company's products due to frequent upgrades increase the risk that
new product introductions, price reductions by the Company or its competitors,
or other factors affecting the digital photo market could result in significant
product returns. Any price protection charges or product returns in excess of
recorded allowances would have a material adverse effect on the Company's
business, operating results and financial condition.
The Company has recently experienced and may continue to experience growth
in the number of employees, the scope of its operating and financial systems and
the geographic distribution of its operations and customers due to an
anticipated increase in sales and the recent acquisition transaction with
Primax. 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
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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 April 1997, the Company filed a demurrer requesting dismissal of such
lawsuit. A hearing on such demurrer is expected in July 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 March 31, 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: May 13, 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
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- ---------------------------------------------------------------------------
<S> <C>
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.
</TABLE>
14
<PAGE>
EXHIBIT INDEX
(Continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- ---------------------------------------------------------------------------
<S> <C>
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.
</TABLE>
* 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,033
<SECURITIES> 5,636
<RECEIVABLES> 3,947
<ALLOWANCES> 1,895
<INVENTORY> 5,998
<CURRENT-ASSETS> 18,940
<PP&E> 1,467
<DEPRECIATION> 721
<TOTAL-ASSETS> 19,783
<CURRENT-LIABILITIES> 6,025
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> (170)
<TOTAL-LIABILITY-AND-EQUITY> 19,783
<SALES> 1,830
<TOTAL-REVENUES> 2,047
<CGS> 3,768
<TOTAL-COSTS> 3,768
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,266)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,266)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,266)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
