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 JUNE 30, 1998.
[ ] 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
June 30, 1998 was 14,081,683.
<PAGE>
STORM TECHNOLOGY, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at June 30, 1998 and
December 31, 1997
Condensed Consolidated Statement of Operations for the three and six
month periods ended June 30, 1998 and 1997
Condensed Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $21 $5,310
Accounts receivable, net......................... 8,414 10,204
Inventories...................................... 3,406 3,795
Other current assets............................. 193 355
----------- -----------
Total current assets.......................... 12,034 19,664
Property and equipment, net........................ 1,337 1,523
Goodwill........................................... 1,241 1,655
Other assets....................................... 10 40
----------- -----------
Total assets................................ $14,622 $22,882
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $6,802 $3,903
Accrued liabilities.............................. 4,119 3,935
Trade payables to related parties................ 13,187 11,831
Line of credit................................... 666 1,000
Current portion of long-term obligations......... 260 151
Convertible note payable to related party........ 4,105 --
----------- -----------
Total current liabilities..................... 29,139 20,820
Convertible note payable to related party.......... -- 4,000
Long-term obligations.............................. 542 401
----------- -----------
Total liabilities............................. 29,681 25,221
----------- -----------
Contingency (Note 3)
Stockholders' equity (deficit):
Convertible preferred stock...................... 1 1
Common stock..................................... 14 13
Additional paid-in capital....................... 48,214 45,662
Deferred compensation............................ (56) (80)
Accumulated deficit.............................. (63,232) (47,935)
----------- -----------
Total stockholders' equity (deficit).......... (15,059) (2,339)
----------- -----------
Total liabilities and
stockholders' equity (deficit)............. $14,622 $22,882
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................. $10,302 $6,602 $26,361 $8,649
Cost of revenues...................... 14,299 6,300 28,082 10,068
--------- --------- --------- ---------
Gross profit (loss)................... (3,997) 302 (1,721) (1,419)
--------- --------- --------- ---------
Operating expenses:
Research and development............ 1,580 1,289 2,929 2,405
Marketing and selling............... 2,691 1,991 5,594 4,079
General and administrative.......... 1,630 1,158 3,544 2,141
Goodwill amortization............... 207 -- 414 448
--------- --------- --------- ---------
Total operating expenses....... 6,108 4,438 12,481 9,073
--------- --------- --------- ---------
Loss from operations.................. (10,105) (4,136) (14,202) (10,492)
Interest income (expense), net........ (387) 90 (467) 180
--------- --------- --------- ---------
Net loss.............................. (10,492) (4,046) (14,669) (10,312)
Embedded yield on preferred stock..... (628) -- (628) --
--------- --------- --------- ---------
Net loss applicable to common
stockholders......................... ($11,120) ($4,046) ($15,297) ($10,312)
========= ========= ========= =========
Basic and diluted net loss per
share................................ ($0.82) ($0.39) ($1.15) ($0.99)
========= ========= ========= =========
Weighted average number of
common shares outstanding............ 13,637 10,406 13,247 10,415
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STORM TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ ($14,669) ($10,312)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation, amortization and other non-cash
charges....................................... 1,118 711
Changes in assets and liabilities:
Accounts receivable......................... 1,790 2,739
Inventories................................. 389 2,120
Other current assets........................ 162 185
Other assets................................ 30 36
Accounts payable............................ 2,899 (1,259)
Accrued liabilities......................... 184 974
Trade payables to related parties........... 1,356 (1,730)
--------- ---------
Net cash used in operating activities........... (6,741) (6,536)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment.................. (388) (810)
Sales of short-term investments..................... -- 2,800
--------- ---------
Net cash provided by (used in) investing
activities..................................... (388) 1,990
--------- ---------
Cash flows from financing activities:
Net repayments of line of credit.................... (334) --
Proceeds from secured equipment financings.......... 362 --
Repayment of secured equipment financings........... (112) --
Proceeds from issuance of common stock.............. 144 23
Proceeds from issuance of convertible preferred
stock and other................................... 1,780 (20)
--------- ---------
Net cash provided by financing activities....... 1,840 3
--------- ---------
Net decrease in cash and cash equivalents.............. (5,289) (4,543)
Cash and cash equivalents at the beginning of the
period................................................ 5,310 7,335
--------- ---------
Cash and cash equivalents at the end of the period..... $21 $2,792
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<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, 1997, 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-CONVERTIBLE PREFERRED STOCK:
On June 4, 1998 the Company issued 20,000 shares of Series B
Convertible Preferred Stock at a per share price of $100. Proceeds to
the Company totaled approximately $1.8 million net of issuance costs.
Each share of Series B Preferred Stock is convertible by the holder into
shares of the Company's common stock at a conversion price which is
approximately 80% of the then applicable market price of the Company's
common stock. Such discount, calculated as of the issuance date, has
been reflected as embedded yield on preferred stock in the Condensed
Consolidated Statement of Operations for the quarter ended June 30,
1998.
NOTE 3-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, as amended in May 1998, 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.
A similar complaint was filed in the United States District Court by the
same plaintiffs in December 1997. The Company believes that the
allegations are without merit and intends to vigorously defend itself in
such matters.
<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's vision is to empower consumers to use all forms of digital
images to create more personable, memorable and effective
communications. Storm has been competing and gaining market share based
on a strategy of product innovation and price performance leadership to
develop and market personal scanners using the latest technology with
high quality at affordable consumer price points.
In 1995, the Company entered the personal scanner market by bundling
its EasyPhoto organizer software with a snapshot-sized photo scanner
manufactured by Primax Electronics, Ltd. ("Primax"). In 1996, Storm
established its own internal personal scanner hardware and software
product development teams, continued to build leadership in the personal
photo scanner market and leveraged OEMs to enter the page-sized sheetfed
scanner market segment. During 1997, Storm established itself as the
market leader in the personal photo scanner product segment, acquired
certain scanner assets from Logitech, Inc. and affiliated companies
("Logitech") (the "Logitech Acquisition"), resulting in a market
leadership position in page-sized sheetfed personal scanners, and
leveraged OEMs to enter the flatbed personal market segment. With the
December 1997 Logitech Acquisition, the Company has expanded
distribution in Europe through Logitech's existing European
infrastructure, providing access to over 8,000 retail outlets in the
region, broadened its underlying product portfolio and digital imaging
technology, and effectively doubled its worldwide market share.
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 Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 138.8% 95.4% 106.5% 116.4%
--------- --------- --------- ---------
Gross profit (loss)................... -38.8% 4.6% -6.5% -16.4%
--------- --------- --------- ---------
Operating expenses:
Research and development............ 15.4% 19.5% 11.2% 27.7%
Marketing and selling............... 26.1% 30.2% 21.2% 47.2%
General and administrative.......... 15.8% 17.5% 13.4% 24.8%
Goodwill amortization............... 2.0% 0.0% 1.6% 5.2%
--------- --------- --------- ---------
Total operating expenses....... 59.3% 67.2% 47.4% 104.9%
--------- --------- --------- ---------
Loss from operations.................. -98.1% -62.6% -53.9% -121.3%
Interest income (expense), net........ -3.7% 1.3% -1.7% 2.1%
--------- --------- --------- ---------
Net loss.............................. -101.8% -61.3% -55.6% -119.2%
========= ========= ========= =========
</TABLE>
Revenues
Revenues were $10.3 million in the second quarter of 1998, an
increase of 56% from the $6.6 million reported in the second quarter of
1997. Revenues increased to $26.4 million for the six months ended June
30, 1998 from $8.6 million in the comparable period of 1997. The
substantial increase in revenues was due primarily to European sales of
Logitech-branded products and increased European sales of Storm-branded
products resulting from the Logitech Acquisition and continued increases
in domestic unit sales volumes.
Cost of revenues
Cost of revenues increased to $14.3 million in the second quarter of
1998 from $6.3 million in the second quarter of 1997. Cost of revenues
were $28.1 million and $10.1 million for the six month periods ended
June 30, 1998 and 1997, respectively. Cost of revenues increased in
dollar amounts as the Company incurred higher costs associated with its
increase in product sales and due to a reserve provision recorded in the
second quarter of 1998. This reserve provision, totaling approximately
$4.4 million, was primarily related to the write-down of inventory
associated with the Company's transition to its new line of
differentiated scanner products. Included in the 1997 cost of revenues
was a $1.1 million charge, primarily related to the write-down of the
Company's EasyPhoto Drive inventory for purposes of reconfiguration and
sale to OEM customers, recorded in the first quarter of 1997.
Gross profit (loss)
Gross loss was ($4.0) million for the second quarter of 1998,
representing (38.8%) of total revenues. For the second quarter of 1997,
gross profit was $0.3 million, representing 4.6% of total revenues.
Gross loss was ($1.7) million and ($1.4) million, respectively, for the
six month periods ended June 30, 1998 and 1997, representing (6.5%) and
(16.4%), respectively, of total revenues for such periods. The negative
gross margins during the second quarter of 1998 and the six months ended
June 30, 1998 and 1997 were primarily due to the adverse impact of the
provisions for inventory write-downs in the second quarter of 1998 and
the first quarter of 1997, as described above.
Research and development
Research and development expenses increased to $1.6 million in the
second quarter of 1998 from $1.3 million in the second quarter of 1997.
Research and development expenses were $2.9 million and $2.4 million,
respectively, for the six month periods ended June 30, 1998 and 1997.
The increase in these expenses in dollar amounts from 1997 to 1998 is
primarily attributable to an increase in research and development
personnel to support the Company's new product development and
anticipated revenue growth. The decrease in research and development
expenses as a percentage of revenues from 1997 to 1998 is primarily
attributable to the significant increase in 1998 revenues. 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 $2.7 million in the
second quarter of 1998 from $2.0 million in the first quarter of 1997.
Marketing and selling expenses increased to $5.6 million for the six
months ended June 30, 1998 from $4.1 million for the comparable period
in 1997. The increase in these expenses in dollar amounts is primarily
the result of increased promotional expenses to support the Company's
domestic and international revenue growth. The decrease in marketing and
selling expenses as a percentage of revenues from 1997 to 1998 is
primarily attributable to the significant growth in 1998 revenues. The
Company intends to continue to allocate substantial resources to
marketing and selling activities, but marketing and selling expenses may
vary as a percentage of total revenues.
General and administrative
General and administrative expenses increased to $1.6 million in the
second quarter of 1998 from $1.2 million in the second quarter of 1997.
For the six months ended June 30, 1998, general and administrative
expenses increased to $3.5 million from $2.1 million in the comparable
period of 1997. The increase in these expenses in dollar amounts from
1997 to 1998 is primarily attributable to an increase in administrative
personnel and customer support costs to support the Company's domestic
and international revenue growth. The decrease in general and
administrative expenses as a percentage of revenues from 1997 to 1998 is
primarily attributable to the significant growth in 1998 revenues. The
Company intends to continue to allocate substantial resources to general
and administrative activities, but general and administrative expenses
may vary as a percentage of total revenues.
Goodwill amortization
Goodwill amortization was $0.2 million and $0.4 million for the three
and six month periods ended June 30, 1998, respectively, representing
the amortization of goodwill associated with the December 1997 Logitech
Acquisition over a two year period. The Company expects that such
goodwill and the resultant amortization charges will increase
significantly in 1998, as additional consideration is paid to Logitech
based on the achievement of certain 1998 revenue objectives in Europe.
The goodwill amortization charge of $0.4 million in the first quarter of
1997 represents the write-off of the remaining goodwill associated with
the purchase of certain photo scanner technologies from Primax.
Interest income (expense), net
Interest income (expense), net consists primarily of interest
expense incurred in connection with the Company's line of credit and
long-term obligations offset by interest earned on cash equivalents and
short-term investments. Interest income (expense), net was less than
$0.5 million in each of the periods presented. The Company expects
interest expense to increase during 1998 in conjunction with increased
borrowings under the Company's line of credit to help fund the Company's
growth and interest incurred on notes payable issued and issuable to
Logitech in connection with the Logitech Acquisition.
Provision for income taxes
No provision for federal and state income taxes has been recorded as
the Company has incurred net operating losses from inception through
June 30, 1998.
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
generating net proceeds to the Company of $22.7 million. During 1997 and
the second quarter of 1998 the Company raised an additional $5.0 million
and $2.0 million, respectively, from the private placement of equity
securities.
During the first six months of 1998 the Company used cash of $6.7
million in operating activities, an increase of $0.2 million from the
comparable period of 1997. Such operating activities were funded
partially from the issuance of Series B convertible preferred stock
totaling $2.0 million and, to a lesser extent, proceeds from secured
equipment financings.
As of June 30, 1998, the Company had approximately $0.1 million in
cash and cash equivalents and a $10.0 million revolving accounts receivable
line of credit. The line of credit expires on February 27, 1999 and is secured
by the assets of the Company. At June 30, 1998, the Company had $0.7 million
of borrowings outstanding under this line of credit and additional
availability of approximately $5 million. Principally due to the reserve
provisions recorded in the second quarter of 1998, the Company would not have
been in compliance with its tangible net worth bank covenant as of June 30,
1998 had the bank not waived such covenant. In conjunction with the waiver,
the line of credit was reduced to $6.0 million. The Company is currently
negotiating a revised covenant with the bank. As of June 30, 1998, the
Company's principal commitments consisted primarily of the above-mentioned
line of credit, secured equipment financings, trade payables to Primax, a note
payable to Logitech and a lease for its office facilities. The Company and
Primax are currently in negotiations with regard to the net balance of trade
payables due to Primax and a related payment plan. In conjunction with such
discussions, both parties agreed to a "stand-still" period extending through
early September 1998. 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 it will require supplemental financing in
addition to its existing cash balances and its bank line of credit to
meet the Company's capital and operating requirements for the next 12
months. The Company's management is currently exploring financing
alternatives to supplement Storm's cash position. Potential sources of
additional financing for the Company include private equity financings,
mergers, strategic investments, strategic partnerships, an increase in
its available bank line of credit or other forms of debt financings.
Nevertheless, 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, has incurred net
losses in every period since inception and has a negative net worth.
Additionally, the Company is currently in negotiations with its bank to revise
the covenant requirements under its line of credit and with Primax to agree on
a modified payment plan for its existing trade payables. There can be no
assurance that the Company will attain profitability, or, if profitability is
attained, that the Company will sustain profitability on a quarterly or an
annual basis. Furthermore, the failure to gain supplemental financing or
complete such negotiations on sufficiently favorable terms could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company recently completed the acquisition of Logitech's scanner
product line, primarily to expand its presence in the European consumer
scanner market, a market which is relatively new to the Company. While
the Company believes that the scanner products acquired from Logitech
offer an opportunity for the Company to increase its market share and
product offerings, there can be no assurance that the Company will be
successful in doing so. Furthermore, as the Company increases its
foreign sales, it may be materially and adversely affected by
fluctuations in currency exchange rates, changes in regulatory
requirements or duty rates, difficulties in staffing and managing
foreign operations and other risks inherent in conducting business on an
international level. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's future
international operations and, consequently, on the Company's business,
operating results and financial condition.
The market for the Company's products is intensely competitive and
rapidly evolving. The Company currently derives substantially all of its
revenues from its personal scanner 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 personal scanner products 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 images 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
resellers, 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 the Company's
customers, 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
and timing of 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.
The Company is currently transitioning production of its scanner
products to a subcontract manufacturer in Mexico and a third party
scanner manufacturer in Taiwan. There can be no assurance that such
suppliers will be able to meet the Company's requirements for quality
manufactured products, competitive pricing and timely availability or
U.S. Customs' requirements for timely import into the United States.
Furthermore, obtaining products from alternative manufacturing sources
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 requested quantities of
quality hardware components at competitive prices from these suppliers
on a timely basis or to increase manufacturing capacity from such
suppliers 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, OEMs, and resellers such as computer superstores, consumer
electronics superstores, office supply superstores, specialty computer
stores, on-line companies and mass merchants. Accordingly, the Company
is dependent upon the continued viability and financial stability of
these customers. The Company's customers generally offer products of
several different companies, including scanner products that are
competitive with the Company's products. Accordingly, these customers
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 and
resellers 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 imaging
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.
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, as amended in May 1998, 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.
A similar complaint was filed in the United States District Court by the
same plaintiffs in December 1997. The Company believes that the
allegations are without merit and intends to vigorously defend itself in
such matters. However, there can be no assurance that the ultimate
outcome of such lawsuits will not have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's common stock was recently delisted from the Nasdaq
National Market and is currently traded on the non-Nasdaq OTC Bulletin
Board Market. Because the Company's securities are not listed on NASDAQ,
trading in the Company's common stock is subject to certain rules
promulgated under the Exchange Act, which impose additional disclosure
and various sales practice requirements on broker-dealers in connection
with any trades involving a stock defined as a penny stock (generally,
any non-NASDAQ equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). The additional burdens
imposed upon broker-dealers by such requirements may discourage broker-
dealers from effecting transactions in the Company's common stock and
the ability of purchasers of the Company's common stock to resell such
securities in the secondary market.
The Company has recently experienced growth in the number of
employees, the scope of its operating and financial systems and the
geographic distribution of its operations and customers. 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
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, as amended in May 1998, 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.
A similar complaint was filed in the United States District Court by the
same plaintiffs in December 1997. The Company believes that the
allegations are without merit and intends to vigorously defend itself in
such matters.
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
The Company held its Annual Meeting of Shareholders on May 7, 1998.
The matters described below were voted on at such Meeting and the number
of votes cast with respect to each matter are enumerated below.
Proposal I - Election of Directors
For Against Abstain
---------- ---------- ----------
Richard C. Alberding 9,196,994 53,436
Louis J. Doctor 9,196,994 53,436
James M. Koshland 9,196,994 53,436
L. William Krause 9,196,894 53,536
William H. Lane III 9,196,994 53,436
Adriaan Ligtenberg 9,196,994 53,436
Proposal II - To ratify the issuance of Series A 8.5% Convertible
Preferred Stock
For Against Abstain
---------- ---------- ----------
6,375,043 116,611 2,758,776
Proposal III - To ratify the acquisition of certain assets of
Logitech, Inc. and certain of its affiliated companies
For Against Abstain
---------- ---------- ----------
6,416,609 9,400 2,824,421
Proposal IV- To ratify the appointment of Price Waterhouse LLP as
the Company's independent public accountants for fiscal
year 1998.
For Against Abstain
---------- ---------- ----------
9,238,318 2,700 9,412
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) One report on Form 8-K was filed during the three month
period ended June 30, 1998. This report filed on June 16, 1998,
announced the issuance of the Company's Series B Convertible
Preferred Stock.
<PAGE>
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: August 12, 1998.
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)
<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'').
2.2** Agreement for Purchase and Sale of Assets dated as of December 18,
1997.
2.3** Joint Sales and Marketing Agreement dated as of December 18, 1997.
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.
3.10** Certificate of Designation for Series A 8.5% Convertible
Preferred Stock filed December 18, 1997.
3.11** Certificate of Designation for Series B Convertible Preferred
Stock filed June 3, 1998.
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.
10.17* Distribution Agreement by and between Storm California and Primax
dated February 29, 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.
** Filed as an exhibit to the Company's Report on Form 8-K filed on
January 2, 1998 or June 3, 1998 and incorporated herein by reference.
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACT
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE
STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21
<SECURITIES> 0
<RECEIVABLES> 10,162
<ALLOWANCES> 1,748
<INVENTORY> 3,406
<CURRENT-ASSETS> 12,034
<PP&E> 3,139
<DEPRECIATION> 1,802
<TOTAL-ASSETS> 14,622
<CURRENT-LIABILITIES> 29,139
<BONDS> 0
0
1
<COMMON> 14
<OTHER-SE> (15,074)
<TOTAL-LIABILITY-AND-EQUITY> 14,622
<SALES> 26,361
<TOTAL-REVENUES> 26,361
<CGS> 28,082
<TOTAL-COSTS> 28,082
<OTHER-EXPENSES> 12,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (467)
<INCOME-PRETAX> (14,669)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,669)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,669)
<EPS-PRIMARY> ($1.15)
<EPS-DILUTED> ($1.15)
</TABLE>
