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Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-20045
PROSPECTUS
2,700,000 SHARES
LOGO
COMMON STOCK
------------------------
All of the 2,700,000 shares of Common Stock offered hereby are being sold
by Storage Dimensions, Inc. ("Storage Dimensions" or the "Company").
Prior to this offering, there has been no public market for the Common
Stock of the Company. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. Common Stock has
been approved for listing on the Nasdaq National Market under the symbol "STDM."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
Per Share $7.00 $0.49 $6.51
- -------------------------------------------------------------------------------------------------
Total(3) $18,900,000 $1,323,000 $17,577,000
=================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting estimated expenses of the offering of $950,000, payable by
the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 405,000 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $21,735,000, $1,521,450 and $20,213,550,
respectively.
------------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about March
17, 1997, at the office of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
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SMITH BARNEY INC. SALOMON BROTHERS INC
March 11, 1997
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[ARTWORK]
[PICTURES OF DISK AND TAPE STORAGE PRODUCTS]
ARTWORK CAPTIONS
1. Storage Dimensions offers a broad family of high-availability disk and tape
storage solutions for networks utilizing PC-LAN (Intel-based) servers, with
an emphasis on servers utilizing the Windows NT and NetWare operating
systems. The Company has developed an extensive library of proprietary
software which allows it to bring new technologies to the market quickly and
efficiently, while providing capabilities and features that differentiate the
Company's products from those of its competitors. Storage Dimensions'
products have won numerous industry awards in product comparisons and
editorial reviews.
2. The Company's SuperFlex and MegaFlex products provide redundancy and
fault-tolerance in a modular and scalable architecture, for deployment as
single, stand-alone units or higher capacity, multi-unit systems.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE> 3
[GRAPHIC OF A ILLUSTRATIVE CLIENT/SERVER NETWORK]
ARTWORK CAPTIONS
1. Networks employing the client/server architecture provide information and
computing resources to an organization's users (the "clients") by means of
shared computer servers (the "servers"). Storage Dimensions' products are
designed for deployment in a wide range of server applications found within
the client/server enterprise networks of large corporations, institutions and
government agencies.
2. Storage Dimensions' SuperFlex and MegaFlex disk storage products are
engineered to provide redundancy and fault-tolerance for critical components
such as disk drives, power supplies and cooling systems. Redundant components
are easily serviced and hot-swappable, to allow replacement by end-user
service personnel while the system remains on-line. Moreover, the Company's
storage management software is designed to provide ease of installation and
use, robust management of failure conditions, remote monitoring, automatic
notification of failure events, and on-line diagnostic and trouble-shooting
support.
To complement its disk products, Storage Dimensions has engineered a family
of high-speed, high-reliability tape backup systems that are designed to
address the challenges of backing up increasing amounts of data in
ever-shortening time periods. These tape products are developed and tested to
be easily integrated and fully compatible with the Company's storage systems.
The Company supplies external storage systems that are easily integrated with
the computer systems from a broad range of manufacturers. This cross-platform
capability affords significant economic advantages to end-users who have
heterogeneous and dynamic network environments, by letting them standardize
on a single external storage system that can be easily reconfigured and
redeployed as requirements change, as compared to the internal storage which
is dedicated to a specific manufacturer's server.
<PAGE> 4
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus.
THE COMPANY
Storage Dimensions designs, manufactures, markets and supports
high-performance data storage systems for open systems network applications.
Storage Dimensions currently focuses on the Intel-based local area network
market (the "PC-LAN market") by developing and marketing a broad family of disk
and tape storage systems that are designed to satisfy the high-performance,
fault-tolerance and high-availability (minimum downtime) requirements of its
customers while at the same time reducing life-cycle cost of ownership. The
Company's products combine its proprietary software with industry-standard
hardware, such as disk drives, tape drives and RAID (Redundant Arrays of
Independent Disks) controllers, which allows the Company to leverage the product
development and manufacturing capabilities and efficiencies of industry OEM
manufacturers and to offer its customers products that take advantage of what
the Company believes to be the best technology available. Storage Dimensions'
products have won numerous industry awards in product comparisons and editorial
reviews. As the leading independent supplier of high capacity RAID storage
systems for the PC-LAN market, Storage Dimensions believes that it is
well-positioned to take advantage of new opportunities being created by the
projected growth in the PC-LAN market, in particular the market for systems
utilizing Microsoft Windows NT ("Windows NT") and Novell NetWare ("NetWare").
The increased use of network computing to support business-critical
enterprise applications is fueling rapid demand growth for network disk storage
systems incorporating high performance, fault tolerance and high availability.
In addition, capacity requirements for network storage are accelerating due to
the deployment of data-intensive new applications, such as relational databases,
decision support systems, the Internet and intranets, video/multimedia and
document management. The Company believes that these factors will also increase
the demand for tape backup systems, which provide additional protection against
data loss in the event of various system malfunctions. While these factors are
driving the overall expansion of network storage, the PC-LAN storage market is
expected to grow disproportionately due, in part, to the deployment of
Intel-based servers using Pentium and Pentium Pro microprocessors, which offer
the computing power of RISC-based architectures at a significantly lower cost.
International Data Corporation ("IDC") projects that the U.S. market for PC-LAN
storage systems employing RAID technology will grow from $1.4 billion in 1995 to
$6.0 billion in 2000, a compound annual growth rate of 34%. These trends are
reinforced by the rapid adoption of the Windows NT operating system, which is
increasingly being used in mid-range database and application servers instead of
UNIX operating systems. IDC projects that the U.S. market for PC-LAN RAID
storage systems running on Windows NT servers will grow from $0.3 billion in
1995 to $2.1 billion in 2000, a compound annual growth rate of 50%.
Storage Dimensions' objective is to leverage its position as the leading
independent supplier of PC-LAN storage systems to capitalize on opportunities
presented by the projected growth in this market. Key elements of the Company's
strategy include the following: (i) focus on developing and marketing products
for the PC-LAN storage systems market, primarily for Windows NT and NetWare
applications; (ii) support customers' transition to Windows NT by designing
products that can be used in heterogeneous and dynamic network environments;
(iii) leverage proprietary systems integration software to bring new products
and features to market quickly; (iv) incorporate leading edge hardware in new
products through close relationships with key suppliers of storage system
components and technologies; (v) differentiate its products through proprietary
storage management software; (vi) provide comprehensive, proactive and
responsive customer service and support programs to end-user customers; and
(vii) leverage prior field sales and channel investments by maintaining both a
direct sales force and reseller distribution channels.
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The Company sells its products through a field sales force located in 15
domestic sales offices. In addition, the Company maintains multi-tiered
distribution channels comprised of distributors, national computer dealers,
systems integrators and VARs. Smaller customers have ready access to its
products through these indirect sales channels, and larger customers have the
option of sourcing directly from the Company or from a number of alternate
channels. Storage Dimensions' end-user customers include a broad range of
Fortune 1000 companies, including Cabletron Systems, Inc., the Centers for
Disease Control and Prevention, CNA Financial Corporation, Fleet Financial
Group, Inc., The Gap, Inc., Gateway 2000, MCI Telecommunications Corporation,
Pfizer Inc., The Southern Company and 3Com Corporation, as well as other major
corporations, institutions and governmental agencies.
The Company was incorporated in the State of Delaware in November 1992. In
an acquisition effected on December 26, 1992 (the "Acquisition"), the Company
acquired the assets and assumed the liabilities of the "Storage Dimensions"
subsidiary of Maxtor Corporation ("Maxtor") for an aggregate purchase price of
$21.4 million. The Acquisition was financed through equity investments in the
Company made by Capital Partners, Inc. ("Capital Partners") and certain of its
affiliates (collectively, the "Capital Partners Group"), by certain members of
the Company's management and by Maxtor. In addition, the Company entered into an
Investment Advisory Services Agreement (the "Advisory Agreement") with Capital
Partners, pursuant to which Capital Partners was to provide advisory services to
the Company for a term of five years and the Company was to pay Capital Partners
advisory fees of $360,000 per year. The Advisory Agreement was terminated in
December 1996. See "Certain Transactions." References herein to the
"Predecessor" are references to the Storage Dimensions subsidiary of Maxtor
prior to the Acquisition. The Company's address is 1656 McCarthy Boulevard,
Milpitas, California 95035 and its telephone number is (408) 954-0710.
"Storage Dimensions" and "LANStor" are registered trademarks of the
Company. This Prospectus also contains trademarks of other companies.
THE OFFERING
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Common Stock to be offered........................... 2,700,000 shares
Common Stock to be outstanding after the offering.... 7,836,623 shares(1)
Use of proceeds...................................... For repayment of outstanding debt and for
working capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol........................ STDM
</TABLE>
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(1) Based on the number of shares outstanding as of December 31, 1996. Excludes
481,754 shares of Common Stock issuable upon exercise of stock options
outstanding as of December 31, 1996. See "Management -- Employee Stock
Plans" and Notes 6 and 7 of the Notes to Consolidated Financial Statements.
------------------------
Except as set forth in the consolidated financial statements or as
otherwise indicated, all information in this Prospectus (i) reflects the
conversion of all of the Company's outstanding shares of Preferred Stock into
shares of Common Stock, which will occur automatically upon the closing of this
offering, (ii) reflects a one-for-four reverse stock split of the Company's
Common Stock effected in January 1997, and (iii) assumes that the Underwriters'
over-allotment option is not exercised. See "Description of Capital Stock,"
"Underwriting," and Notes 6 and 11 of Notes to Consolidated Financial
Statements. The Company operates and reports financial results on a
fifty-two/fifty-three week fiscal year cycle ending on the Saturday nearest
December 31. The Company also follows a five-four-four week quarterly cycle. For
convenience, the Company has presented its fiscal years as ending on December 31
and its fiscal quarters as ending on March 31, June 30, September 30 and
December 31. See Note 1 of Notes to Consolidated Financial Statements.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
PREDECESSOR COMPANY
------------ ----------------------------------------------------------------------------
NINE QUARTER ENDED
MONTHS YEAR ENDED --------------------------------------
ENDED DECEMBER 31, JUNE DEC.
DECEMBER 31, ---------------------------------- MARCH 31, 30, SEPT. 30, 31,
1992 1993 1994 1995 1996 1996 1996 1996 1996
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales:
Enterprise and OEM...... $ 8,764 $22,706 $40,088 $52,475 $69,873 $14,899 $17,795 $18,174 $19,005
Desktop................. 53,421 42,662 21,136 7,683 2,437 1,033 524 320 560
------- ------- ------- ------- ------- ------- ------- ------- -------
Total net sales....... 62,185 65,368 61,224 60,158 72,310 15,932 18,319 18,494 19,565
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............. 18,807 17,128 19,226 22,988 26,983 5,820 6,525 7,014 7,624
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing..... 9,040 10,108 10,662 13,344 14,081 3,130 3,492 3,507 3,952
Research and
development........... 2,943 3,623 4,339 5,377 5,872 1,340 1,409 1,616 1,507
General and
administrative........ 3,067 6,986 3,293 3,390 3,819 876 902 927 1,114
Advisory fee(1)......... -- 340 362 360 729 91 91 91 456
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 15,050 21,057 18,656 22,471 24,501 5,437 5,894 6,141 7,029
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations.............. 3,757 (3,929) 570 517 2,482 383 631 873 595
Net income (loss)......... 2,301 (5,527) (437) (636) 1,195 119 271 550 255
Pro forma net income per
share(2)................ 0.22 0.02 0.05 0.10 0.05
Supplemental pro forma net
income(3)............... 1,946 285 499 736 426
Supplemental pro forma net
income per share(3)..... 0.28 0.04 0.07 0.11 0.06
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
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ACTUAL AS ADJUSTED(4)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 1,682 $ 8,947
Working capital................................................................ 2,513 19,140
Total assets................................................................... 22,898 30,163
Short-term borrowings.......................................................... 9,629 267
Accumulated deficit............................................................ (5,405) (5,405)
Total stockholders' equity..................................................... 4,628 21,255
</TABLE>
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(1) Represents an advisory fee paid to Capital Partners pursuant to the Advisory
Agreement between the Company and Capital Partners. Two of the Company's
directors, Mr. Brian D. Fitzgerald and Mr. A. George Gebauer, are also
officers of Capital Partners and Mr. Fitzgerald is the founder of Capital
Partners. The Advisory Agreement was terminated in December 1996. The 1996
amount includes a one-time termination payment of $360,000. See "Certain
Transactions."
(2) Per share information for periods prior to the year ended December 31, 1996
has been omitted because it is not meaningful. See Note 1 of Notes to
Consolidated Financial Statements for an explanation of shares used in
computing pro forma net income per share.
(3) The supplemental pro forma information gives effect to the sale by the
Company of that number of shares of Common Stock sufficient to generate net
assets equal to the amount of the debt to be paid from the proceeds of this
offering, and the repayment of such debt, all as if the offering and debt
repayment had occurred at the beginning of the period. See "Use of Proceeds"
and "Certain Transactions."
(4) Adjusted to reflect the sale of 2,700,000 shares of Common Stock by the
Company hereby, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company and the application of
the estimated net proceeds therefrom, including the use of approximately
$9.4 million to repay amounts owed under a bank line of credit and a note
payable to Maxtor. See "Use of Proceeds" and "Capitalization."
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. In evaluating the Company's business, prospective investors should
consider carefully the following factors in addition to the other information
set forth in this Prospectus.
HISTORY OF OPERATING LOSSES; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company was organized in December 1992 as the result of a management
buyout of the Storage Dimensions subsidiary of Maxtor. The Company had an
accumulated deficit of $5.4 million as of December 31, 1996. While the Company
generated net income in 1996, it incurred losses in each of 1993, 1994 and 1995.
There can be no assurance that the Company will remain profitable on a quarterly
or annual basis.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including:
the level of competition; the size, timing, cancellation or rescheduling of
significant orders; product configuration and mix; market acceptance of new
products and product enhancements; new product announcements or introductions by
the Company's competitors; deferrals of customer orders in anticipation of new
products or product enhancements; changes in pricing by the Company or its
competitors; the impact of price protection measures and return privileges
granted by the Company to its distributors and VARs; the ability of the Company
to develop, introduce and market new products and product enhancements on a
timely basis; hardware component costs and availability, particularly with
respect to hardware components obtained from sole sources; hardware supply
constraints; the Company's success in expanding its sales and marketing
programs; technological changes in the network storage system market, in
particular the PC-LAN storage system market; the mix of sales among the
Company's sales channels; levels of expenditures on research and development;
changes in Company strategy; personnel changes; general economic trends and
other factors. In addition, the Company has experienced modest seasonality in
the past, with sales in the first quarter declining somewhat from the level
achieved in the fourth quarter of the prior year. The Company expects this trend
to continue in future periods and, as a result, expects net sales and results of
operations for the first quarter of 1997 to decrease from the levels achieved in
the fourth quarter of 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are shipped shortly after orders are received. As
a result, sales in any quarter are generally dependent on orders booked and
shipped in that quarter. Sales are also difficult to forecast because the PC-LAN
storage system market is rapidly evolving and the Company's sales cycles vary
substantially from customer to customer. The Company's customers generally have
the right to cancel orders at any time and to return the Company's products for
a refund. The cancellation of orders already placed and the return of products
could have a material adverse effect on the Company's operating results in any
quarter. Due to the typical timing of customer orders, the Company often ships
products representing a significant portion of its net sales for a quarter
during the last month of that quarter. Any significant deferral of these sales
could have a material adverse effect on the Company's results of operations in
any particular quarter. To the extent that the Company completes significant
sales earlier than expected, operating results for subsequent quarters may be
adversely affected. The Company's expense levels are based, in part, on its
expectations as to future sales. As a result, if sales levels are below
expectations, net income may be disproportionately affected.
Over the past several years, the Company has transitioned its focus from
desktop subsystem products to enterprise RAID products for use primarily in
PC-LAN network applications. As a result, the Company has become increasingly
dependent on the market for these products and on its ability to compete
successfully in this market. Although the Company has experienced growth in its
net sales of enterprise and OEM products in recent periods, the Company's net
sales from its desktop products have declined during the same periods. There can
be no assurance that the Company will continue to experience sales growth with
respect to its
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enterprise and OEM products in future periods. Due to all of the foregoing
factors, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as an
indicator of future performance. It is possible that in some future quarter the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially and adversely affected. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RELIANCE ON KEY CUSTOMERS AND INDIRECT DISTRIBUTION CHANNELS
The Company sells its products through a direct sales force and through
multi-tiered distribution channels. Approximately 70% of the Company's sales in
1996 were made through its indirect sales channels. In 1996, the Company's top
ten customers, of which six were distributors or VARs, accounted for
approximately 50% of the Company's total net sales. In particular, Xerox
Corporation ("Xerox"), an OEM customer, and Tech Data Corporation ("Tech Data"),
a distributor, accounted for approximately 13% and 8% of the Company's 1996
total net sales, respectively. In 1995, the Company's top ten customers, of
which eight were distributors or VARs, accounted for approximately 51% of its
total net sales, and Tech Data and Xerox accounted for approximately 15% and 11%
of the Company's total net sales, respectively. The Company expects that a high
percentage of its sales for the foreseeable future will be through indirect
channels and to a limited number of customers. There can be no assurance that
orders from existing customers will continue at their historical levels, or that
the Company will be able to obtain orders from new customers. The Company
generally has not entered into long-term volume purchase contracts with its
customers, and the Company's customers generally have certain rights to extend
or to delay the shipment of their orders. The Company provides price protection
to distributors such that, if the Company reduces the price of its products,
distributors are entitled to a credit for the difference between the new,
reduced price and the price they previously paid for products which are held in
the distributor's inventory at the time of the price reduction. As a result,
price reductions could have an immediate material adverse effect on the
Company's results of operations, depending upon distributor inventory levels at
the time of the price reduction. In 1995 and 1996, the Company issued
approximately $550,000 and $840,000, respectively, of credits in connection with
such price protection. The Company's distributors and VARs may also carry
competing product lines and could reduce or discontinue sales of the Company's
products, which could have a material adverse effect on the Company's operating
results. Although the Company believes that it provides adequate allowances for
product returns, there can be no assurance that actual returns will not exceed
recorded allowances which could have a material adverse effect on its operating
results. In addition, there can be no assurance that existing end-user customers
will not purchase their network storage equipment from the manufacturer that
provides their network computing systems and, as a result, reduce or eliminate
purchases from the Company. The loss of one or more of the Company's current
customers, particularly a principal customer, or cancellation or rescheduling of
orders already placed, could materially and adversely affect the Company's
business, operating results or financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The network storage system market is characterized by rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
increased storage capacities by the Company's competitors and the emergence of
new industry standards could render the Company's existing products obsolete and
unmarketable. The Company's future success will depend upon its ability to
develop and to introduce new products with increasing storage capabilities
(including new software releases and enhancements) on a timely basis that keep
pace with technological developments and emerging industry standards and address
the increasingly sophisticated needs of its customers. The Company intends to
begin shipping its entry level storage system product (RAIDPro) in the first
half of 1997 and its new intelligent storage server product in the second half
of 1997. There can be no assurance that the Company will be successful in
developing and releasing these two new products on its current schedule or at
all, or that these products will achieve market acceptance. The
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failure of the Company to achieve significant net sales from these two products
could have a material adverse effect on the Company's business, operating
results or financial condition. There can be no assurance that the Company will
be successful in developing and marketing any other products that respond to
technological changes or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products, in particular those for use with Windows NT,
in a timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will be materially and adversely affected.
Network storage system products like those offered by the Company may
contain undetected software errors or failures when first introduced or as new
versions are released. There can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found in new
products after commencement of commercial shipments, resulting in a loss of or
delay in market acceptance, which could have a material adverse effect on the
Company's business, operating results or financial condition. The Company's
standard warranty provides that if the system does not function to published
specifications the Company will repair or replace the defective component
without charge. Although to date the Company's suppliers of hardware components
have generally covered the warranty costs associated with such components, there
can be no assurance that such manufacturers will continue to be willing or able
to cover such costs, and their failure to do so would result in such costs being
borne by the Company. There can be no assurance that the Company's warranty
costs will not be significant in the future. Significant warranty costs,
particularly those that exceed reserves, could have a material adverse effect on
the Company's business, operating results or financial condition.
The Company's agreements with its customers typically contain provisions
intended to limit the Company's exposure to potential product liability claims.
It is possible that the limitation of liability provisions contained in the
Company's agreements may not be effective. Although the Company has not received
any product liability claims to date, the sale and support of products by the
Company and the incorporation of products from other companies may entail the
risk of such claims. A successful product liability claim against the Company
could have a material adverse effect on the Company's business, operating
results or financial condition.
DEPENDENCE ON GROWTH IN THE PC-LAN MARKET
Most of the Company's products address the PC-LAN market, in particular
NetWare and Windows NT applications. The Company currently intends to continue
to focus its development and marketing efforts on PC-LAN storage system
applications. While the Company may in the future evaluate opportunities outside
its target markets, no such products are currently under development. To date, a
significant portion of the Company's net sales have been derived from sales of
products for use with NetWare applications. The Company's future financial
performance will depend in large part on continued growth in the PC-LAN market,
in particular NetWare and Windows NT applications. There can be no assurance
that NetWare and Windows NT will remain the leading operating systems in the
PC-LAN market, or that the PC-LAN market will grow at rates currently
anticipated, or at all. If the PC-LAN market fails to grow or grows more slowly
than anticipated, or if PC-LAN storage systems based on emerging standards other
than NetWare or Windows NT and other standards adopted by the Company become
increasingly accepted by the market, the Company's business, operating results
and financial condition would be materially and adversely affected. During
recent years, segments of the computer industry have experienced significant
economic downturns characterized by decreased product demand, production
overcapacity, price erosion, work slowdowns and layoffs. The Company's
operations may in the future experience substantial fluctuations from period to
period as a consequence of such industry patterns, general economic conditions
affecting the timing of orders from major customers and other factors affecting
capital spending. There can be no assurance that such factors will not have a
material adverse effect on the Company's business, operating results or
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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COMPETITION
The network storage system market is intensely competitive. The Company
competes primarily in the PC-LAN server storage market and experiences the
greatest competition from traditional suppliers of PC-LAN network servers, such
as Compaq Corporation ("Compaq"), Hewlett-Packard Company ("Hewlett-Packard")
and International Business Machines Corporation ("IBM"), who market storage
systems as part of their complete computer systems. Storage Dimensions also
competes against independent storage system suppliers to the PC-LAN server
market, including DEC Storage Works, MTI Technology, Procom Technology, Inc. and
StreamLogic Corporation. In addition, providers of storage for the mainframe or
UNIX-based markets, such as Auspex Systems, Inc., Data General Corporation, EMC
Corporation, Network Appliance, Inc., Storage Computer, Inc. and Symbios Logic,
Inc., could develop and market products that address the PC-LAN storage systems
market, and in particular Windows NT applications. Many of the Company's current
and potential competitors have significantly greater financial, technical,
marketing, purchasing and other resources than the Company, and as a result, may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, to devote greater resources to the development, promotion
and sale of products than can the Company, or to deliver competitive products at
a lower end-user price. The Company also expects that competition will increase
as a result of industry consolidations. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results or financial condition.
The Company believes that the principal competitive factors affecting its
market include: fault-tolerant reliability, performance, ease of use,
scalability, configurability, price and customer service and support. There can
be no assurance that the Company will be able to successfully incorporate these
factors into its products and to compete against current or future competitors
or that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results or financial condition. See
"Business -- Competition."
DEPENDENCE ON LIMITED NUMBER OF SUPPLIERS OF HIGH QUALITY COMPONENTS
The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. For example, the
Company purchases disk drives primarily from Seagate Technology, Inc.
("Seagate") and Micropolis Corporation ("Micropolis"), DLT tape drives
exclusively from Quantum Corporation ("Quantum") and DGR (Dynamic Growth and
Reconfiguration) RAID controllers exclusively from American Megatrends, Inc.
("American Megatrends"). The Company's reliance on its suppliers involves
several risks, including: an inadequate supply of required components; price
increases; late deliveries; and poor component quality. These risks are
particularly significant with respect to suppliers of disk drives because, in
order to meet product performance requirements, the Company must obtain disk
drives with extremely high quality and capacity. In addition, there is currently
a significant market demand for disk drives, tape drives and RAID controllers,
and from time to time the Company may experience component shortages, selective
supply allocations and increased prices of such components. Although to date the
Company has been able to purchase its requirements of such components, there can
be no assurance that the Company will be able to obtain its full requirements of
such components in the future or that prices of such components will not
increase. In addition, there can be no assurance that problems with respect to
yield and quality of such components and timeliness of deliveries will not
occur. Disruption or termination of the supply of these components could delay
shipments of the Company's products and could have a material adverse effect on
the Company's business, operating results or financial condition. Such delays
could also damage relationships with current and prospective customers. See
"Business -- Manufacturing."
In the past, due to the Company's quality requirements, the Company has
experienced delays in the shipments of its new products principally due to an
inability to qualify component parts from disk drive manufacturers and other
suppliers, resulting in delay or loss of product sales. The Company has
currently
9
<PAGE> 11
qualified disk drives manufactured by Seagate and Micropolis, tape drives from
Quantum, and RAID controllers from Mylex Corporation ("Mylex") and American
Megatrends. Although these delays in the past have not had a material adverse
effect upon the Company's business, operating results or financial condition,
there can be no assurance that in the future any such delays would not have such
a material adverse effect.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
Storage Dimensions' success depends significantly upon its proprietary
technology. The Company currently relies on a combination of copyright and
trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company has registered
its Storage Dimensions and LANStor trademarks and will continue to evaluate the
registration of additional trademarks as appropriate. The Company generally
enters into confidentiality agreements with its employees and with key vendors
and suppliers. The Company currently has one U.S. patent application pending
associated with the object-oriented layered architecture of its RAIDFlex array
management software. There can be no assurance that this patent will eventually
be issued, that the Company will develop proprietary products or technologies
that are patentable, that any patent issued in the future will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the Company's ability to do business. The Company believes that the rapidly
changing technology in the computer storage industry makes the Company's success
dependent more on the technical competence and creative skills of its personnel
than on any patents it may be able to obtain.
There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that companies in
the storage system market will increasingly be subject to infringement claims as
the number of products and competitors in the Company's target markets grows.
Any such claims or litigation may be time-consuming and costly, cause product
shipment delays, require the Company to redesign its products or require the
Company to enter into royalty or licensing agreements, any of which could have a
material adverse effect on the Company's business, operating results or
financial condition. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company. See "Business -- Proprietary Technology and Intellectual Property."
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends in significant part upon the
continued service of its key technical and senior management personnel. The
Company provides incentives such as salary, benefits and option grants (which
are typically subject to vesting over four years) to attract and retain
qualified employees. The loss of the services of one or more of the Company's
officers or other key employees could have a material adverse effect on the
Company's business, operating results or financial condition. The Company's
future success also depends on its continuing ability to attract and retain
highly qualified technical and management personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its key technical and management employees or that it can attract, assimilate or
retain other highly qualified technical and management personnel in the future.
See "Business -- Employees" and "Management."
10
<PAGE> 12
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after this offering. The initial
public offering price was determined by negotiation between the Company and the
Underwriters based upon several factors, and may not be indicative of future
market prices. See "Underwriting" for information relating to the factors used
in determining the initial public offering price. The trading price of the
Company's Common Stock could be subject to wide fluctuations in response to a
number of factors, including quarterly variations in operating results,
announcements of technological innovations or new products, applications or
product enhancements by the Company or its competitors, changes in financial
estimates by securities analysts and other events. In addition, the stock market
has experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock after this offering
could adversely affect the market price of the Company's Common Stock and could
impair the Company's ability to raise capital through the sale of equity
securities. Upon completion of this offering, the Company will have outstanding
7,836,623 shares of Common Stock, assuming no exercise of options outstanding as
of December 31, 1996. Of these shares, the 2,700,000 shares offered hereby
(3,105,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act of 1933, as amended (the "Securities Act"), unless purchased
by "affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Rule 144") described below. The remaining 5,136,623 shares of
Common Stock outstanding upon completion of this offering are "restricted
securities" as that term is defined in Rule 144. All of these shares are subject
to Lock-Up Agreements (described below); accordingly, none of these shares will
be eligible for immediate sale upon commencement of this offering. Upon
expiration of the Lock-Up Agreements (which occurs on the date 180 days after
commencement of this offering), an aggregate of 254,132 shares will become
eligible for sale without restriction pursuant to Rule 144(k) or Rule 701 under
the Securities Act and approximately 4,882,491 additional shares will be
eligible for sale subject to the volume and manner of sale restrictions of Rule
144. See "Shares Eligible for Future Sale." Holders of an aggregate of 4,806,623
shares will have the right to require the Company to register such shares for
sale under the Securities Act. See "Description of Capital Stock -- Registration
Rights."
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of this offering, the Company's executive officers and
directors, together with their affiliates, will beneficially own approximately
63.1% of the Company's outstanding shares of Common Stock. Accordingly, these
stockholders, if acting together, will be able to elect the Company's directors,
approve mergers and other change in control transactions involving the Company
and take other corporate actions requiring stockholder approval, regardless of
how other stockholders of the Company may vote. See "Management," "Principal
Stockholders" and "Description of Capital Stock."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation, as
amended and restated, and Bylaws, as amended, Delaware law and the Company's
indemnification agreements with certain officers and directors of the Company
may be deemed to have an anti-takeover effect. Such provisions may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
to be in that stockholder's best interests, including attempts that might result
in a premium over the market price for the shares held by stockholders.
The Company's Board of Directors may issue additional shares of Common
Stock or establish one or more classes or series of Preferred Stock, having the
number of shares (up to 10,000,000), designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations as
determined by
11
<PAGE> 13
the Board of Directors without stockholder approval. The Company's Certificate
of Incorporation, as amended and restated, and Bylaws, as amended, also contain
a number of provisions that could impede a takeover or change in control of the
Company, including but not limited to the elimination of stockholders' ability
to take action by written consent and a fair price requirement.
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Each of the foregoing provisions gives the Board of Directors, acting
without stockholder approval, the ability to prevent, or render more difficult
or costly, the completion of a takeover transaction that stockholders might view
as being in their best interests. See "Description of Capital
Stock -- Anti-Takeover Provisions."
DILUTION
Investors participating in this offering will incur immediate, substantial
dilution. To the extent outstanding options to purchase the Company's Common
Stock are exercised, there will be further dilution. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,700,000 shares of
Common Stock being offered by the Company hereby, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, are estimated to be approximately $16.6 million ($19.3 million if the
Underwriters' over-allotment option is exercised in full). The Company expects
to use the net proceeds from this offering to repay indebtedness under the
Company's revolving line of credit facility ($5.8 million outstanding as of
December 31, 1996) and $3.6 million owed to Maxtor under a subordinated note
dated December 26, 1992 (the "Maxtor Note"), and for general corporate purposes,
including working capital and capital expenditures. The line of credit expires
in May 1998 and bears interest at the rate of prime plus 1% (9.25% as of
December 31, 1996). Amounts owed under the Maxtor Note bear interest at 12%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions." A portion of the net proceeds may also
be used to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. The Company has no present
plans, agreements or commitments and is not currently engaged in any
negotiations with respect to any such transactions. Pending use of the net
proceeds for the above purposes, the Company intends to invest such funds in
short-term, interest-bearing, investment grade obligations.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock or other
securities. The Company currently anticipates that it will retain all of its
future earnings for use in the expansion and operation of its business and does
not anticipate paying any cash dividends in the foreseeable future.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the total capitalization of the Company at
December 31, 1996 and such capitalization as adjusted to give effect to the
conversion of the Company's Preferred Stock into Common Stock and the sale by
the Company of the 2,700,000 shares of Common Stock offered by the Company
hereby (after deducting underwriting discounts and commissions and estimated
offering expenses) and the application of net proceeds to the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Short-term borrowings(1)....................................... $ 9,629 $ 267
======= =======
Stockholders' equity:
Preferred Stock, $0.005 par value; 13,850,000 shares
authorized, 13,849,670 shares issued and outstanding,
actual(2); 10,000,000 shares authorized, none issued and
outstanding, as adjusted.................................. $ 69 $ --
Common Stock, $0.005 par value; 22,500,000 shares authorized,
1,674,212 shares issued and outstanding, actual;
40,000,000 shares authorized, 7,836,623 shares issued and
outstanding, as adjusted(3)............................... 8 39
Additional paid-in capital................................... 10,442 27,107
Deferred compensation........................................ (486) (486)
Accumulated deficit.......................................... (5,405) (5,405)
------- -------
Total stockholders' equity................................ 4,628 21,255
------- -------
Total capitalization................................. $ 4,628 $21,255
======= =======
</TABLE>
- ---------------
(1) See Notes 2 and 4 of Notes to Consolidated Financial Statements.
(2) Upon completion of this offering, each four outstanding shares of Preferred
Stock will automatically convert into one share of Common Stock.
(3) As of December 31, 1996, there were options outstanding to purchase an
aggregate of 481,754 shares of Common Stock at a weighted average exercise
price of $0.55 per share and 1,024,586 shares were reserved for future
issuance under the Company's employee stock plans. See
"Management -- Employee Stock Plans" and Note 7 of Notes to Consolidated
Financial Statements.
13
<PAGE> 15
DILUTION
The net tangible book value of the Company as of December 31, 1996 was
$4,628,000 or $0.90 per common equivalent share. Net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of common
equivalent shares outstanding at that date. After giving effect to the sale by
the Company of the 2,700,000 shares of Common Stock offered hereby (after
deduction of underwriting discounts and commissions and estimated offering
expenses payable by the Company), the Company's pro forma net tangible book
value at December 31, 1996 would have been $21,255,000 or $2.71 per share. This
represents an immediate increase in net tangible book value to existing
stockholders of $1.81 per share and an immediate dilution to new investors of
$4.29 per share. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $7.00
Net tangible book value per share as of December 31, 1996.................. $0.90
Increase in net tangible book value per share attributable to new
investors............................................................... 1.81
-----
Pro forma net tangible book value per share after the offering............... 2.71
-----
Dilution per share to new investors.......................................... $4.29
=====
</TABLE>
The following table sets forth on a pro forma basis as of December 31, 1996
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid, and the average price per share paid by
existing stockholders and by the new investors (before deduction of underwriting
discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 5,136,623 65.5% $ 9,599,000 33.7% $1.87
New investors..................... 2,700,000 34.5 18,900,000 66.3 7.00
--------- ------ ----------- ------
Total................... 7,836,623 100.0% $28,499,000 100.0%
========= ====== =========== ======
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no exercise of stock options outstanding at December 31, 1996. As of
December 31, 1996, there were options outstanding to purchase a total of 481,754
shares of Common Stock at a weighted average exercise price of $0.55 per share
and 1,024,586 shares were reserved for grant of future options under the
Company's option plans. To the extent that any of these options are exercised,
there will be further dilution to new investors. See "Capitalization,"
"Management -- Employee Stock Plans" and Notes 6 and 7 of Notes to Consolidated
Financial Statements.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The consolidated statement of
operations data for the years ended December 31, 1994, 1995 and 1996 and the
consolidated balance sheet data as of December 31, 1995 and 1996 are derived
from consolidated financial statements of the Company that have been audited by
Price Waterhouse LLP, independent accountants, and are included elsewhere in
this Prospectus. The consolidated statement of operations data for the nine
months ended December 31, 1992 and the fiscal year ended December 31, 1993 and
the balance sheet data as of December 31, 1992, 1993 and 1994 are derived from
the audited consolidated financial statements of the Company that are not
included herein. The historical results are not necessarily indicative of the
results of operations to be expected in the future.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ -------------------------------------
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------
1992 1993 1994 1995 1996
------------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales:
Enterprise and OEM................................... $ 8,764 $22,706 $40,088 $52,475 $69,873
Desktop.............................................. 53,421 42,662 21,136 7,683 2,437
------- ------- ------- ------- -------
Total net sales............................... 62,185 65,368 61,224 60,158 72,310
Cost of sales.......................................... 43,378 48,240 41,998 37,170 45,327
------- ------- ------- ------- -------
Gross profit........................................... 18,807 17,128 19,226 22,988 26,983
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.................................. 9,040 10,108 10,662 13,344 14,081
Research and development............................. 2,943 3,623 4,339 5,377 5,872
General and administrative........................... 3,067 6,986 3,293 3,390 3,819
Advisory fee(1)...................................... -- 340 362 360 729
------- ------- ------- ------- -------
Total operating expenses...................... 15,050 21,057 18,656 22,471 24,501
------- ------- ------- ------- -------
Income (loss) from operations.......................... 3,757 (3,929) 570 517 2,482
Other income (expense), net............................ (46) (997) (983) (1,123) (1,155)
------- ------- ------- ------- -------
Income before provision for income taxes............... 3,711 (4,926) (413) (606) 1,327
Provision for income taxes............................. 1,410 601 24 30 132
------- ------- ------- ------- -------
Net income (loss)...................................... $ 2,301 $(5,527) $ (437) $ (636) $ 1,195
======= ======= ======= ======= =======
Pro forma net income per share(2)...................... $ 0.22
=======
Weighted average common and common equivalent shares
outstanding(2)....................................... 5,529
=======
Supplemental pro forma net income(3)................... $ 1,946
=======
Supplemental pro forma net income per share(2)(3)...... $ 0.28
=======
Supplemental pro forma shares outstanding(3)........... 6,924
=======
</TABLE>
<TABLE>
<CAPTION>
COMPANY
-------------------------------------
PREDECESSOR
------------ DECEMBER 31,
DECEMBER 31, -------------------------------------
1992 1993 1994 1995 1996
------------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 4,257 $ 502 $ 470 $ 363 $ 1,682
Working capital........................................ 12,512 1,952 2,680 543 2,513
Total assets........................................... 27,633 18,332 18,001 19,751 22,898
Long-term debt, less current portion................... -- 2,667 2,800 -- --
Total stockholders' equity............................. 16,203 3,580 3,331 2,862 4,628
</TABLE>
- ---------------
(1) Represents an advisory fee paid to Capital Partners pursuant to the Advisory
Agreement. The Advisory Agreement was terminated in December 1996. The 1996
amount includes a one-time termination payment of $360,000. See "Certain
Transactions."
(2) Per share information for periods prior to the year ended December 31, 1996
has been omitted because it is not meaningful. See Note 1 of Notes to
Consolidated Financial Statements for an explanation of shares used in
computing pro forma net income per share.
(3) The supplemental pro forma information gives effect to the sale by the
Company of that number of shares of Common Stock sufficient to generate net
assets equal to the amount of the debt to be paid from the proceeds of this
offering, and the repayment of such debt, all as if the offering and debt
repayment had occurred at the beginning of the period. See "Use of Proceeds"
and "Certain Transactions."
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section as well as those discussed
under the caption "Risk Factors" elsewhere in this Prospectus.
OVERVIEW
The Company was formed in late 1992 to acquire the assets of the "Storage
Dimensions" subsidiary of Maxtor for an aggregate of $21.4 million. The
Acquisition, which was completed in December 1992, was financed through equity
investments in the Company made by the Capital Partners Group by certain members
of management and by Maxtor. A portion of the purchase price was also funded
through bank borrowings and through a subordinated term loan in the principal
amount of $4 million payable to Maxtor. The note payable to Maxtor was
originally due December 31, 1995 but the maturity date was extended to the
earlier to occur of the completion of this offering or May 10, 1997. A portion
of the proceeds of this offering will be used to repay the remaining balance due
to Maxtor.
Prior to the Acquisition, the Predecessor was primarily engaged in
designing, manufacturing and selling high volume storage products that attached
to PCs and Macintosh computers and low-end servers. These desktop products
generally incorporated Maxtor disk drives. As part of its strategy to develop a
business that could successfully operate independently from Maxtor and would
generate higher gross margins, during 1992 the Predecessor began to sell RAID
products targeted at the enterprise storage markets. For the nine months ended
December 31, 1992, desktop and enterprise/OEM product sales represented 85.9%
and 14.1%, respectively, of total net sales. In furtherance of its long-term
strategy, the transition was accelerated following the Acquisition such that, in
1994 enterprise/OEM product sales represented a majority of total net sales and,
for the year ended December 31, 1996, enterprise/OEM product sales grew to 96.6%
of total net sales. As the mix shifted from desktop products to enterprise/OEM
products, the gross margins improved from 26% in 1993 to 37% in 1996. The
Company does not expect sales of desktop products to represent a material
portion of its net sales in future periods.
The transition from desktop storage to enterprise RAID storage products
required a significant investment in research and development, sales and
marketing, and operations. To implement this transition, the Company
significantly enhanced its infrastructure and employee expertise during 1994,
1995 and 1996, and operating expenses increased from 32% of sales in 1993 to 34%
in 1996. The largest single expense associated with this transition was the
staffing of a direct end-user sales organization starting in the third quarter
of 1994.
The absorption of fixed manufacturing overhead suffered during the
transition from desktop to enterprise/OEM products as manufacturing volume
decreased and RAID systems required more sophisticated and time consuming
integration and test processes. The sale of the Company's Macintosh product line
in 1994 further reduced volume and exacerbated the unfavorable overhead
absorption situation. By the end of 1995 and continuing through 1996, the higher
manufacturing volumes of the Company's RAID enterprise/OEM products resulted in
greater overhead absorption and reductions in the per-unit manufacturing costs
of such products. At the end of 1996, the Company had significant excess
manufacturing capacity remaining. As a result, if manufacturing volumes were to
increase, the Company would expect to achieve further economies of scale and
lower per-unit manufacturing costs.
Revenue from product sales is recognized upon shipment. Net sales reflect
the invoiced amount for goods shipped less reserves for estimated returns. The
Company provides price protection to its distributors such that, if the Company
reduces the price of its products, distributors are entitled to a credit for the
difference between the new, reduced price and the price they previously paid for
products which are held in the distributor's inventory at the time of the price
reduction. As a result, price reductions could have a material adverse effect on
results of operations, depending upon distributor inventory levels at the time
of the price
16
<PAGE> 18
reduction. In 1994, 1995 and 1996, the Company issued approximately $161,000,
$550,000 and $840,000, respectively, of credits in connection with such price
protection.
Storage Dimensions utilizes a direct sales force to penetrate major new
accounts, to create demand for its products, and to secure repeat business from
existing customers. Storage Dimensions also maintains reseller distribution
channels that facilitate procurement of the Company's products by small and
medium-sized end-users, producing incremental revenues from its marketing, sales
and promotional efforts. In addition, certain large customers prefer to source
through the reseller channels as part of their overall network equipment
sourcing and integration strategy. Therefore, the Company's resellers also
fulfill some large customer orders that were generated by the Company's direct
sales force. With its basic field sales organization and distribution channels
in place, the Company believes that it can generate additional sales at a lower
incremental selling cost, and intends to expand its field sales operations to
further leverage its current investment.
In connection with the Acquisition, the Company entered into the Advisory
Agreement with Capital Partners pursuant to which Capital Partners provided
advisory services to the Company. The Company paid $362,000 in 1994, $360,000 in
1995 and $729,000 in 1996 pursuant to the Advisory Agreement. The 1996 amount
includes a one-time payment of $360,000 paid by the Company in connection with
termination of the Advisory Agreement by mutual agreement in December 1996. The
foregoing amounts comprise the "Advisory Fee" expense item in the Company
Financial Statements. See "Certain Transactions."
During 1996, the Company agreed to issue an option to a consultant (the
"Consultant Option") pursuant to which the consultant will be entitled to
purchase up to 25,000 shares of Common Stock at an exercise price of $0.20 per
share. Rights under the Consultant Option are contingent upon successful
completion of this offering. The Company recorded a compensation charge in the
fourth quarter of 1996 of approximately $175,000, which represents the estimated
net value of the option as of December 31, 1996. Such amount was included in
general and administrative expenses.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statement of operations as a percentage of net sales for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales:
Enterprise and OEM............................ 65.5% 87.2% 96.6%
Desktop....................................... 34.5 12.8 3.4
----- ----- -----
Total net sales....................... 100.0% 100.0% 100.0%
===== ===== =====
Cost of sales................................... 68.6 61.8 62.7
----- ----- -----
Gross profit.................................... 31.4 38.2 37.3
----- ----- -----
Operating expenses:
Sales and marketing........................... 17.4 22.2 19.5
Research and development...................... 7.1 8.9 8.1
General and administrative.................... 5.4 5.6 5.3
Advisory fee.................................. 0.6 0.6 1.0
----- ----- -----
Total operating expenses.............. 30.5 37.3 33.9
----- ----- -----
Income from operations.......................... 0.9 0.9 3.4
Other income (expense), net..................... (1.6) (1.9) (1.6)
----- ----- -----
Income (loss) before provision for income
taxes......................................... (0.7) (1.0) 1.8
Provision for income taxes...................... -- -- 0.2
----- ----- -----
Net income(loss)................................ (0.7)% (1.0)% 1.6%
===== ===== =====
Supplemental pro forma net income............... 2.7%
=====
</TABLE>
17
<PAGE> 19
1996 COMPARED TO 1995
Net Sales. Net sales increased 20.2% to $72.3 million in 1996, compared to
$60.2 million during 1995. Sales of enterprise/OEM products and desktop products
represented 96.6% and 3.4%, respectively, of total net sales in 1996 compared to
87.2% and 12.8%, respectively, in 1995, reflecting the continued shift in the
Company's product strategy toward these newer products. Net enterprise/OEM
product sales increased 33.1% to $69.8 million in 1996 compared to $52.5 million
in 1995. This increase resulted primarily from increased sales of previously
existing products and sales of products introduced in late 1995 and in 1996,
including: products incorporating dynamic growth and reconfigurability ("DGR")
features; enterprise storage products for Windows NT-based environments; and new
products incorporating 9 gigabyte disk drives. The level of sales to the
Company's primary OEM customer also increased in 1996. The Company believes that
these increases in sales are attributable, at least in part, to the Company's
increase of its sales staff in late 1994 and early 1995 which became more
productive in 1996. Desktop product sales decreased 68.0% to $2.5 million in
1996 compared to $7.7 million in 1995. The Company does not expect sales of
desktop products to represent a material portion of its total net sales in
future periods.
Gross Profit. Gross profit for 1996 was $27.0 million, or 37.3% of net
sales, compared to $23.0 million, or 38.2% of net sales in 1995. The decrease in
gross profit as a percentage of net sales in 1996 was primarily attributable to
pricing pressures in the market for products using 4 gigabyte disk drives during
the first half of 1996, as well as a relative increase in OEM sales which
generally carry lower gross profit margins than enterprise products. The adverse
effects of these factors were partially offset by the overall increase in sales
of enterprise products which tend to carry higher gross margins, manufacturing
efficiencies resulting from the higher level of sales of enterprise/OEM products
and the elimination from the Company's desktop product line of certain
lower-margin, commodity-like products. The Company's gross margin has been and
will continue to be affected by a variety of factors, including: competition;
product configuration; the mix of direct versus indirect sales; the mix of
desktop, enterprise and OEM products sold in any given period; the availability
of new products and product enhancements which tend to carry higher gross
margins than older products; and the cost and availability of components.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions, advertising and promotional costs and customer service
and support expenses. Sales and marketing expenses for 1996 totaled $14.1
million, or 19.5% of net sales, compared to $13.3 million, or 22.2% of net sales
in 1995. Sales and marketing expense in 1996 in absolute amount was relatively
flat compared to 1995 as the Company did not significantly increase its sales
staff during most of 1996. The decrease in sales and marketing expense as a
percentage of net sales in 1996 resulted from increased productivity of the
sales and marketing organization. In late 1996, the Company again began to
expand its sales organization which will result in an increase in sales and
marketing expenses in absolute amount. There can be no assurance that there will
be a proportional increase in net sales and, as a result, sales and marketing
expenses as a percentage of net sales are expected to fluctuate in future
periods.
Research and Development. Research and development expenses consist
primarily of employee compensation, prototype expenses and fees paid to outside
consultants. To date no software development costs have been capitalized.
Research and development expenses for 1996 totaled $5.9 million, or 8.1% of net
sales, compared to $5.4 million, or 8.9% of net sales in 1995. The increase in
research and development spending in absolute amount during 1996 was primarily a
result of increased staffing levels necessary to support continued development
of RAID products, primarily for the enterprise storage environment. The decrease
as a percentage of net sales was a result of the more rapid increase in the
level of sales in 1996 as compared to research and development spending. The
Company believes that significant and continued investments in research and
development will be required to remain competitive and expects that these
expenditures will increase in absolute dollars in future periods and to
fluctuate as a percentage of net sales.
General and Administrative. General and administrative expenses consist
primarily of compensation expenses for employees performing the Company's
administrative functions. General and administrative expenses for 1996 totaled
$3.8 million, or 5.3% of net sales, compared to $3.4 million, or 5.6% of net
sales in 1995. General and administrative expenses increased in absolute amount
primarily as a result of consulting
18
<PAGE> 20
costs associated with strategic planning activities. The Company believes that
it will incur additional general and administrative expenses associated with
operating as a public company.
Advisory Fee. The advisory fees consist of amounts payable to Capital
Partners pursuant to the Advisory Agreement. Advisory fees totaled $729,000, or
1.0% of net sales in 1996, compared to $360,000, or 0.6% of net sales in 1995.
The 1996 amount includes a one-time payment of $360,000 made in connection with
termination of the Advisory Agreement. No further advisory fees will be payable
under the Advisory Agreement. See "Certain Transactions."
Other Income (Expense), Net. Other income (expense), net consists primarily
of interest payments on outstanding debt. Other income (expense), net was an
expense of $1.2 million in 1996, up from an expense of $1.1 million in 1995. The
difference primarily represents a one time charge relating to the refinancing of
the Company's revolving line of credit during 1996. Other income (expense), net
in future periods is expected to benefit from the investment of the proceeds of
this offering as well as the reduction in debt following the offering. See "Use
of Proceeds."
Income Taxes. Income tax expenses incurred in 1995 and 1996 consist of
federal alternative minimum taxes and California minimum franchise taxes and
taxes paid outside the United States. Operating loss carryforwards generated
during recent periods when the Company was not profitable were virtually
exhausted as of December 31, 1996. Remaining gross deferred tax assets of
$1,695,000 at December 31, 1996 are primarily attributable to differences
between the financial accounting and tax deductibility of certain items
including inventory reserves, depreciation and amortization, research and
development credits and compensation accruals. In determining likelihood of
future realization of the net deferred tax assets, management considered various
factors including the Company's past history of losses and variability in
quarterly results, and the significant competitive pressures in the industry in
which the Company operates. See "Risk Factors -- History of Operating Losses;
Potential Fluctuations in Quarterly Results." In the opinion of management,
based on these factors, as of December 31, 1996, it was considered more likely
than not that the gross deferred tax assets would not be realized. Accordingly,
at December 31, 1996, the Company recorded a full valuation allowance for these
deferred tax assets. A future change in the Company's assessment of the
likelihood of future realization of deferred tax assets could result in a
reduction of the valuation allowance, a corresponding reduction in the Company's
income tax expense recorded for financial statement purposes and a corresponding
increase in net income. This would not, however, result in a change in actual
income taxes payable by the Company in any future period. See Note 5 of Notes to
the Consolidated Financial Statements.
1995 COMPARED TO 1994
Net Sales. Net sales decreased 1.7% to $60.2 million in 1995, compared to
$61.2 million during 1994. Sales decreased primarily due to a 63% decrease in
sales of desktop products, partially offset by a 30% increase in sales of
enterprise/OEM products. Enterprise/OEM products accounted for 87.2% of the net
sales in 1995, up from 65.5% of net sales in 1994.
Gross Profit. Gross profit for 1995 was $23.0 million, or 38.2% of net
sales, compared to $19.2 million, or 31.4% of net sales in 1994. The increase in
gross profit as a percentage of net sales in 1995 was primarily attributable to
a favorable sales mix of higher-end enterprise systems included in
enterprise/OEM product revenues partially offset by an unfavorable mix in sales
of lower margin desktop products included in desktop product revenues in the
period.
Sales and Marketing. Sales and marketing expenses for 1995 totaled $13.3
million, or 22.2% of net sales, compared to $10.7 million, or 17.4% of net sales
in 1994. Sales and marketing expenses increased in absolute amount and as a
percent of net sales in 1995 primarily as a result of the Company's efforts to
build its sales and marketing organization to support the transition from
indirect to direct sales efforts.
Research and Development. Research and development expenses for 1995
totaled $5.4 million, or 8.9% of net sales, compared to $4.3 million, or 7.1% of
net sales in 1994. The increase in research and development spending in both
absolute amount and as a percentage of net sales during 1995 was primarily a
result of development activities related to the Company's RAID products.
19
<PAGE> 21
General and Administrative. General and administrative expenses for 1995
totaled $3.4 million, or 5.6% of net sales, compared to $3.3 million, or 5.4% of
net sales in 1994. General and administrative expenses in both absolute amount
and as a percentage of net sales were relatively flat from 1994 to 1995 as
management responded to flat overall sales levels.
Advisory Fee. Advisory fees totaled $360,000 and $362,000 in 1995 and 1994,
respectively, and constituted 0.6% of net sales in both years.
Other Income (Expense), Net. Other income (expense), net was an expense of
$1.1 million in 1995, up from an expense of $983,000 in 1994. The increase in
1995 was primarily attributable to higher average loan balances during the year
as well as an increased interest rate on the loan payable to Maxtor. See
"Certain Transactions."
Income Taxes. Income tax expenses incurred in 1994 and 1995 were minimal as
a result of operating losses incurred. Gross deferred tax assets of $2,259,000
at December 31, 1995 are primarily attributable to operating loss carryforwards
and differences between the financial accounting and tax deductibility of
certain items including inventory reserves, depreciation and amortization,
research and development credits and compensation accruals. In the opinion of
management, as of December 31, 1995, it was considered more likely than not that
the net deferred tax assets would not be realized. Accordingly, at December 31,
1995, the Company recorded a full valuation allowance for these deferred tax
assets. See Note 5 of Notes to the Consolidated Financial Statements.
20
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited consolidated statement of
operations data for each of the eight quarters in the two years ended December
31, 1996, as well as such data expressed as a percentage of the Company's net
sales for the periods indicated. This data has been derived from unaudited
consolidated financial statements and has been prepared on the same basis as the
Company's audited Consolidated Financial Statements which appear elsewhere in
this Prospectus. In the opinion of the Company's management, this data includes
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
1995 1996
--------------------------------------------- ---------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales:
Enterprise and OEM............... $11,806 $12,624 $13,088 $14,957 $14,899 $17,795 $18,174 $19,005
Desktop.......................... 3,282 1,560 1,542 1,299 1,033 524 320 560
------- ------- ------- ------- ------- ------- ------- -------
Total net sales............ 15,088 14,184 14,630 16,256 15,932 18,319 18,494 19,565
Cost of sales...................... 9,442 8,787 8,841 10,100 10,112 11,794 11,480 11,941
------- ------- ------- ------- ------- ------- ------- -------
Gross profit....................... 5,646 5,397 5,789 6,156 5,820 6,525 7,014 7,624
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.............. 3,359 3,283 3,347 3,355 3,130 3,492 3,507 3,952
Research and development......... 1,217 1,373 1,343 1,444 1,340 1,409 1,616 1,507
General and administrative....... 892 818 826 854 876 902 927 1,114
Advisory fee..................... 91 88 91 90 91 91 91 456
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses... 5,559 5,562 5,607 5,743 5,437 5,894 6,141 7,029
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations...... 87 (165) 182 413 383 631 873 595
Other income (expense), net........ (269) (315) (280) (259) (255) (351) (286) (263)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
income taxes..................... (182) (480) (98) 154 128 280 587 332
Provision for income taxes......... 0 6 5 19 9 9 37 77
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).................. $ (182) $ (486) $ (103) $ 135 $ 119 $ 271 $ 550 $ 255
======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income per share..... $ 0.02 $ 0.05 $ 0.10 $ 0.05
======= ======= ======= =======
Shares used in per share
calculations..................... 5,496 5,496 5,562 5,572
======= ======= ======= =======
AS A PERCENTAGE OF REVENUES:
Net sales:
Enterprise and OEM............... 78.2% 89.0% 89.5% 92.0% 93.5% 97.1% 98.3% 97.1%
Desktop.......................... 21.8 11.0 10.5 8.0 6.5 2.9 1.7 2.9
------- ------- ------- ------- ------- ------- ------- -------
Total net sales............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 62.6 62.0 60.4 62.1 63.5 64.4 62.1 61.0
------- ------- ------- ------- ------- ------- ------- -------
Gross profit....................... 37.4 38.0 39.6 37.9 36.5 35.6 37.9 39.0
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.............. 22.3 23.1 22.9 20.6 19.6 19.1 19.0 20.2
Research and development......... 8.1 9.7 9.2 8.9 8.4 7.7 8.7 7.7
General and administrative....... 5.9 5.8 5.6 5.3 5.5 4.9 5.0 5.7
Advisory fee..................... 0.6 0.6 0.6 0.6 0.6 0.5 0.5 2.3
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses... 36.9 39.2 38.3 35.4 34.1 32.2 33.2 35.9
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations...... 0.5 (1.2) 1.3 2.5 2.4 3.4 4.7 3.1
Other income (expense), net........ (1.8) (2.2) (1.9) (1.6) (1.6) (1.9) (1.5) (1.3)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
income taxes..................... (1.3) (3.4) (0.6) 0.9 0.8 1.5 3.2 1.8
Provision for income taxes......... 0.0 0.0 0.0 0.1 0.1 0.0 0.2 0.4
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).................. (1.3)% (3.4)% (0.6)% 0.8% 0.7% 1.5% 3.0% 1.4%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company's results of operations over the eight quarters ending December
1996 reflect growing revenue in each quarter for enterprise/OEM products except
for the first quarter of 1996. The first quarter of
21
<PAGE> 23
1996 was impacted by pricing pressures for 4 gigabyte drives and followed a
quarter with unusually large OEM sales. Desktop product revenues declined
throughout the period as the Company's shift toward enterprise/OEM products
continued, with the exception of the fourth quarter of 1996 when such revenues
increased somewhat as a result of the Company taking an opportunistic order for
desktop products during such quarter. Enterprise/OEM products rose from 78.2% of
net sales in the first quarter of 1995 to a high of 98.3% of net sales in the
third quarter of 1996.
Overall margins were relatively constant during the period. In 1995 the
Company was one of the first manufacturers to introduce the 4 gigabyte disk
drive in a RAID product. The higher gross margin of these drives facilitated an
increase in total gross margins to a high point of 39.6% in the third quarter of
1995. A downward trend started, however, in the fourth quarter of 1995 as lower
margin OEM business grew and competitive pressures from other market entrants
negatively impacted prices for 4 gigabyte products. This pressure continued
through the second quarter of 1996, with an overall drop of 4.0% in gross margin
points in that nine month period. Partially offsetting these effects were
continued improvements in manufacturing efficiencies, including higher
absorption of fixed costs. In the second half of 1996, overall industry demand
for storage has held prices firm. Further manufacturing efficiencies and the
introduction of new RAID products utilizing new technologies, including DGR and
9 gigabyte disk drives, fueled further improvements in gross margin.
Sales and marketing expenses in absolute amount were relatively flat during
this period following an increase in sales staff in late 1994. In early 1996
there was a temporary drop in marketing headcount and a curtailment of trade
show and advertising expenses. Overall productivity improvements in the sales
and marketing organizations have driven sales and marketing expenses as a
percentage of net sales down from a high of 23.1% in the second quarter of 1995
to a low of 19.0% in the third quarter of 1996. In late 1996, the Company again
began to expand its sales organization, and sales and marketing expenses as a
percentage of net sales increased to 20.2% in the fourth quarter of 1996. This
expansion is expected to result in further increases in sales and marketing
expenses in absolute amount. There can be no assurance that there will be a
proportional increase in net sales and, as a result, sales and marketing
expenses as a percentage of net sales are expected to fluctuate in future
periods.
Research and development expenses increased in absolute amount over the
eight quarter period as the Company implemented new projects related to the
development of its RAID product line. Both software and hardware development
capabilities were strengthened. With the growth in revenue levels, research and
development expenses as a percentage of net sales has fallen from a high of 9.7%
in the second quarter of 1995 to 7.7% in the fourth quarter of 1996.
General and administrative expenses have been relatively constant in
absolute amount over the eight quarters, except for the increased expenses
associated with corporate development and financing activities in 1996, and an
additional $175,000 in compensation expense in the fourth quarter of 1996 as a
result of a commitment to grant to a consultant of the Company a stock option
exercisable upon consummation of this offering in exchange for financial
planning and management services. Overall general and administrative headcount
has fluctuated slightly, but in the fourth quarter of 1996 was below the average
level of 1995. These expenses as a percentage of net sales have ranged from a
low of 4.9% in the second quarter of 1996 to a high of 5.9% in the first quarter
of 1995.
Advisory fees were relatively constant in absolute amount during each
quarter except the fourth quarter of 1996 which included an additional $360,000
associated with termination of the Advisory Agreement.
Income taxes during the period were relatively low due to the availability
of operating loss carryforwards from prior periods to offset income. The
operating loss carryforwards were virtually exhausted as of December 31, 1996,
and the Company expects future profits, if any, to be fully taxable.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including the
level of competition; the size, timing, cancellation or rescheduling of
significant orders; product configuration and mix; market acceptance of new
products and product enhancements; new product announcements or introductions by
the Company's competitors; deferrals
22
<PAGE> 24
of customer orders in anticipation of new products or product enhancements;
changes in pricing by the Company or its competitors; the impact of price
protection measures and return privileges granted by the Company to its
distributors and VARs; the ability of the Company to develop, introduce and
market new products and product enhancements on a timely basis; hardware
component costs and availability, particularly with respect to hardware
components obtained from sole sources; hardware supply constraints; the
Company's success in expanding its sales and marketing programs; technological
changes in the network storage system market, in particular the PC-LAN storage
system market; the mix of sales among the Company's sales channels; levels of
expenditures on research and development; changes in Company strategy; personnel
changes; general economic trends and other factors. In addition, the Company has
experienced modest seasonality in the past, with sales in the first quarter
declining somewhat from the level achieved in the fourth quarter of the prior
year. The Company expects this trend to continue in future periods and, as a
result, expects net sales and results of operations for the first quarter of
1997 to decrease from the levels achieved in the fourth quarter of 1996.
Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are shipped shortly after orders are received. As
a result, sales in any quarter are generally dependent on orders booked and
shipped in that quarter. Sales are also difficult to forecast because the PC-LAN
storage system market is rapidly evolving and the Company's sales cycles vary
substantially from customer to customer. The Company's customers generally have
the right to cancel orders at any time and to return the Company's products for
a refund. The cancellation of orders already placed and the return of products
could have a material adverse effect on the Company's operating results in any
quarter. Due to the typical timing of customer orders, the Company often ships
products representing a significant portion of its net sales for a quarter
during the last month of that quarter. Any significant deferral of these sales
could have a material adverse effect on the Company's results of operations in
any particular quarter. To the extent that the Company completes significant
sales earlier than expected, operating results for subsequent quarters may be
adversely affected. The Company's expense levels are based, in part, on its
expectations as to future sales. As a result, if sales levels are below
expectations, net income may be disproportionately affected.
Over the past several years, the Company has transitioned its focus from
desktop subsystem products to enterprise RAID products for use primarily in
PC-LAN network applications. As a result, the Company has become increasingly
dependent on the market for these products and in its ability to compete
successfully in this market. Although the Company has experienced growth in its
net sales of enterprise and OEM products in recent periods, the Company's net
sales from its desktop products have declined during the same periods. There can
be no assurance that the Company will experience similar sales growth, if any,
with respect to its enterprise and OEM products in future periods. Due to all of
the foregoing factors, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as an indicator of future performance. It is possible that in some
future quarter the Company's operating results may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's working capital increased to $2.5
million, up from $543,000 at December 31, 1995. The increase in working capital
was primarily attributable to a combination of the contribution of cash
generated by profitable operations in 1996 and close management of assets during
the year. Net accounts receivable increased to $11.9 million at December 31,
1996, compared to $9.6 million at December 31, 1995, as a result of the higher
sales volume in 1996. Inventories decreased to $6.3 million at December 31,
1996, down from $6.9 million at December 31, 1995. Throughout 1996, the Company
worked to reduce inventory levels through closer work with key suppliers and
careful material planning. These results have been partly offset by a decision
to stock key disk drives at the end of 1996 to offset the risk of potential
supply shortages. Accounts payable decreased to $5.1 million at December 31,
1996, compared to $6.2 million at December 1995. The higher level of accounts
payable at the end of 1995 was a result of longer payment cycles due to lower
available cash balances at that time.
23
<PAGE> 25
The Company has an $11 million revolving line of credit expiring in May
1998. The borrowings under the line of credit bear interest at the rate of prime
plus 1% (9.25% at December 31, 1996). Borrowings are secured by all the
Company's assets. Borrowings outstanding under the line of credit were $5.8
million at December 31, 1996 and, as of such date, $4.5 million was available
for additional borrowings. There are no financial covenants in the line of
credit. In connection with the Acquisition, the Company delivered to Maxtor the
Maxtor Note in the principal amount of $4 million. Due to cash constraints,
principal payments under the Maxtor Note were deferred, and did not commence
until the third quarter of 1996. As of December 31, 1996, $3.6 million in
principal amount remained outstanding under the Maxtor Note. The Company intends
to use a portion of the proceeds of this offering to repay the Maxtor Note and
to reduce the outstanding balance under its revolving line of credit. See "Use
of Proceeds" and "Certain Transactions."
The Company presently expects that the proceeds of this offering, together
with cash generated from operations should be sufficient to meet its operating
and capital requirements for at least twelve months. The Company may, however,
need additional capital prior to that time. There can be no assurance that
additional capital will be available to the Company on favorable terms or at
all.
24
<PAGE> 26
BUSINESS
Storage Dimensions designs, manufactures, markets and supports
high-performance data storage systems for open systems network applications.
Open systems networks are comprised of equipment that conforms to industry
standards of interoperability. Storage Dimensions currently focuses on the
PC-LAN market by developing and marketing a broad family of disk and tape
storage systems that are designed to satisfy the high-performance,
fault-tolerance and high-availability (minimum downtime) requirements of its
customers while at the same time reducing life-cycle cost of ownership
(consisting of the purchase price of the equipment plus the cost of operating
this equipment over its life span). The Company's products combine its
proprietary software with industry-standard hardware, such as disk drives, tape
drives and RAID controllers, which allows the Company to leverage the product
development and manufacturing capabilities and efficiencies of industry OEM
manufacturers and to offer its customers products that take advantage of what
the Company believes to be the best technology available. Storage Dimensions'
products have won numerous industry awards in product comparisons and editorial
reviews. As the leading independent supplier of high capacity RAID storage
systems for the PC-LAN market, Storage Dimensions believes that it is
well-positioned to take advantage of new opportunities being created by the
projected growth in the PC-LAN market, in particular the market for systems
utilizing Windows NT and NetWare.
INDUSTRY BACKGROUND
The increased use of network computing to support business-critical
enterprise applications is fueling rapid demand growth for network disk storage
systems incorporating high performance, fault tolerance and high availability.
In addition, capacity requirements for network storage are accelerating, due to
the deployment of data-intensive new applications, such as relational databases,
decision support systems, the Internet and intranets, video/multimedia and
document management. The Company believes that these factors will also increase
the demand for high-speed network tape backup, which provides additional
protection against data loss in the event of various system malfunctions.
RAID technology has facilitated this rapid expansion of network storage.
Traditionally, storage fault-tolerance was achieved using a technique called
mirroring, which involves the recording of duplicate data records on redundant
disks. Although effective, mirroring is an expensive means to protect against
data loss. In 1987, a team of researchers at the University of California at
Berkeley defined the concept of RAID, which utilizes parity algorithms to
achieve data redundancy at a significantly lower cost than mirroring. The
subsequent widespread implementation of RAID technology has removed a major
barrier to the proliferation of network computing by providing a cost-effective
method for achieving high storage reliability in enterprise network
applications.
Historically, enterprise computing products have been categorized into
three general markets: (1) proprietary/mainframe systems, (2) RISC-based UNIX
multiuser systems, and (3) Intel-based local area networks ("PC-LAN market"). In
each of these markets, independent third-party suppliers have emerged to offer
advanced storage systems as alternatives to the storage systems offered by the
computer manufacturers themselves. To maximize their probability for success,
these independent storage system suppliers have generally focused on
opportunities within one of the three specific markets and tailored their
business, marketing and sales strategies accordingly. As a result, the markets
for storage systems are not monolithic in nature, but, rather, each of the three
markets is unique with its own principal competitors. Moreover, it is often
difficult for an industry participant to move from one market to another without
implementing major changes in business strategy that can undermine its
competitiveness in its original target market.
Among the three principal enterprise computing markets, the PC-LAN market
is experiencing the fastest growth, according to IDC. The PC-LAN market emerged
in the late 1980s with the proliferation of desktop PCs and the development of
network operating systems (such as NetWare) that could efficiently tie PC's
together for resource and information sharing. This expansion is now being
fueled by the deployment of Intel-based servers using Pentium and Pentium Pro
microprocessors, which offer the computing power of RISC-based architectures at
a significantly lower cost. IDC projects that the U.S. market for PC-LAN storage
systems employing RAID technology will grow from $1.4 billion in 1995 to $6.0
billion in 2000, a compound
25
<PAGE> 27
annual growth rate of 34%. These trends are further reinforced by the rapid
adoption of the Windows NT operating system, which is increasingly being used in
mid-range database and application servers instead of UNIX operating systems.
IDC further projects that the U.S. market for PC-LAN RAID storage systems
running on Windows NT servers will grow from $0.3 billion in 1995 to $2.1
billion in 2000, a compound annual growth rate of 50%.
One of the key issues facing end-users of PC-LAN networks is the ongoing
cost of network maintenance and administration. For example, the Gartner Group
has estimated that the purchase price of hardware and software comprises only
20% of the three-year cost of network ownership. The remaining 80% of a
network's life-cycle cost of ownership consists of other associated expenses,
such as downtime, troubleshooting, repair, administration, training and user
support. With respect to network storage, there are many opportunities for the
storage system software to assist the end-user in lowering the life-cycle cost
of ownership, by providing useful functionality such as ease of installation,
ease of reconfiguration, robust management of failure conditions, remote
monitoring and alerting, diagnostic and troubleshooting support and ease of
repair.
Moreover, as enterprises adopt the latest generation networking
technologies to achieve higher levels of performance and reliability, complex
issues can arise surrounding integration of new system components into the
existing environment. For example, storage systems provided by server
manufacturers oftentimes are mounted internally to the server, are not
compatible with other manufacturers' servers, and cannot be readily migrated to
new servers or operating systems as requirements change. In such cases, the
adoption of new technologies, such as Pentium Pro-based servers and Windows NT,
can result in the premature, technological obsolescence of existing network
storage investments. On the other hand, these costs can be significantly reduced
by utilizing a server-independent storage system that is designed for use in a
heterogenous environment, supporting a range of servers and operating systems.
Therefore, to achieve the objective of minimizing the life-cycle cost of
network storage, end-users need comprehensive storage solutions that incorporate
a number of features in addition to RAID fault-tolerance including: (1) high
availability with minimum system downtime (planned and unplanned); (2)
complementary high-performance tape backup solutions; (3) easy network storage
management and administration; (4) cross-platform support for heterogeneous
network hardware and environments; and (5) a comprehensive customer service and
support program. Many suppliers today offer only a portion of these features.
THE STORAGE DIMENSIONS' SOLUTION
Storage Dimensions currently focuses on the PC-LAN storage system market by
developing and marketing a comprehensive family of disk and tape storage systems
that are designed to satisfy the high-performance, fault-tolerance and
high-availability requirements of its customers while at the same time reducing
life-cycle cost of ownership. The Company's solution combines its proprietary
software with industry-standard hardware, such as disk drives, tape drives and
RAID controllers, which allows the Company to leverage the product development
and manufacturing capabilities and efficiencies of industry OEM manufacturers
and to offer its customers products that take advantage of what the Company
believes to be the best technology available. The Company provides a complete,
integrated solution for the PC-LAN storage system market by offering the
following features:
High availability with minimum system downtime. Storage Dimensions'
SuperFlex disk storage products are engineered to provide redundancy and
fault-tolerance for critical components such as disk drives, power supplies and
cooling systems. Redundant components are easily serviced and hot-swappable, to
allow replacement by end-user service personnel while the system remains online.
Moreover, the storage management software is designed to provide robust
management of failure conditions, remote monitoring, automatic notification of
failure events and online diagnostic and troubleshooting support.
Complementary high-performance tape back-up solutions. To complement its
disk products, Storage Dimensions has engineered a family of high-speed,
high-reliability tape backup systems that are designed to address the challenges
of backing up increasing amounts of data in ever-shortening time periods. These
tape products are developed and tested to be easily integrated and fully
compatible with the Company's storage systems. In addition, these products are
marketed on a stand-alone basis for use with other manufacturers' disk storage
systems.
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<PAGE> 28
Easy network storage management and administration. Storage Dimensions
engineers its integration software to make its disk storage systems easy to
install, use, reconfigure, troubleshoot and administer. In addition, for the
NetWare and Windows NT environments, the Company has developed VantagePoint
network storage management software that provides remote monitoring, problem
alerting, configuration documentation and performance measurement of multiple
storage systems from a single network console.
Cross-platform support for heterogeneous network hardware. Storage
Dimensions designs external storage systems that are easily integrated with the
computer systems from a broad range of manufacturers. This cross-platform
capability affords significant economic advantages to end-users who have
heterogeneous and dynamic network environments by letting them standardize on a
single external storage system that can be easily reconfigured and redeployed as
requirements change, as compared to internal storage which is dedicated to a
specific manufacturer's server. Thus, as application needs evolve over time and
new generation servers are procured, the Company's storage systems can be
readily migrated and resized to meet changing circumstances instead of being
prematurely obsoleted. In particular, the Company's products are engineered to
support a seamless transition to Windows NT, without the need to prematurely
retire storage systems originally purchased to support NetWare or other network
operating systems. This provides important investment protection in the network
environment, where the capital expenditures on storage systems are often equal
to or greater than those spent on servers.
A comprehensive customer service and support program. The Company also
provides a complementary suite of service and support programs targeted at
lowering the maintenance cost of its storage systems, including an artificial
intelligence knowledge base that helps the Company provide fast and accurate
diagnosis of technical problems, 24-hour access to technical support and
replacement parts, overnight replacement of failed components and comprehensive
site agreements.
COMPANY STRATEGY
Storage Dimensions' objective is to leverage its position as the leading
independent supplier of PC-LAN storage systems to capitalize on opportunities
presented by the projected growth in this market. The Company believes it is in
a unique position to capitalize on the significant growth projected for RAID
network storage for PC-LAN servers, and in particular, networks using Windows NT
for fileservers, database servers, the Internet and intranet communications
servers and dedicated applications servers. Key elements of the Company's
strategy include the following:
Focus on products for PC-LAN storage systems market. The Company will
continue to concentrate its engineering and development efforts on designing
storage system products that are compatible with both NetWare, the current
leading LAN operating system, and Windows NT, a newly emerging industry standard
that is expected to become widely accepted by the year 2000. The Company strives
to leverage its existing customer base of major corporations, institutions and
government agencies, many of whom are expected to expand their PC-LAN
implementations, particularly through the adoption of Windows NT, within the
next five years.
Support customers' transition to Windows NT. Storage Dimensions will
continue to design products that can be used in heterogeneous and dynamic
network environments, thus allowing its customers to standardize on a single
storage system that can be easily reconfigured and redeployed as requirements
change. In particular, the Company will continue to focus its product
development efforts on providing an easy, seamless transition to Windows NT,
without the need to obsolete or retire prior investments in Storage Dimensions'
disk and tape storage systems.
Leverage proprietary systems integration software. Storage Dimensions has
developed an extensive, object-oriented software library which it uses to
quickly integrate new hardware products into its storage systems. The Company's
strategy is to continue to expand its software library by adding new features
and functionality in an incremental manner, building on its earlier investments,
and to leverage this library to bring new products and features to market
quickly.
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<PAGE> 29
Incorporate leading edge hardware in new products. The Company will
continue to combine leading edge hardware with its proprietary software to
produce state-of-the-art storage solutions for the PC-LAN storage systems
market. The Company also strives to develop and maintain close relationships
with key suppliers of storage system components and technologies, such as
American Megatrends, Cheyenne Software, Inc. ("Cheyenne"), Micropolis, Mylex,
Seagate, The Qualix Group, Inc. ("Qualix") and Quantum, which the Company
believes enables it to quickly introduce new products that incorporate the
latest technological advances.
Differentiate through proprietary storage management software. Storage
Dimensions has developed VantagePoint, a network storage management software
program that allows remote monitoring and oversight of multiple storage systems
on the network from a single central console. The Company believes that
efficient network management differentiates its products from those of its
competitors and intends to continue to enhance its network management product
offerings.
Differentiate through customer service and support. The Company believes
that comprehensive, proactive and responsive customer service and support are
essential to be a market leader in the PC-LAN storage system market, and it
intends to continue to enhance its service and support programs. The Company has
already made, and intends to continue to make in the future, major investments
in customer service and support, in order to offer a wide range of service and
support options to its customers.
Leverage field sales and channel investments. Storage Dimensions utilizes a
direct sales force to penetrate major new accounts, to create demand for its
products and to secure repeat business from existing customers. Storage
Dimensions also maintains reseller distribution channels that facilitate
procurement of the Company's products by small and medium-sized end-users,
producing incremental revenues from its marketing, sales and promotional
efforts. With its basic field sales organization and distribution channels in
place, the Company believes that it can generate additional sales at a lower
incremental selling cost, and intends to expand its field sales operations to
further leverage its current investment.
PRODUCTS
Storage Dimensions develops and markets a broad and integrated family of
disk and tape storage systems that are designed to satisfy the high-performance,
fault-tolerance and high-availability requirements of its customers while at the
same time reducing life-cycle cost of ownership. The Company's SuperFlex disk
storage products are designed and engineered to incorporate leading edge
features and capabilities relative to the storage products offered by computer
and server manufacturers, to minimize system downtime and to support easy
integration with a broad range of server platforms and operating systems. While
the Company's products are generally developed for use with Windows NT and
NetWare operating systems, certain of the Company's products are also compatible
with other operating systems, including Sun Solaris, IBM AIX and IBM OS/2
operating systems.
To complement its disk products, Storage Dimensions has engineered a family
of high-speed, high-reliability tape backup systems that are designed to address
the challenges of backing up increasing amounts of data in ever-shortening time
periods. These tape products are developed and tested to be easily integrated
and fully compatible with the Company's disk storage systems. In addition, the
Company offers tape backup products as stand-alone products to back up data
maintained on other manufacturers' disk storage systems. To facilitate easy
network administration, the Company has developed VantagePoint, a network
storage management software program that allows remote monitoring and oversight
of multiple storage systems on the network from a single central console. The
Company believes that its products are differentiated from competitive products
based on functionality, performance, ease of use and lower life-cycle cost of
ownership.
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Current Products. The following table summarizes the Company's current product
offerings:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
TYPICAL
OPERATING DATE OF CAPACITY END USER
SYSTEMS DATE OF LATEST RANGE LIST
PRODUCT DESCRIPTION SUPPORTED INTRODUCTION GENERATION (GIGABYTES) PRICE(1)
- ------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
DISK PRODUCTS
- ------------------------------------------------------------------------------------------------------------------
SuperFlex 2000 For mirroring and non-RAID NetWare, NT, September October 6-63(2) $6,330 - 24,370
Disk Array applications OS/2, Solaris, 1994 1996
AIX
- ------------------------------------------------------------------------------------------------------------------
SuperFlex 3000 RAID applications using NetWare, NT, September December 6-63(2) $7,660 - 25,700
Disk Array host-based controller OS/2 1994 1996
- ------------------------------------------------------------------------------------------------------------------
SuperFlex 3000 Host-based RAID with NetWare, NT, May October 6-63(2) $8,150 - 25,870
with DGR Disk Dynamic Growth and OS/2 1996 1996
Array Reconfiguration
- ------------------------------------------------------------------------------------------------------------------
SuperFlex 4000 RAID applications using NetWare, NT, September September 6-63(2) $9,140 - 27,170
Disk Array embedded bridge controller OS/2, Solaris, 1994 1996
AIX
- ------------------------------------------------------------------------------------------------------------------
SuperFlex 5000 Dual redundant RAID NetWare, NT, October November 6-63(2) $16,040 - 33,760
Disk Array controllers (embedded) OS/2, Solaris 1996 1996
- ------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
TAPE PRODUCTS
- ------------------------------------------------------------------------------------------------------------------
SuperFlex DAT 7 DAT Tape Drives with NetWare, NT, September N/A 24-56(2) $8,220 - 14,880
TapeArray parallel data streaming Solaris, AIX 1994
- ------------------------------------------------------------------------------------------------------------------
MegaFlex DLT 4 DLT Tape Drives with NetWare, NT, May N/A 120-140(2) $20,280 - 25,890
TapeArray parallel streaming and data Solaris, AIX 1995
redundancy
- ------------------------------------------------------------------------------------------------------------------
4700 DLT Tape Single drive, seven NetWare, NT, December N/A 280 $11,720
Library cartridge tape library Solaris, AIX 1995
- ------------------------------------------------------------------------------------------------------------------
DLT Tape Backup Stand-alone DLT Tape NetWare, NT, October June 30-40 $3,620 - 5,590
Subsystem Solaris, AIX 1995 1996
- ------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
OTHER
- ------------------------------------------------------------------------------------------------------------------
VantagePoint Network Storage Management NetWare, NT December July N/A $930
Software 1995 1996
- ------------------------------------------------------------------------------------------------------------------
XStor Tape For document input to Xerox SCO UNIX August N/A 5 N/A
Storage System Docutech Printing System 1992
(OEM product)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) The list prices set forth above represent the per unit list prices to
corporate customers for volume purchases. Actual prices paid by customers
vary depending on the source and the volume of units purchased.
(2) Larger systems can be readily constructed by integrating multiple units into
a single system.
Storage Dimensions has developed, and will continue to enhance, its
existing extensive proprietary object-oriented software library. This library
enables the Company to quickly integrate new hardware technologies to bring new
products to market in a rapid and cost-effective manner. Storage Dimensions'
software library supports a range of operating systems with a minimum of
additional software investment. For example, the advanced SuperFlex 4000 and
5000 products incorporate the Company's proprietary RAIDFlex disk array
management software, which was specifically engineered to facilitate
cross-platform support and to require only a minimal portion of the underlying
code to be rewritten to adapt it to a new operating system. Similarly, the
Company can adapt RAIDFlex software to manage a new generation RAID controller
by modifying only
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<PAGE> 31
the section of the code that deals with controller-specific algorithms and
instruction sets. The Company has a U.S. patent application pending associated
with the object-oriented, layered architecture of its RAIDFlex array management
software.
The Company's products utilize its proprietary software to incorporate
leading edge hardware features and capabilities relative to the storage products
offered by computer and server manufacturers, with design features specifically
engineered to minimize system downtime and to support easy integration and
administration. For example, in May 1996, the Company introduced the SuperFlex
3000 with DGR. The DGR feature provides the ability to both expand and
reconfigure a RAID array without taking the system off-line, therefore
significantly reducing the time, effort and cost of managing RAID storage in
typical corporate network environments. SuperFlex with DGR won LAN Times' "Best
of LAN Times" (1997) and PC Week's "Analyst's Choice" (1996) awards. In
addition, the Company became one of the first suppliers of network storage
systems to incorporate the new generation 9 gigabyte disk drives in their
products when it began shipping the first of such products in September 1996.
Storage Dimensions' products have won numerous other awards, including:
INFOWorld's "Hot Products" (1997); LAN Times' "Best of LAN Times" (1996);
Computer Technology Review's "Editor's Choice" (1995); LAN Magazine's "Disk
Array Product of the Year" (1995); and Networld+Interop's "Best of Show" (1995).
Products Under Development.
The Company is currently completing development of a low-cost storage
system (RAIDPro), which provides DGR functionality in a new, small form-factor
enclosure. Unlike the SuperFlex product line, which sells at a price premium
over server-internal storage, RAIDPro has been designed to provide external,
independent storage for low-end servers at a price directly competitive with the
internal storage marketed by server vendors. This product is targeted at a major
new market for the Company consisting of departmental and branch servers, that
the SuperFlex product line did not effectively address. The Company is also
developing a clustered storage system that is expected to provide shared storage
for a cluster of network servers using a common operating system, with support
for automatic server failover and integrated tape backup. The Company currently
intends to begin shipping its low-cost RAIDPro product in the first half of 1997
and its new clustered storage system in the second half of 1997. There can be no
assurance that the Company will be successful in developing and releasing these
two new products on its current schedule or at all, or that these products will
achieve market acceptance. The failure of the Company to achieve significant net
sales from these two products could have a material adverse effect on the
Company's business, operating results or financial condition.
The Company intends to continue to design its mainstream products to be
compatible with both Windows NT and NetWare and selected products to be
compatible with Sun Solaris, IBM AIX and IBM OS/2 operating systems. In
particular, the Company has focused, and expects to continue to focus, its
product development efforts on providing an easy, seamless transition to Windows
NT, without the need to obsolete or retire its prior investments in Storage
Dimensions' disk storage systems. As a result of the Company's efforts, most of
the Company's current disk and tape systems can be, and the Company intends that
its future products will be able to be, migrated between NetWare and Windows NT
by simply installing the Company's software upgrade. This greatly simplifies the
purchasing decision for customers in the process of migrating to Windows NT and
for those considering such a change in the future.
If the Company is unable, for technological or other reasons, to develop
and introduce new products, in particular those for use with Windows NT, in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will be materially and adversely affected. In addition, there can also be no
assurance that the Company will be successful in developing and marketing any
other products that respond to technological changes or evolving industry
standards, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of new products,
or that its new products will adequately meet the requirements of the
marketplace and achieve market acceptance. See "-- Research and Development."
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<PAGE> 32
CUSTOMERS AND APPLICATIONS
Storage Dimensions markets its products primarily to large corporations,
institutions and government agencies for use in business-critical network server
applications that require high-reliability and non-stop operation. The Company
has successfully placed major installations in a broad cross-section of
enterprises, encompassing a range of mainstream computing applications. The
following table lists each end user of the Company's products that the Company
believes (based on direct sales data and data supplied by independent resellers
and distributors) to have purchased at least $100,000 of the Company's products
since January 1, 1995:
BANKING
American National Bank & Trust Co. of Chicago
Federal National Mortgage Association
First National Bank of Chicago
Fleet Financial Group
Home Savings of America, FSB
KeyCorp
National City Bank, Kentucky
Northern Trust Bank of Arizona, N.A.
People's Bank
Standard Federal Bank
FINANCIAL SERVICES
Arthur Andersen & Co., S.C.
Bear Stearns & Co., Inc.
Bloomberg L.P.
CNA Financial Corporation
Donaldson, Lufkin & Jenrette, Inc.
Dow Jones & Company, Inc.
Instinet Corporation
KPMG Peat Marwick LLP
Neuberger & Berman
Prudential Securities Inc.
Scudder, Stevens & Clark, Inc.
Salomon Brothers Inc
The Life Insurance Co. of Virginia
William M. Mercer Companies, Inc.
TECHNOLOGY
Adobe Systems Incorporated
Applied Materials Inc.
Cabletron Systems Incorporated
Candle Corporation
Cheyenne Software, Inc.
CIDCO Inc.
Cisco Systems Inc.
Comdisco, Inc.
Computer Curriculum Corp.
D&B Software
Gateway 2000
Great Plains Software
Iomega Corporation
The Learning Company
3Com Corporation
Macromedia
Rockwell International Corp.
Symantec Corporation
Unisys Corporation
U.S. Robotics Corp.
Xilinx Inc.
CONSUMER & RETAIL
Borders, Inc.
The Gap, Inc.
Great A&P Tea Co.
Guess?, Inc.
K-Mart Corporation
Quaker Oats Co.
Safeway Inc.
Wal-Mart Stores, Inc.
UTILITIES
Entergy Corporation
Southern California Edison
Southern New England Power
Southern Company
Wisconsin Electric Power Co.
GOVERNMENT*
Atomic Energy Agency (International)
Bureau of Reclamation
Centers for Disease Control and Prevention
Civil Aviation Authority (U.K.)
Defense Logistics Agency
Department of Defense
Department of Energy
Department of the Air Force
Department of the Navy
Environmental Protection Agency
Medicare Fraud Agency
Naval Surface Warfare Center
Foreign Office (U.K.)
United States Postal Service
31
<PAGE> 33
COMMUNICATIONS
American Portable Telecom Inc.
Cherry Communications
Excel Communications, Inc.
J.J. Keller & Associates, Inc.
MCI Telecommunications Corporation
Metrocall, Inc.
Nynex Corporation
Premier Communications
Radio Stockholm
The Southern New England Telephone Company
OTHER
Goose Creek School District
Great Western Publishing, Inc.
HCIA, Inc.
Hoffman-LaRoche Inc.
The Mead Corporation
Mobil Oil Corp.
Muzak, L.P.
Pfizer Inc.
Western International Media Corporation
West Publishing Company
- ---------------
* U.S. Government agencies unless otherwise indicated.
Representative examples of applications of the Company's products include
the following:
Southern Company. Southern Company is the holding company of a number of
regulated and unregulated power utilities in the Southeastern United States,
with 1995 revenues exceeding $9 billion. In 1995, Southern Company standardized
on the Storage Dimensions SuperFlex 4000 to provide high-availability storage
for its NetWare applications running on Intel-based fileservers. In early 1996,
to implement a corporate-wide e-mail system which would support over 20,000
users, Southern Company's information resources staff selected application
software running under Windows NT, to be deployed on a number of new DEC Alpha
2000 servers. As part of this business-critical messaging implementation,
Southern Company required a high-availability storage solution, with high-speed
tape backup. After evaluating several alternatives, Southern Company again
standardized on Storage Dimensions, selecting both its SuperFlex 4000 disk
storage and companion DLT4000 tape backup. Principal reasons cited by Southern
Company included the efficiencies available by having a single enterprise-wide
storage solution to support both NetWare and NT across a variety of server
platforms. This standardization was viewed as not only supporting the current
e-mail implementation in an efficient manner, but also as a sound investment to
support additional conversions to Windows NT, which were expected in the future.
Southern Company's favorable experience with Storage Dimensions' products and
service in the NetWare environment was another important factor in its decision.
Cabletron Systems, Incorporated. Cabletron Systems, Incorporated
("Cabletron") is a New Hampshire-based supplier of networking products, with
1995 revenues exceeding $1 billion. Cabletron initially evaluated the Storage
Dimensions SuperFlex 4000 systems to upgrade their NetWare-based PC-LAN servers,
which provide business-critical 7x24 file, print and mail services for over
2,400 users. With these applications at stake, high availability and short
backup windows were critical buying criteria. Cabletron also wished to simplify
its network management and maintenance requirements by standardizing on a single
storage vendor, rather than dealing with the storage products from multiple
server vendors. After evaluating the available alternatives, Cabletron purchased
several SuperFlex 4000 disk array systems to support its NetWare servers. In
addition, they selected the MegaFlex DLT4000 TapeArray for high-speed backup
after running bench-marking tests which demonstrated significant throughput
improvements over their existing solution. Following their favorable experience
with the NetWare server rollout, Cabletron subsequently evaluated and selected
the SuperFlex 4000 system for their Sun-based database applications under
Solaris 2.4. Commonality of spares and reduced support costs were cited as
important factors in this follow-on decision.
3Com Corporation. Based in Silicon Valley, 3Com Corporation ("3Com")
designs and markets a broad range of networking products for open systems
networks, with annual revenues exceeding $2 billion. 3Com's initial experience
with Storage Dimensions and its products began in 1995 with their purchase of
several MegaFlex DLT TapeArrays for use in backing up high capacity NetWare
servers at its corporate headquarters. Subsequently, 3Com evaluated and
standardized on the Storage Dimensions DLT4000 tape backup system for PC-LAN
servers in field offices worldwide, citing its favorable experiences with
Storage Dimensions' customer service and technical support as important factors
in the decision process. Most recently, in the process of changing PC-LAN server
vendors, 3Com became more aware of the shortcomings
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<PAGE> 34
and inflexibilities associated with purchasing internal LAN storage that is tied
to a specific manufacturer's CPUs. Seeking a RAID storage solution that can be
readily migrated to new platforms as requirements change, 3Com has recently
standardized on the Storage Dimensions SuperFlex 3000 with DGR for PC-LAN
servers installed at major company sites. In addition to its platform
independence, the SuperFlex 3000 with DGR offered key ease of use
characteristics, due to its support of dynamic growth and reconfiguration. Also
important was the SuperFlex 3000's seamless support of both NetWare and Windows
NT, because 3Com plans to continue using both operating systems for PC-LAN
applications.
In 1996, Xerox Corporation accounted for approximately 13% of total net
sales. In 1995, Xerox accounted for approximately 11% of net sales and Tech Data
for approximately 15% net sales. In 1994, Tech Data accounted for approximately
12% of sales. Xerox is the Company's primary OEM customer and Tech Data is a
distributor.
SALES AND MARKETING
Storage Dimensions has implemented both a direct sales force and reseller
distribution channels in order to provide broad market penetration for its
products. Historically, the Company marketed its products to end-users through
indirect reseller channels, including distributors, national computer dealers,
system integrators and VARs. In 1994, the Company recruited and deployed a
direct field sales organization in order to more effectively pursue large
corporate and institutional sales opportunities in the United States. As of
December 31, 1996, the U.S. field sales organization consisted of 30 sales
professionals located in 15 geographical markets, including Boston, New York,
Washington D.C., Atlanta, Detroit, Chicago, Minneapolis, Dallas, Los Angeles and
the San Francisco Bay Area. The Company utilizes its direct sales force to
penetrate major new accounts, to create demand for its products and to secure
repeat business from existing customers.
The Company also maintains indirect reseller channels to facilitate
procurement of the Company's products by small and medium-sized end-users,
producing incremental revenues from its marketing, sales, and promotional
efforts that would otherwise be lost. In addition, certain large customers
prefer to source through the reseller channels as part of their overall network
equipment sourcing and integration strategy. Storage Dimensions has developed
pricing structures and field sales commission plans that are designed to
minimize sales channel conflicts and, as a result, is able to benefit from
significantly higher revenues than if only a direct sales model were deployed.
The Company believes that this two-pronged sales strategy provides meaningful
competitive advantage over competitors who only provide products directly to
end-user customers. In a recent survey by LAN Magazine of the largest 100 LAN
resellers in the United States, Storage Dimensions was the independent storage
systems supplier mentioned most often as the preferred provider of both disk
array and tape backup products.
With its domestic field sales organization and reseller distribution
channels in place, the Company plans to generate additional sales at a lower
incremental cost by systematically expanding its field sales operation in terms
of both staffing and geographical presence. Internationally, the Company relies
primarily on local distributors and maintains a sales and service office in
London, England to support its European distributors.
To support its field sales organization, in 1995 the Company established a
telemarketing department located in its Milpitas headquarters location for
processing new leads, qualifying new prospects, identifying active projects and
initiating appointments for field sales personnel to visit new customers.
Specifically, the telemarketing department focuses on identifying large new
sales opportunities and on facilitating a smooth hand-off of these opportunities
to the field sales personnel. The telemarketing department also works closely
with the marketing communications department to identify lead sources and
develop promotional programs that are most effective in developing target
opportunities.
In 1995, Storage Dimensions implemented a trade-in program called
FlexCredit, which provides a significant trade-in credit on used disk and tape
drives, from both Storage Dimensions and other selected manufacturers, toward
the purchase of new products from the Company. FlexCredit is another example of
Storage Dimensions' strategy to lower the cost of ownership of network storage,
and the Company believes the program has been instrumental in both retaining
existing customers and capturing new ones. Storage
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<PAGE> 35
Dimensions maintains an active presence in the used storage equipment market
such that FlexCredit trade-ins can be recycled at nominal economic cost to the
Company.
CUSTOMER SERVICE AND SUPPORT
The Company believes that its ability to provide comprehensive, proactive
and responsive support is an important element in penetrating new customer
accounts and in securing repeat business from existing customers. The Company is
committed to providing superior customer service and support aimed at
simplifying installation, reducing field failures, minimizing system downtime
and streamlining administration. For example, beginning in 1992, the Company
undertook a major investment in an "artificial intelligence" knowledge base,
called TechConnect, to facilitate the timely and accurate diagnosis of customer
field problems and to enable the Company to recommend solutions with the highest
probability of success, with reporting capabilities to provide feedback on the
most common problems experienced by end-users of the Company's products.
Although accessed primarily by Storage Dimensions technical support personnel,
the TechConnect system is also accessible by the Company's customers 24 hours a
day, through the Internet, in the event any customer wishes to access solution
documents directly.
Historically, service revenues have not comprised a significant portion of
the Company's sales. In 1996, the Company began an aggressive program to develop
value-added service contracts designed to achieve a lower life-cycle cost of
ownership for its customers. The following represent the Company's primary
service programs currently available:
7x24 Priority Service and Parts. For an annual site fee, the Company
provides priority access to technical support personnel during business
hours and access within 20 minutes via a pager after hours. In addition,
the Company provides replacement of failed parts 24 hours-a-day by
counter-to-counter air freight with courier delivery.
Tape Maintenance. For an annual fee per tape drive, the Company will
provide for overnight shipment of a replacement unit for drives that fail
and are not covered by the Company's or manufacturer's standard warranty.
TechAssist Emergency Off-Hours Support. For a one-time fee, the
Company provides access to technical support personnel after hours to
customers who need emergency help, but have not contracted for the 7x24
Priority Service.
FlexGuard Premium Site Support. FlexGuard bundles optional services
into comprehensive site service and support arrangements to meet the
special needs of large organizations.
In addition to the above services, the Company provides telephone support
during business hours free of charge.
The Company supports and administers the pass-through of standard
warranties from its OEM component vendors which run from one to five years. In
addition, the Company provides a three year warranty on the system as a whole. A
customer may also contract for an extended warranty from the Company on
components whose factory warranty has expired. In the United States, defective
components are replaced overnight, in advance of the receipt of the failed part,
as a standard practice. Although to date the Company's suppliers of hardware
components have covered the warranty costs associated with such components,
there can be no assurance that such manufacturers will continue to be willing or
able to cover such costs, and their failure to do so would result in such costs
being borne by the Company. There can be no assurance that warranty costs to the
Company will not be significant in the future, which could have a material
adverse effect on the Company's business, operating results or financial
condition.
RESEARCH AND DEVELOPMENT
To date, Storage Dimensions has made substantial investments in research
and development, particularly in the areas of fault-tolerant RAID systems
integration and storage management software. The Company's solution combines its
proprietary software and industry-standard hardware to produce integrated RAID
fault-
34
<PAGE> 36
tolerant storage solutions, with companion high-performance tape backup. Storage
Dimensions has developed an extensive, object-oriented software library which it
uses to quickly integrate new hardware products into its storage systems. The
Company's strategy is to continue to expand its software library by adding new
features and functionality in an incremental manner, building on its earlier
investments, and to leverage this library to bring new products and features to
market quickly.
The Company's engineering design teams work cross-functionally with
marketing managers, applications engineers and customers to develop products and
product enhancements. Computer input/output standards are maintained and an
extensive disk drive and controller board qualification program monitors
industry-standard components to ensure the quality and performance when
integrated into the Company's storage system products. The Company also strives
to develop and maintain close relationships with key suppliers of storage system
components and technologies, such as American Megatrends, Cheyenne, Micropolis,
Mylex, Seagate, Qualix and Quantum, which the Company believes enables it to
quickly introduce new products that incorporate the latest technological
advances.
The Company's expenses for research and development for fiscal years 1994,
1995 and 1996 were $4.3 million, $5.4 million and $5.9 million, respectively. As
of December 31, 1996, the Company had 41 regular full-time employees engaged in
research and development activities, of which 18 were specifically focused on
software development, test and qualification.
The network storage system market is characterized by rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
increased storage capacities and the emergence of new industry standards could
render the Company's existing products obsolete and unmarketable. The Company's
future success will depend upon its ability to develop and to introduce new
products with increasing storage capabilities (including new software releases
and enhancements) on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing any new products that respond to
technological changes or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. In addition, network storage system products like those offered by
the Company may contain undetected software errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in new products after commencement of commercial shipments,
resulting in a loss of or delay in market acceptance, which could have a
material adverse effect on the Company's business, operating results or
financial condition.
MANUFACTURING
Storage Dimensions' manufacturing operations, located in Milpitas,
California, consist primarily of assembly and integration of the Company's
proprietary software and enclosures with industry-standard components, such as
disk drives, tape drives, and RAID controllers, from its suppliers. The
assembled units are then subjected to a systems-level test to ensure performance
to specification in the anticipated end-user computing environment. The
Company's manufacturing operations have been ISO 9002 certified, an
international quality standard. The Company strives to develop close
relationships with its suppliers, exchanging critical information and
implementing joint corrective action programs to maximize the quality of its
components, to reduce costs and inventory investments and to create flexibility
for rapid capacity expansion when required. The Company believes that its
current facilities and capital equipment will be adequate to meet its
manufacturing needs in the foreseeable future.
The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. For example, the
Company purchases disk drives primarily from Seagate and Micropolis, DLT tape
drives exclusively from Quantum and DGR RAID controllers exclusively from
American Megatrends. The Company's reliance on its suppliers involves several
risks, including: an
35
<PAGE> 37
inadequate supply of required components; price increases; late deliveries; and
poor component quality. These risks are particularly significant with respect to
suppliers of disk drives because, in order to meet product performance
requirements, the Company must obtain disk drives with extremely high quality
and capacity. In addition, there is currently a significant market demand for
disk drives, tape drives and RAID controllers, and from time to time the Company
may experience component shortages, selective supply allocations and increased
prices of such components. Although to date the Company has been able to
purchase its requirements of such components, there can be no assurance that the
Company will be able to obtain its full requirements of such components in the
future or that prices of such components will not increase. In addition, there
can be no assurance that problems with respect to yield and quality of such
components and timeliness of deliveries will not occur. Disruption or
termination of the supply of these components could delay shipments of the
Company's products and could have a material adverse effect on the Company's
business, operating results or financial condition. Such delays could also
damage relationships with current and prospective customers. In addition, in the
past, due to the Company's quality requirements, the Company has experienced
delays in the shipments of its new products principally due to an inability to
qualify component parts from disk drive manufacturers and other suppliers,
resulting in delay or loss of product sales. The Company has currently qualified
disk drives manufactured by Seagate and Micropolis, tape drives from Quantum,
and RAID controllers from Mylex and American Megatrends. Although these delays
in the past have not had a material adverse effect upon the Company's business,
operating results or financial condition, there can be no assurance that in the
future any such delays would not have such a material adverse effect.
COMPETITION
The network storage system market is intensely competitive. The Company
competes primarily in the PC-LAN storage systems market and experiences the
greatest competition from traditional suppliers of PC-LAN network servers, such
as Compaq, Hewlett-Packard and IBM, who market storage systems as part of their
complete computer systems. Storage Dimensions also competes against independent
storage system suppliers to the PC-LAN server market, including DEC Storage
Works, MTI Technology, Procom Technology, Inc. and StreamLogic Corporation. In
addition, providers of storage for the mainframe or UNIX-based markets, such as
Auspex Systems, Inc., Data General Corporation, EMC Corporation, Network
Appliance, Inc., Storage Computer, Inc. and Symbios Logic, Inc. could develop
and market products that address the PC-LAN storage systems market, and in
particular Windows NT applications. Many of the Company's current and potential
competitors have significantly greater financial, technical, marketing,
purchasing and other resources than the Company, and as a result, may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, to devote greater resources to the development, promotion and sale
of products than can the Company, or to deliver competitive products at a lower
end-user price. The Company also expects that competition will increase as a
result of industry consolidations. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results or financial condition.
The Company believes that the principal competitive factors affecting its
market include: fault-tolerant reliability, performance, ease of use,
scalability, configurability, price and customer service and support. There can
be no assurance that the Company will be able to successfully incorporate these
factors into its products and to compete against current or future competitors
or that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results or financial condition.
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
Storage Dimensions' success depends significantly upon its proprietary
technology. The Company currently relies on a combination of copyright and
trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company has registered
its Storage Dimensions and LANStor trademarks and will continue
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<PAGE> 38
to evaluate the registration of additional trademarks as appropriate. The
Company generally enters into confidentiality agreements with its employees and
with key vendors and suppliers. The Company currently has one U.S. patent
application pending associated with the object-oriented layered architecture of
its RAIDFlex array management software. There can be no assurance that this
patent will eventually be issued, that the Company will develop proprietary
products or technologies that are patentable, that any patent issued in the
future will provide the Company with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not have a
material adverse effect on the Company's ability to do business. The Company
believes that the rapidly changing technology in the computer storage industry
makes the Company's success dependent more on the technical competence and
creative skills of its personnel than on any patents it may be able to obtain.
There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that companies in
the storage system market will increasingly be subject to infringement claims as
the number of products and competitors in the Company's target markets grows.
Any such claims or litigation may be time-consuming and costly, cause product
shipment delays, require the Company to redesign its products or require the
Company to enter into royalty or licensing agreements, any of which could have a
material adverse effect on the Company's business, operating results or
financial condition. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company.
EMPLOYEES
As of December 31, 1996, Storage Dimensions had a total of 215 regular
full-time employees, of which 41 were engaged in engineering, research and
development; 95 in marketing, sales, and customer support; 47 in manufacturing;
and 32 in general management and administration. In addition, the Company had a
total of 6 part-time and 10 temporary employees as of December 31, 1996. None of
the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are good.
The Company's future performance depends in significant part upon the
continued service of its key technical and senior management personnel. The
Company provides incentives such as salary, benefits and option grants (which
are typically subject to vesting over four years) to attract and retain
qualified employees. The loss of the services of one or more of the Company's
officers or other key employees could have a material adverse effect on the
Company's business, operating results or financial condition. The Company's
future success also depends on its continuing ability to attract and retain
highly qualified technical and management personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its key technical and management employees or that it can attract, assimilate or
retain other highly qualified technical and management personnel in the future.
FACILITIES
Storage Dimensions' principal administrative, sales, marketing,
manufacturing and research and development facility is located in approximately
80,000 square feet of space in Milpitas, California. This facility is leased
through December 6, 1998. The Company leases other sales offices throughout the
U.S., as well as a European operations site in London, U.K. The Company believes
that its existing facilities are adequate for its current needs.
LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
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<PAGE> 39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- --------------------------------------------------------
<S> <C> <C>
David A. Eeg................... 52 President, Chief Executive Officer and Director
Gene E. Bowles, Jr............. 49 Executive Vice President, Marketing & Customer Service
and Director
Robert E. Bylin................ 54 Senior Vice President, Finance and Chief Financial
Officer
Frederick J. Berkowitz......... 39 Vice President, Systems Engineering
James M. Canter................ 33 Vice President, Software Engineering
Ted Chen....................... 44 Vice President, Marketing
Ralph Ciarlanti III............ 37 Vice President, Operations
Kenneth D. Epstein............. 41 Vice President, North American Sales
Brian D. Fitzgerald............ 52 Chairman of the Board
A. George Gebauer.............. 63 Vice Chairman of the Board
Dr. Chong Sup Park............. 48 Director
</TABLE>
DAVID A. EEG, a founder of the Company, has served as President and Chief
Executive Officer of the Company since the Company's inception in December 1992
and served as a Director since January 1993. From December 1985 to December
1992, Mr. Eeg served as President and Chief Executive Officer of the
Predecessor, which was an independent company from its formation in December
1985 and was acquired by, and became a wholly-owned subsidiary of, Maxtor in
1987. Mr. Eeg's career spans more than 25 years in the computer peripherals
industry and includes executive level positions in firms ranging from start-ups
to large corporations including Atasi, a disk drive manufacturing company,
Shugart Associates, a disk storage company, and Control Data Corporation, a
computer manufacturing company.
GENE E. BOWLES, JR., a founder of the Company, has served the Company as an
Executive Vice President with various responsibilities since December 1992, is
currently Executive Vice President, Marketing and Customer Service and has
served as Secretary and a Director since January 1993. From December 1985 to
December 1992, Mr. Bowles served as an Executive Officer of the Predecessor,
most recently as Executive Vice President, Sales, Marketing and Customer
Service. Mr. Bowles has also been a member of the Advisory Committee to the
Board of Directors of Qualix since 1991. Prior management experience includes 15
years at companies such as Atasi, a disk drive manufacturing company, Texas
Instruments, an electronic products company, and Caterpillar, Inc., a heavy
machinery company. Mr. Bowles holds a B.S.E. in Industrial Engineering from the
University of Michigan, an M.S. in Engineering Management from Northeastern
University and an M.B.A. from Stanford University, Graduate School of Business.
ROBERT E. BYLIN has served as Senior Vice President, Finance and Chief
Financial Officer of the Company since August 1994, and from December 1992 to
August 1994, as the Company's Vice President, Finance and Chief Financial
Officer. Mr. Bylin also served as a Director of the Company from August 1994 to
January 1997. From March 1991 to December 1992, Mr. Bylin served as Vice
President, Finance and Chief Financial Officer of the Predecessor. In addition,
Mr. Bylin served as a Director for the Financial Executives Institute, Santa
Clara Valley Chapter, from 1993 to 1995, and as a Director of Technology Federal
Credit Union since 1986. Prior to joining the Predecessor, Mr. Bylin was Vice
President of Finance and Administration for Memorex Computer Supplies, a
computer media and peripherals company, from 1987 until March 1991. Mr. Bylin
holds a B.S. in Mathematics from Trinity College and an M.B.A. from the Harvard
Graduate School of Business.
FREDERICK J. BERKOWITZ has served as Vice President, Systems Engineering of
the Company since November 1996. From October 1990 to October 1996, Mr.
Berkowitz served as the Director of Platform Development at Hal Computer
Systems, a network computer system company. Mr. Berkowitz holds a B.S. in
38
<PAGE> 40
Electrical Engineering from Union College and an M.S. in Computer Information
and Control Engineering from the University of Michigan.
JAMES M. CANTER has served as Vice President, Software Engineering of the
Company since March 1996, and has held various software engineering positions at
the Company since December 1992. From February 1988 to December 1992, Mr. Canter
held various software engineering positions at the Predecessor. From 1985 to
1988, Mr. Canter was Product Development Manager for TW Technologies, a supplier
of peripheral storage subsystems. Mr. Canter holds a B.S. in Microbiology from
Arizona State University.
TED CHEN has served as Vice President, Marketing of the Company since July
1995, and from January 1995 to July 1995, as the Company's Vice President, Unix
Marketing. From January 1993 to January 1995, Mr. Chen was the Director,
Marketing at Lynx Real-Time Systems, a software development company, and from
July 1981 to December 1992 he held various marketing positions at
Hewlett-Packard Company, a computer company, most recently as Marketing Manager.
Mr. Chen holds a B.S. and M.S. in Electrical Engineering from Cornell University
and an M.B.A. from the Harvard Graduate School of Business.
RALPH CIARLANTI III has served as Vice President, Operations of the Company
since November 1995, and, from December 1992 to October 1995, held various
manufacturing positions at the Company. From June 1992 to September 1992, Mr.
Ciarlanti was the Senior Quality Engineer of the Predecessor and from October
1992 to December 1992, Mr. Ciarlanti was the Manager of Quality Assurance of the
Predecessor. From July 1987 to June 1992, Mr. Ciarlanti served as the
Peripherals Supplier Quality Manager at Tandem Computers Incorporated, a
computer manufacturing company. Mr. Ciarlanti holds an A.S. in Computer
Technology from San Jose City College.
KENNETH D. EPSTEIN has served as Vice President, Sales of the Company since
July 1996 and from December 1994 to June 1996, as the Company's Director, OEM
sales. From October 1993 to December 1994 Mr. Epstein was the Vice President,
Sales at Maximum Strategy, a computer storage system company, and the Regional
Director, Sales at QMS, Inc., a computer printer company, from February 1987 to
September 1993. Mr. Epstein holds a B.S. in Business Administration from the
University of Colorado.
BRIAN D. FITZGERALD has served as Chairman of the Board since inception of
the Company in December 1992. Mr. Fitzgerald formed Capital Partners and Capital
Partners I, L.P. in 1982 and has since been the former's President and a General
Partner of the latter. Capital Partners acts as a diversified investment holding
and operating company. Capital Partners(R) is a registered trademark that
describes the overall group of Capital Partners(R) entities. Mr. Fitzgerald and
Mr. Gebauer formed Capital Partners II, L.P. in 1990. Capital Partners I,
Capital Partners II and related entities hold majority ownership positions and
various officer and director positions in seven other businesses in diversified
industries. From 1977 to 1982, Mr. Fitzgerald was a General Partner of
Industrial Capital Group and from 1974 to 1977 served as strategic planning
manager and corporate staff consultant at General Electric Company. Mr.
Fitzgerald was formerly a Director of Bryant Universal Roofing, Inc., a private
corporation which filed for bankruptcy in April 1996 under Chapter 11 of the
U.S. Bankruptcy Code. Mr. Fitzgerald is also the Chairman of the Board of
Security Capital Corporation, a public company, a position he has held since
July 1990, and is a director of a number of privately held companies. Mr.
Fitzgerald holds an A.B. degree from Princeton University and an M.B.A. from the
Harvard Graduate School of Business.
A. GEORGE GEBAUER has served as Vice Chairman of the Board since inception
of the Company in December 1992. Mr. Gebauer joined Capital Partners in July
1986 and is currently its Vice President. From 1980 to 1986, Mr. Gebauer served
as Director of Corporate Development at Axel Johnson, Inc., a diversified
holding company. In addition, since 1990 Mr. Gebauer has served as the
President, Treasurer and a Director of Security Capital Corporation. Mr. Gebauer
was formerly a Director of Bryant Universal Roofing, Inc., a private corporation
which filed for bankruptcy in April 1996 under Chapter 11 of the U.S. Bankruptcy
Code. In addition, Mr. Gebauer was formerly a Director and Executive Officer of
Alpha Modular Systems, Inc. a privately-held California corporation which had an
involuntary petition under Chapter 7 of the U.S. Bankruptcy Code filed against
it in March 1994 by certain of its creditors in the United States Bankruptcy
Court for the Central District of California. Mr. Gebauer also serves as
Director of a number of privately held
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<PAGE> 41
companies. Mr. Gebauer holds a B.A. in Chemistry from Amherst College, an M.S.
in Chemical Engineering from M.I.T. and an M.B.A. from Rutgers University.
CHONG SUP PARK has served as a Director of the Company since August 1996.
Dr. Park is the President of Hyundai Electronics America, an electronics
company, where he has been employed since September 1996, and, since July 1996,
has also served as the Vice Chairman of Maxtor Corporation, a disk drive
manufacturer. Dr. Park was the President of Maxtor Corporation from February
1995 to June 1996, the President of Axil Computer Inc., a workstation
manufacturing company, from July 1993 to January 1995, the Executive Vice
President at Ernst & Young Consulting, Inc., a public accounting firm, from
April 1992 to June 1993, and the Senior Vice President of Hyundai Electronics
Company Limited from January 1990 to March 1992. Dr. Park holds a B.A. in
Management from Yonsei University, an M.A. in Management from Seoul National
University, an M.B.A. from the University of Chicago and a Doctorate in
Management from Nova Southwestern University.
Dr. Park was nominated and elected to the Board of Directors pursuant to a
Stockholders Agreement (the "Stockholders Agreement") dated as of December 26,
1992 by and among the Company, Gene E. Bowles, Jr., David A. Eeg, members of the
Capital Partners Group, Maxtor, and certain other management investors. The
provisions of the Stockholders Agreement relating to election of directors
terminate upon the closing of this offering.
All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Company's Board of Directors. There are no family
relationships between any of the directors or executive officers of the Company.
BOARD COMMITTEES
In December 1996, the Board established an Audit Committee, a Compensation
Committee, a Nonofficer Stock Option Committee and an Executive Committee. The
Audit Committee, currently comprised of directors A. George Gebauer and C.S.
Park, recommends to the Board of Directors the engagement of the Company's
independent accountants, reviews with such accountants the plan, scope and
results of their examination of the consolidated financial statements and
determines the independence of such accountants. The Compensation Committee,
currently comprised of directors A. George Gebauer and C.S. Park, reviews and
makes recommendations to the Board of Directors regarding all forms of
compensation to be provided to the executive officers, directors and consultants
to the Company. The Nonofficer Stock Option Committee, currently comprised of
directors Gene E. Bowles, Jr. and David A. Eeg, is authorized to grant stock
options to nonofficer employees of the Company within certain guidelines
determined from time to time by the Compensation Committee or the Board of
Directors. The Executive Committee, currently comprised of Directors David A.
Eeg, Brian D. Fitzgerald and C.S. Park, provides Board guidance to management
between meetings of the full board.
DIRECTOR COMPENSATION
Beginning January 1, 1997, nonemployee members of the Company's Board of
Directors receive an annual fee of $16,000 plus $1,000 for each board meeting
attended in person for their services as directors. Prior to that time,
directors did not receive compensation for services as directors. The Company's
1996 Stock Plan provides that options may be granted to nonemployee directors of
the Company. See "-- Employee Stock Plans -- 1996 Stock Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Company's Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
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<PAGE> 42
EMPLOYMENT AGREEMENTS
Concurrent with the Acquisition in December 1992, the Company entered into
employment agreements with each of Messrs. Eeg, Bowles and Bylin. The employment
agreements provided for an initial term of three years, with automatic renewals
for successive one-year terms unless renewal is declined by either party. The
employment agreements may be terminated at any time by the employee or by the
Company by proper notice. The employment agreements provide that Messrs. Eeg,
Bowles and Bylin may not compete with the Company during the term of their
employment with the Company and, at the option of the Company and conditioned
upon the Company continuing to make salary payments, such agreements not to
compete may be extended for a period of up to two years post termination. In the
event that a covered employee is terminated without cause, the Company is
required to make severance payments for up to one year equal to then current
salary, and may elect to make such payments for up to an additional year. In the
event that a covered employee is terminated with cause, the Company may elect to
make severance payments for up to two years. In either event, the noncompetition
agreement remains in effect for the period during which the severance payments
are being made.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation, as amended and restated, limits
the liability of directors to the maximum extent permitted by Delaware law.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors
except for liability arising out of (i) a breach of their duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law, or (iv) any
transaction from which the director derived an improper personal benefit.
The Company's charter documents provide that the Company shall indemnify
its officers, directors and agents to the fullest extent permitted by law,
including those circumstances where indemnification would otherwise be
discretionary. The Company believes that indemnification under its charter
documents covers at least negligence or gross negligence on the part of
indemnified parties. The Company has entered into indemnification agreements
with each of its directors and officers which may, in some cases, be broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require the Company, among
other things, to indemnify each director and officer against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature)
and to advance such persons' expenses incurred as a result of any proceeding
against him or her as to which such person could be indemnified.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding that could result in a claim for such
indemnification.
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<PAGE> 43
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth all compensation
awarded to, earned by, or paid for services rendered to the Company in all
capacities during the year ended December 31, 1996 for (i) the Company's Chief
Executive Officer and (ii) the Company's four most highly compensated other
executive officers whose salary, bonus and other compensation for such year
exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)(1)
- -------------------------------------------- ---------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
David A. Eeg, President and CEO............. 282,068 16,753 -- 8,315
Gene E. Bowles, Jr., Executive Vice
President, Marketing and Customer
Service................................... 220,237 13,615 -- 7,398
Robert E. Bylin, Senior Vice President,
Finance & CFO............................. 156,132 13,360 -- 3,872
Ted Chen, Vice President, Marketing......... 135,015 9,525 10,000 11,297
Kenneth D. Epstein, Vice President, North
American Sales............................ 92,292 6,100 9,375 65,950
</TABLE>
- ---------------
(1) Includes car allowances, sales commissions, group life insurance and
long-term disability insurance.
Option Grants During 1996. The following table sets forth for each of the
Named Executive Officers certain information concerning stock options granted
during 1996.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(3)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED(1) 1996 PER SHARE DATE(2) 5% ($) 10% ($)
- --------------------------------- ---------- ---------------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
David A. Eeg..................... -- -- -- -- -- --
Gene E. Bowles, Jr. ............. -- -- -- -- -- --
Robert E. Bylin.................. -- -- -- -- -- --
Ted Chen......................... 10,000 4.8% $1.00 8/06/06 6,289 15,937
Kenneth D. Epstein............... 9,375 4.5% $1.00 8/06/06 5,896 14,491
</TABLE>
- ---------------
(1) Options generally have a ten year term, and vest at the rate of 1/8 of the
shares six months from the vesting start date and the balance monthly over
the succeeding 42 months.
(2) Options may terminate before their expiration dates if the optionee's status
as an employee or consultant is terminated or upon the optionee's death or
disability prior to such date.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices. The actual value realized may be greater or less than
the potential realizable values set forth in the table.
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<PAGE> 44
Aggregate Option Exercises in 1996 and Year-End Option Values. The
following table sets forth for each of the Named Executive Officers certain
information concerning options exercised during 1996 and the number of shares
subject to both exercisable and unexercisable stock options as of December 31,
1996. The following table also sets forth the value of unexercised
"in-the-money" options held at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF VALUE REALIZED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES (MARKET PRICE AT DECEMBER 31, 1996 DECEMBER 31, 1996(1)
ACQUIRED ON EXERCISE LESS --------------------------- ---------------------------
NAME EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Eeg............. -- $ -- 61,198 1,302 $ 477,344 $10,156
Gene E. Bowles, Jr....... -- -- 61,198 1,302 477,344 10,156
Robert E. Bylin.......... 29,843 101,466(2) 3,388 6,768 26,426 52,794
Ted Chen................. -- -- 4,374 15,626 34,117 113,883
Kenneth D. Epstein....... -- -- 1,484 11,016 11,575 78,425
</TABLE>
- ---------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1996 ($8.00 per share
as determined by the Board of Directors by reference to an independent
appraisal of the Common Stock) and the exercise price of the Named Executive
Officer's option.
(2) No public market existed for the Company's Common Stock during 1996. The
value realized represents the estimated value of shares of Common Stock
determined as of the date of exercise by reference to an independent
appraisal of the Company's Common Stock, less the option exercise price.
EMPLOYEE STOCK PLANS
1993 STOCK PLAN
The Company's 1993 Stock Plan (the "1993 Plan"), which provides for the
grant of 555,555 shares of Common Stock, was approved by the Company's Board of
Directors and stockholders on June 11, 1993. As of December 31, 1996, options to
purchase 456,754 shares were outstanding under the 1993 Plan and 24,586 shares
of Common Stock remained available for issuance under the 1993 Plan. The terms
of the 1993 Plan are substantially similar to those of the 1996 Stock Plan
described below.
1996 STOCK PLAN
The Company's 1996 Stock Plan (the "1996 Plan") provides for the granting
to employees and consultants of nonstatutory stock options. The 1996 Plan was
approved by the Board of Directors in December 1996 (which approval was
conditioned upon completion of this offering) and by the stockholders in January
1997. A total of 1,000,000 shares of Common Stock have been reserved for
issuance pursuant to the 1996 Plan. The Company intends to grant options to
purchase an aggregate of 620,000 shares of Common Stock at the per share price
to the public in this offering to certain executive officers of the Company,
effective upon this offering.
The 1996 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"). The Committee has the power to determine the
terms of the options granted, including the exercise price, the number of shares
subject to each option, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the Committee has the
authority to amend, suspend or terminate the 1996 Plan, provided that no such
action may affect any share of Common Stock previously issued and sold or any
option previously granted under the 1996 Plan.
Options granted under the 1996 Plan are not generally transferable by the
optionee, and generally each option is exercisable during the lifetime of the
optionee only by such optionee. Unless otherwise specified in the option
agreement, options granted under the 1996 Plan must be exercised within three
months of the end of optionee's status as an employee or consultant of the
Company, or within twelve months after such
43
<PAGE> 45
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. The exercise price of options granted under the
1996 Plan is determined by the Committee.
The 1996 Plan provides that in the event of a change in control in which
the current stockholders of the Company own less than 50% of the surviving
company or a sale of all or substantially all of the Company's assets each
Optionee will have the right to exercise the option as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable. If an
option becomes exercisable in full in the event of a merger or sale of assets,
the Committee shall notify the optionee that the option shall be fully
exercisable for a specified period from the date of such notice, and the option
will terminate upon the expiration of such period.
During 1996, the Company agreed to grant to a consultant of the Company,
upon the completion of this offering, an option to acquire 25,000 shares of
Common Stock at an exercise price of $0.20 per share. Such option, when issued,
will be fully vested and exercisable and will have a two-year term.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
approved by the Board of Directors in December 1996 (which approval was
conditioned upon completion of this offering) and by the stockholders in January
1997. A total of 200,000 shares of Common Stock has been reserved for issuance
under the Purchase Plan. The Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, has two six-month offering periods
each year beginning on the first trading day on or after February 15 and August
15, respectively, except for the first such offering period which commences on
the first trading day on or after the effective date of this offering and ends
on the last trading day on or before August 14, 1997. The Purchase Plan is
administered by the Board of Directors or by a committee appointed by the Board.
Employees are eligible to participate if they are customarily employed by the
Company or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions of up to 15% of an
employee's compensation (including commissions, but excluding overtime and other
bonuses and incentive compensation), up to a maximum of $7,500 per offering
period. The Board of Directors intends to review the percentage and maximum
withholding levels on at least an annual basis, and to increase or decrease such
levels as it deems appropriate. The price of stock purchased under the Purchase
Plan is 85% of the lower of the fair market value of the Common Stock at the
beginning or at the end of each offering period. Employees may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with the Company.
Rights granted under the Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the Purchase Plan. The Purchase Plan provides that, in
the event of a merger of the Company with or into another corporation or a sale
of all or substantially all of the Company's assets, the Board of Directors
shall shorten the offering period then in progress (so that employees' rights to
purchase stock under the Plan are exercised prior to the merger or sale of
assets). The Purchase Plan will terminate in 2006. The Board of Directors has
the authority to amend or terminate the Purchase Plan, except that no such
action may adversely affect any outstanding rights to purchase stock under the
Purchase Plan.
401(K) PLAN
The Company has a 401(k) Plan, pursuant to which eligible employees may
elect to reduce their current salary by up to the statutorily prescribed annual
limit ($9,500 in 1996) and have the amount of such reduction contributed to the
401(k) Plan. The Company matches employee contributions to the 401(k) Plan at
the rate of 50% of the employee's contribution up to a specified limit. The
401(k) Plan is intended to qualify under Section 401 of the Internal Revenue
Code so that contributions by participants to the 401(k) Plan, and income earned
on plan contributions, are not taxable to participants until withdrawn from the
401(k) Plan.
44
<PAGE> 46
CERTAIN TRANSACTIONS
In connection with the Acquisition, the Company issued to Maxtor the Maxtor
Note, which had a principal amount of $4 million. The Maxtor Note bears interest
at the rate of 8% per annum during the first year, 10% per annum during the
second year and 12% per annum for the remaining term. The Maxtor Note was
originally due on December 26, 1995 but the due date was subsequently extended
to the earlier to occur of the completion of this offering or May 10, 1997.
During 1994, 1995 and 1996, the Company paid to Maxtor $400,000, $482,042 and
$469,377, respectively, in interest payments under the Maxtor Note. The Company
also paid $400,000 of principal in the third quarter of 1996 under the Maxtor
Note. The Company will pay the remaining outstanding principal together with
unpaid interest with a portion of the proceeds of this offering. In addition,
during 1994 and 1995, the Company purchased goods (principally rigid magnetic
and optical disk drives) from Maxtor and its affiliates totaling $1,400,000 and
$69,000, respectively. The Company did not purchase any goods from Maxtor during
1996.
In connection with the Acquisition in December 1992, the Company entered
into the Advisory Agreement with Capital Partners. Capital Partners, together
with its affiliates, is the holder of a majority of the Company's outstanding
voting stock. Directors Fitzgerald and Gebauer are officers of Capital Partners.
During 1994, 1995 and 1996, the Company paid to Capital Partners $362,000,
$360,000 and $729,000, respectively, pursuant to the Advisory Agreement. The
1996 amount includes a one-time payment of $360,000 paid by the Company in
connection with termination of the Advisory Agreement by mutual agreement in
December 1996.
In 1996, the Company loaned David Bultman, its Senior Vice President of
Engineering at the time, amounts totalling $90,000. Mr. Bultman is no longer
employed with the Company. The remaining balance of Mr. Bultman's loan was
$25,183 at December 31, 1996.
The Company intends to grant options to purchase an aggregate of 620,000
shares of Common Stock under the 1996 Plan to certain executive officers of the
Company, effective upon this offering. See "Management -- Employee Stock
Plans -- 1996 Stock Plan."
All future transactions, including loans, between the Company and its
officers, directors and principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors of the Board of Directors, and will be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
45
<PAGE> 47
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 31, 1996 and
as adjusted to reflect the sale of the Common Stock offered hereby for (i) each
person or entity who is known by the Company to beneficially own five percent or
more of the outstanding Common Stock of the Company prior to this offering, (ii)
each of the Company's directors, (iii) each of the Named Executive Officers, and
(iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK OWNED
NUMBER ------------------------------
OF BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER SHARES(1) OFFERING(1) OFFERING(1)(2)
- ------------------------------------------------------- --------- ----------- --------------
<S> <C> <C> <C>
5% STOCKHOLDERS
Capital Partners Group(3).............................. 2,900,623 56.5% 37.0%
Maxtor Corporation..................................... 1,600,000 31.1 20.4
OFFICERS & DIRECTORS
David A. Eeg(4)........................................ 200,625 3.9 2.5
Gene E. Bowles, Jr.(4)................................. 200,625 3.9 2.5
Robert E. Bylin(5)..................................... 72,885 1.4 *
James M. Canter(6)..................................... 20,279 * *
Ted Chen(7)............................................ 12,416 * *
Brian D. Fitzgerald(3)................................. 2,900,623 56.5 37.0
A. George Gebauer(3)................................... -- -- --
Chong Sup Park(8)...................................... 1,600,000 31.1 20.4
All directors and executive officers as a group (11
persons)(9).......................................... 5,044,170 95.2 63.1
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of December 31, 1996 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of each other person. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole voting
and investment power with respect to the shares set forth opposite such
stockholder's name.
(2) Assumes no exercise of Underwriters' over-allotment option.
(3) Represents 1,676,440 shares held by CP Acquisition, L.P. No. 4A, 926,790
shares held by CP Acquisition, L.P. No. 4B, 3,612 shares held by Capital
Partners, Inc., and 293,781 shares held by FGS, Inc. The following
affiliated entities are included in "Capital Partners Group": (a) CP
Acquisition, L.P. No. 4A, a Delaware limited partnership; (b) CP
Acquisition, L.P. No. 4B, a Delaware limited partnership; (c) Capital
Partners, Inc., a Connecticut corporation, of which Brian D. Fitzgerald is
the sole stockholder, an officer and a Director and A. George Gebauer is an
officer; and (d) FGS, Inc., a Delaware corporation, of which Mr. Fitzgerald
is the controlling stockholder, an officer and a Director and Mr. Gebauer is
an officer and a Director. Mr. Fitzgerald may be deemed to beneficially own
the shares held by the entities comprising the Capital Partners Group. Mr.
Gebauer disclaims beneficial ownership of shares held by the entities
comprising the Capital Partners Group.
(4) Includes options to purchase 62,500 shares of Common Stock exercisable at or
within 60 days of December 31, 1996.
(5) Includes options to purchase 4,792 shares of Common Stock exercisable at or
within 60 days of December 31, 1996.
46
<PAGE> 48
(6) Includes options to purchase 16,029 shares of Common Stock exercisable at or
within 60 days of December 31, 1996.
(7) Includes options to purchase 6,041 shares of Common Stock exercisable at or
within 60 days of December 31, 1996.
(8) Represents shares held by Maxtor. Dr. Park is President of Hyundai
Electronics America, the parent of Maxtor and Vice Chairman of the Board of
Maxtor.
(9) Includes shares held by the Capital Partners Group and Maxtor, as well as
options to purchase an aggregate of 161,679 shares at or within 60 days of
December 31, 1996. See notes 3 through 8 above.
47
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
At the consummation of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.005 par value, and
10,000,000 shares of Preferred Stock, $0.005 par value, after giving effect to
the conversion of outstanding Preferred Stock into Common Stock upon
consummation of this offering.
COMMON STOCK
As of December 31, 1996, there were 5,136,623 shares of Common Stock
outstanding (after giving effect to the conversion of all Preferred Stock) held
of record by approximately 50 stockholders. Holders of Common Stock are entitled
to one vote per share on all matters to be voted upon by the stockholders.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior liquidation rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable, and the shares of Common Stock to be outstanding upon
consummation of the offering will be fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, 10,000,000 shares of undesignated
Preferred Stock will be authorized, and no shares will be outstanding. The Board
of Directors has the authority to issue the shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued shares of Preferred Stock and to fix the
number of shares constituting any series and the designations of such series,
without any further vote or action by the stockholders. Although it presently
has no intention to do so, the Board of Directors, without stockholder approval,
can issue Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company.
REGISTRATION RIGHTS
Upon the closing of this offering, the holders or their permitted
transferees ("Holders") of approximately 4,806,623 shares of Common Stock will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act. If the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders, the holders will be entitled to notice of the
registration and will be entitled to include, at the Company's expense, shares
therein. In addition, certain of the Holders may require the Company at its own
expense, on not more than two occasions, to file a registration statement under
the Securities Act, with respect to their shares of Common Stock, and the
Company is required to use its best efforts to effect such registration, subject
to certain conditions and limitations. Further, the Holders may require the
Company, at its expense, to register their shares of Common Stock on a
Registration Statement on Form S-3, when such form becomes available to the
Company, subject to certain conditions and limitations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is First
National Bank of Boston.
48
<PAGE> 50
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
7,836,623 shares of Common Stock, assuming no exercise of options outstanding as
of December 31, 1996. Of these shares, the 2,700,000 shares offered hereby
(3,105,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act of 1933, as amended (the "Securities Act"), unless purchased
by "affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Rule 144") described below. The remaining 5,136,623 shares of
Common Stock outstanding upon completion of this offering are "restricted
securities" as that term is defined in Rule 144. All of these shares are subject
to Lock-Up Agreements (described below). Of these shares none will be eligible
for immediate sale upon commencement of the offering. Upon expiration of the
Lock-Up Agreement (as described below), an aggregate of 254,132 shares will
become immediately eligible for sale without restriction pursuant to Rule 144(k)
or Rule 701 under the Securities Act ("Rule 701") (described below), and
approximately 4,882,491 additional shares will be eligible for sale subject to
the timing, volume and manner of sale restrictions of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner except an affiliate from
whom such shares were purchased) is entitled to sell in "broker's transactions"
or to market makers, within any three-month period commencing 90 days after the
date of this Prospectus, a number of shares that does not exceed the greater of
(i) one percent of the number of shares of Common Stock then outstanding
(approximately 78,000 shares immediately after this offering) or (ii) generally,
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to the availability of current public
information about the Company. Effective April 29, 1997, the holding period
under Rule 144 for such persons will be reduced to one year. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years (including the holding period of
any prior owner other than an affiliate from whom such shares were purchased),
is entitled to sell such shares without having to comply with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Effective April 29, 1997, the holding period under Rule 144(k) for such persons
will be reduced to two years. Under Rule 701, persons who purchase shares upon
exercise of options granted prior to the effective date of this offering are
entitled to sell such shares 90 days after the effective date of this offering
in reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144.
Pursuant to the Lock-Up Agreements, the Company and certain stockholders
(including the Selling Stockholders) owning upon completion of this offering, in
the aggregate, 5,136,623 shares of Common Stock and certain holders of stock
options have agreed not to, directly or indirectly, offer, sell, offer to sell,
contract to sell, grant any option to purchase or otherwise sell or dispose of
(or announce any offer, sale, offer of sale, contract of sale, grant of any
option to purchase or other sale or disposition of) any shares of Common Stock
(including shares issuable under options exercisable during the lock-up period
described below) or any securities convertible into or exercisable or
exchangeable therefor (except for shares of Common Stock they may acquire in the
public market), until 180 days after the date of this Prospectus without the
prior written consent of Smith Barney Inc., on behalf of the Underwriters.
As soon as practicable after the date of this Prospectus, the Company
intends to file registration statements on Form S-8 covering an aggregate of
approximately 1,225,000 shares of Common Stock that have been reserved for
issuance under its employee stock option plans and purchase plans thus
permitting the resale of such shares in the public market without restriction
under the Securities Act.
Prior to this offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.
49
<PAGE> 51
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, each Underwriter named below has severally agreed to purchase, and
the Company has agreed to sell to such Underwriter, the number of shares of
Common Stock set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- -------------------------------------------- ---------
<S> <C>
Smith Barney Inc. .......................... 725,000
Salomon Brothers Inc........................ 725,000
Bear, Stearns & Co. Inc..................... 65,000
Alex. Brown & Sons Incorporated............. 65,000
Black & Company, Inc........................ 50,000
Burnham Securities Inc...................... 50,000
Dain Bosworth Incorporated.................. 50,000
Dean Witter Reynolds Inc. .................. 65,000
Donaldson, Lufkin & Jenrette Securities
Corporation............................... 65,000
EVEREN Securities, Inc. .................... 50,000
Gilford Securities Incorporated............. 50,000
Hambrecht & Quist LLC....................... 65,000
Janney Montgomery Scott Inc. ............... 50,000
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- -------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................. 65,000
Montgomery Securities....................... 65,000
Morgan Stanley & Co. Incorporated........... 65,000
Needham & Company, Inc. .................... 50,000
Pacific Growth Equities, Inc. .............. 50,000
PaineWebber Incorporated.................... 65,000
Parker/Hunter Incorporated.................. 50,000
Robertson, Stephens & Company LLC........... 65,000
SoundView Financial Group, Inc. ............ 50,000
Tucker Anthony Incorporated................. 50,000
Westport Resources Investment Services,
Inc. ..................................... 50,000
---------
Total............................... 2,700,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all of the shares
of Common Stock offered hereby (other than those covered by the over-allotment
options described below) if any such shares of Common Stock are taken.
The Underwriters, for whom Smith Barney Inc. and Salomon Brothers Inc are
acting as the Representatives, propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and part of such shares of Common Stock to certain
dealers at a price that represents a concession not in excess of $0.29 per share
under the price to public. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per share of Common Stock to
certain other dealers. After the initial offering of the shares to the public,
the public offering price and such consessions may be changed by the
Representatives. The Representatives have advised the Company that the
Underwriters do not intend to confirm any shares to any accounts over which they
exercise discretionary control.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions and the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters to
reduce a short position incurred by the Underwriters in connection with the
offering. A "penalty bid" is an arrangement permitting the Representatives to
reclaim the selling concession otherwise accruing to an Underwriter or syndicate
member in connection with the offering if the Common Stock originally sold by
such Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
The Company, the officers and directors of the Company, and certain other
stockholders of the Company designated by the Representatives, have agreed that,
for a period of 180 days from the date of this Prospectus, they will not,
without the prior written consent of the Representatives, offer, sell, contract
to sell, or otherwise dispose of, any shares of Common Stock of the Company or
any securities convertible into, or exercisable or exchangeable for, Common
Stock of the Company.
The Company has granted to the Underwriters an option, exercisable for
thirty days from the date of this Prospectus, to purchase up to an aggregate
405,000 additional shares of Common Stock at the price to public
50
<PAGE> 52
set forth on the cover page of this Prospectus minus the underwriting discounts
and commissions. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, in connection with the offering of
the shares offered hereby. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares listed in such table.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Company's
Common Stock. The initial public offering price was determined by negotiation
between the Company and the Representatives. Among the factors considered in
determining the initial public offering price were the history of and prospects
for the Company's business and the industry in which it competes, an assessment
of the Company's management and the present state of the Company's development,
the past and present revenues and earnings of the Company, the prospects for
growth of the Company's revenues and earnings, the current state of the economy
in the United States and the current level of economic activity in the industry
in which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities market, including current
market valuations of publicly traded companies which are comparable to the
Company.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Gray Cary Ware & Freidenrich, a Professional
Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing.
51
<PAGE> 53
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Certain items are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract,
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement, and the exhibits and schedules thereto, may be inspected
without charge at the public reference facilities maintained by the Commission
in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the Registration Statement may be obtained from such offices upon the payment of
the fees prescribed by the Commission. The Commission maintains a World Wide Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
52
<PAGE> 54
STORAGE DIMENSIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheet as of December 31, 1995 and 1996........................... F-3
Consolidated Statement of Operations for the years ended December 31, 1994, 1995 and
1996................................................................................ F-4
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1994,
1995 and 1996....................................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1995 and
1996................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Storage Dimensions, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Storage
Dimensions, Inc. and its subsidiaries at December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
January 16, 1997, except as to
the last paragraph of Note 11
which is as of March 4, 1997
F-2
<PAGE> 56
STORAGE DIMENSIONS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 363 $ 1,682
Accounts receivable, net........................................... 9,646 11,939
Inventories........................................................ 6,915 6,304
Prepaid expenses and other assets.................................. 508 858
-------- --------
Total current assets....................................... 17,432 20,783
Property and equipment, net.......................................... 2,319 2,115
-------- --------
Total assets............................................... $ 19,751 $ 22,898
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 6,241 $ 5,061
Accrued liabilities................................................ 2,811 3,580
Short-term borrowings.............................................. 3,837 6,029
Short-term debt from stockholder................................... 4,000 3,600
-------- --------
Total current liabilities.................................. 16,889 18,270
-------- --------
Commitments (Note 10)
Stockholders' equity:
Series A Convertible Preferred Stock, $0.005 par value, 13,850
shares authorized; 13,734 and 13,850 shares issued and
outstanding..................................................... 69 69
Common Stock, $0.005 par value, 40,000 shares authorized; 1,608 and
1,674 shares issued and outstanding............................. 8 8
Additional paid-in capital......................................... 9,385 10,442
Deferred stock compensation........................................ -- (486)
Accumulated deficit................................................ (6,600) (5,405)
-------- --------
Total stockholders' equity................................. 2,862 4,628
-------- --------
Total liabilities and stockholders' equity................. $ 19,751 $ 22,898
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 57
STORAGE DIMENSIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales:
Enterprise and OEM..................................... $ 40,088 $ 52,475 $ 69,873
Desktop................................................ 21,136 7,683 2,437
-------- -------- --------
61,224 60,158 72,310
Cost of goods sold....................................... 41,998 37,170 45,327
-------- -------- --------
Gross profit............................................. 19,226 22,988 26,983
-------- -------- --------
Operating expenses:
Sales and marketing.................................... 10,662 13,344 14,081
Research and development............................... 4,339 5,377 5,872
General and administrative............................. 3,293 3,390 3,819
Advisory fee payable to related party.................. 362 360 729
-------- -------- --------
18,656 22,471 24,501
-------- -------- --------
Income from operations................................... 570 517 2,482
Interest expense......................................... (583) (641) (686)
Related party interest expense........................... (400) (482) (469)
-------- -------- --------
Income (loss) before provision for income taxes.......... (413) (606) 1,327
Provision for income taxes............................... 24 30 132
-------- -------- --------
Net income (loss)........................................ $ (437) $ (636) $ 1,195
======== ======== ========
Pro forma net income per share........................... $ 0.22
========
Shares used in per share calculation..................... 5,529
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 58
STORAGE DIMENSIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED TOTAL
--------------- --------------- PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNTS SHARES AMOUNTS CAPITAL COMPENSATION DEFICIT EQUITY
------ ------- ------ ------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993........ 13,132 $66 1,600 $ 8 $ 9,033 $ -- $(5,527) $ 3,580
Issuance of Series A Convertible
Preferred Stock to employees...... 474 2 -- -- 276 -- -- 278
Redemption of Series A Convertible
Preferred Stock................... (153) (1) -- -- (89) -- -- (90)
Net loss............................ -- -- -- -- -- -- (437) (437)
------ --- ----- ------- ----- ------- ------
--
Balance at December 31, 1994........ 13,453 67 1,600 9,220 -- (5,964) 3,331
8
Issuance of Series A Convertible
Preferred Stock to employees...... 341 2 -- 199 -- -- 201
--
Redemption of Series A Convertible
Preferred Stock................... (60) -- -- (35) -- -- (35)
--
Common Stock options exercised...... -- -- 8 1 -- -- 1
--
Net loss............................ -- -- -- -- -- (636) (636)
--
------ --- ----- ------- ----- ------- ------
--
Balance at December 31, 1995........ 13,734 69 1,608 9,385 -- (6,600) 2,862
8
Issuance of Series A Convertible
Preferred Stock to employees...... 383 2 -- 490 -- -- 492
--
Redemption of Series A Convertible
Preferred Stock................... (267) (2) -- (155) -- -- (157)
--
Common Stock options exercised,
net............................... -- -- 66 7 -- -- 7
--
Equity related to issuance of Common
Stock options..................... -- -- -- 715 (540) -- 175
--
Amortization of deferred stock
compensation...................... -- -- -- -- 54 -- 54
--
Net income.......................... -- -- -- -- -- 1,195 1,195
--
------ --- ----- ------- ----- ------- ------
--
Balance at December 31, 1996........ 13,850 $69 1,674 $ 10,442 $ (486) $(5,405) $ 4,628
$ 8
====== === ===== ======= ===== ======= ======
==
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 59
STORAGE DIMENSIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ (437) $ (636) $ 1,195
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation and amortization............................ 2,024 2,495 1,147
Compensation expense from stock and stock options........ -- -- 434
Changes in assets and liabilities:
Accounts receivable.................................... (250) (1,141) (2,293)
Inventory.............................................. (239) (2,106) 611
Prepaid expenses and other assets...................... 95 258 (350)
Accounts payable....................................... (426) 2,158 (1,180)
Accrued liabilities.................................... 456 (118) 769
------- ------- -------
Net cash provided by operating activities........... 1,223 910 333
------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment....................... (1,331) (1,363) (943)
------- ------- -------
Cash flows from financing activities:
Proceeds from sale of Series A Convertible Preferred Stock
to employees............................................. 278 201 287
Payments to repurchase Series A Convertible Preferred
Stock.................................................... (90) (35) (157)
Proceeds from exercise of Common Stock options, net......... -- 1 7
Proceeds (repayments) from short-term borrowings............ (112) 179 1,792
------- ------- -------
Net cash provided by financing activities........... 76 346 1,929
------- ------- -------
Net increase (decrease) in cash and cash equivalents.......... (32) (107) 1,319
Cash and cash equivalents at beginning of year................ 502 470 363
------- ------- -------
Cash and cash equivalents at end of year...................... $ 470 $ 363 $ 1,682
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest...................... $ 833 $ 929 $ 1,066
======= ======= =======
Cash paid during the year for income taxes.................. $ 6 $ 14 $ 25
======= ======= =======
Supplemental schedule of noncash financing activities:
Refinancing of short-term borrowings........................ $ -- $ -- $ 5,289
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 60
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
Storage Dimensions, Inc. (the "Company") was incorporated in Delaware in
November 1992. The Company designs, manufactures, markets and supports high
performance data storage systems for open systems network applications.
The Company was formed in order to effect a majority interest
management-led buy-out (the "MBO") of Storage Dimensions, Inc. (a wholly owned
subsidiary of Maxtor Corporation ("Maxtor")) on December 26, 1992 by an investor
group comprised of members of management and Capital Partners, Inc.
The MBO was accounted for in accordance with the provisions of EITF 88-16,
"Basis in Leveraged Buyout Transactions." Subsequent to the MBO, Maxtor
continued to own 32.8% of the Company. Maxtor's predecessor basis of $1.4
million was used in the determination of the carrying values of Maxtor's share
of the net assets of the Company. The MBO was accounted for as a 67.2% purchase
and, accordingly, there was a step-up in the basis of the assets. The purchase
price of $22.0 million was allocated to the estimated fair values of the net
assets acquired.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all significant intercompany accounts
and transactions.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investment instruments
with original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from three to five years. Amortization of
leasehold improvements is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining lease term.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Revenue from product sales is recognized upon shipment.
Certain sales are made to distributors who have limited rights to return
products or obtain credits for pricing changes. The Company accrues for the
estimated costs of sales returns and allowances in the period the related
revenue is recognized.
F-7
<PAGE> 61
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also, the Company provides product warranties, generally for periods of
either three or five years from the date of product sale. The Company provides
for the estimated cost to repair or replace products under warranty arrangements
in the period the related revenue is recognized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
SOFTWARE DEVELOPMENT COSTS
To date, the period between achieving technological feasibility and
completion of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred in accordance with
AICPA Statement of Position 93-7, "Reporting on Advertising Costs."
FISCAL YEAR
The Company operates and reports financial results on a
fifty-two/fifty-three week fiscal year cycle ending on the Saturday nearest
December 31. The Company also follows a five-four-four week quarterly cycle. For
convenience, the Company presents its fiscal year as ending on December 31.
Fiscal 1994, 1995 and 1996 each contained 52 weeks.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation" (see Note 7).
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
assuming the conversion of all shares of the Company's Series A Convertible
Preferred Stock into Common Stock which will occur upon the consummation of the
Company's intended initial public offering. Per share amounts also give
retroactive effect to the one-for-four reverse split of all shares of Common
Stock (and an adjustment to the conversion price of the Series A Convertible
Preferred Stock) as described in Note 11. Pursuant to the requirements of the
Securities and Exchange Commission, common equivalent shares relating to
preferred stock and stock options (using the treasury stock method and assuming
an initial public offering price of $7.00 per share) issued subsequent to
January 22, 1996 have been included in the computations for all periods
presented. Historical net income or loss per share data has not been presented
since such amounts are not deemed to be meaningful due to the significant change
in the Company's capital structure which is to occur in connection with the
offering.
F-8
<PAGE> 62
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RELATED PARTY TRANSACTIONS:
PURCHASES AND SALES
During 1994 and 1995, the Company purchased goods (principally rigid
magnetic and optical disk drives) from Maxtor Corporation and its affiliates
totaling $1,400,000 and $69,000, respectively. The Company did not purchase any
goods from Maxtor during 1996.
SUBORDINATED NOTE PAYABLE
In December 1992, in conjunction with the MBO, the Company issued a
subordinated promissory note of $4 million to Maxtor (the "Maxtor Note"). The
Maxtor Note is due and payable in full upon the earlier of the consummation of
the Company's initial public offering or May 10, 1997, subject to a
subordination agreement associated with the Company's Loan and Security
Agreement (Note 4) which restricts principal repayments until certain financial
covenants are met. During 1996, in accordance with these financial covenants,
the Company paid $400,000 in principal on the Maxtor Note. Interest at 12% per
annum is paid quarterly by the Company.
ADVISORY FEE
During 1994, 1995 and 1996, the Company paid advisory fees of $362,000,
$360,000 and $729,000, respectively, to one of its investors in accordance with
an Investment Advisory Services Agreement (the "Advisory Agreement"). The
Advisory Agreement was terminated in December 1996.
F-9
<PAGE> 63
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Accounts receivable:
Gross receivables.............................................. $10,218 $12,478
Less allowance for doubtful accounts........................... (572) (539)
------- -------
$ 9,646 $11,939
======= =======
Inventory:
Raw material and purchased components.......................... $ 4,467 $ 3,140
Work in progress............................................... 1,170 1,639
Finished goods................................................. 1,819 2,156
------- -------
7,456 6,935
Less allowance for excess and obsolete inventory............... (541) (631)
------- -------
$ 6,915 $ 6,304
======= =======
Property and equipment:
Machinery and equipment........................................ $ 6,403 $ 6,992
Furniture and fixtures......................................... 599 620
Leasehold improvements......................................... 517 539
------- -------
7,519 8,151
Less accumulated depreciation and amortization................. (5,200) (6,036)
------- -------
$ 2,319 $ 2,115
======= =======
Accrued liabilities:
Accrued employee compensation.................................. $ 1,451 $ 1,865
Other.......................................................... 1,360 1,715
------- -------
$ 2,811 $ 3,580
======= =======
</TABLE>
4. SHORT-TERM BORROWINGS:
On May 17, 1996, the Company entered into a Loan and Security Agreement
(the "Agreement") with Congress Financial Corporation which expires May 16, 1998
and replaced an existing line of credit agreement. Under the revolving line of
credit provisions of the Agreement, the Company may borrow up to $11 million
based upon eligible accounts receivable and inventory. Under the terms of the
Agreement, deposits from collections of accounts receivable are restricted. The
Agreement also allows the Company to borrow up to $1 million for purchases of
property and equipment under its capital expenditure facility and $400,000 under
its term loan provisions. Such borrowings reduce the available borrowings under
the revolving line of credit. Borrowings bear interest at the rate of prime plus
1% (9.25% as of December 31, 1996) and are secured by all of the Company's
assets. Borrowings outstanding under the line at December 31, 1996 include
$267,000 borrowed under the term loan provisions.
F-10
<PAGE> 64
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal..................................................... $ -- $ -- $ 34
State....................................................... 4 6 40
Foreign..................................................... 20 24 58
--- --- ----
$ 24 $ 30 $132
=== === ====
</TABLE>
Deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Depreciation and amortization.................................... $ 397 $ 358
Compensation accrual............................................. 149 199
Inventory reserves............................................... 334 420
Net operating loss carryforward.................................. 810 50
Research and development credits................................. 205 233
Other............................................................ 364 435
------- -------
Gross deferred tax assets........................................ 2,259 1,695
Deferred tax asset valuation allowance........................... (2,259) (1,695)
------- -------
Net deferred tax assets.......................................... $ -- $ --
======= =======
</TABLE>
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based on available evidence including the prior history
of losses, that some portion or all of the deferred tax assets will not be
realized.
A reconciliation of the provision for income taxes to the amount computed
by applying the statutory federal income tax rate to income (loss) before income
taxes is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Tax provision (benefit) at the U.S. federal statutory rate
of 34%................................................... $(140) $(206) $ 451
State income taxes, net of federal tax benefit............. 4 6 40
Change in valuation allowance.............................. 124 184 (564)
Other, net................................................. 36 46 205
----- ----- -----
$ 24 $ 30 $ 132
===== ===== =====
Effective tax rate......................................... (6)% (5)% 10%
===== ===== =====
</TABLE>
6. SHAREHOLDERS' EQUITY:
As of December 31, 1996, the Board of Directors was authorized to issue
13,850,000 shares of Series A Convertible Preferred Stock. The rights,
preferences, privileges and restrictions thereof are set forth in the
Certificate of Incorporation, as amended. Each share is convertible at the
option of the holder into Common Stock based on a formula which currently
results in a one-for-four exchange ratio of Common Stock for Preferred Stock.
This formula is subject to adjustment, as defined, which provides dilution
protection for
F-11
<PAGE> 65
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stockholders. The Preferred Stock automatically converts into shares
of Common Stock at the consent of the majority of the holders of the outstanding
shares or the closing of the sale of securities of the Company pursuant to a
firm commitment underwritten public offering under the Securities Act of 1933,
as amended. The shares have one vote for each share of Common Stock into which
each share of Preferred Stock is convertible.
Holders are entitled to dividends when and at a rate deemed by the Board.
No cash dividend may be paid to common stockholders unless an equal dividend is
paid with respect to all outstanding shares of Series A Preferred in an amount
equal to the number of shares into which each such share of Series A Preferred
could then be converted.
In the event of liquidation, holders of Series A Preferred Stock shares
have a preference over holders of Common Stock. The holders are entitled to
$0.59 per share, plus all declared but unpaid dividends. After payment in full,
the Common Stock holders are entitled to $0.20 per share. The remaining assets
after payment to the Series A Preferred Stock and the Common Stock, if any, will
be distributed ratably among the Common Stock holders and the number of shares
of Common Stock into which the Preferred Stock is then convertible.
In December 1996, the Board authorized 10,000,000 shares of undesignated
Preferred Stock, par value $0.005, effective upon the conversion of the Series A
Convertible Preferred Stock. The Board will have the authority, without further
action by the stockholders, to issue these shares in one or more series and to
fix and determine as to any series any and all of the relative rights and
preferences of shares in such series, including voting rights.
In August and October 1996, under the Company's 1996 Restricted Stock
Purchase Plan, certain employees were granted the right to purchase shares of
Preferred Stock at a price of $0.75 per share ($3.00 per share on a common
equivalent basis). A total of 382,970 shares of Preferred Stock (95,742 common
equivalent shares) were issued in accordance with these grants for a purchase
price of $287,000. Management has recorded $205,000 in compensation expense in
1996 as a result of these grants.
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in December 1996 and by the stockholders in
January 1997 subject to completion of the initial public offering of the
Company's Common Stock. A total of 200,000 shares of Common Stock has been
reserved for issuance under the Purchase Plan. As of December 31, 1996, no
shares have been granted under the Purchase Plan.
7. EMPLOYEE STOCK PLANS:
1996 Stock Plan
The 1996 Stock Plan (the "1996 Plan") provides for the granting to
employees and consultants of nonstatutory stock options. The 1996 Plan was
approved by the Board of Directors in December 1996 subject to completion of the
initial public offering of the Company's Common Stock. A total of 1,000,000
shares of Common Stock are currently reserved for issuance pursuant to the 1996
Plan. As of December 31, 1996, no options have been granted under the 1996 Plan.
1993 Stock Option Plan
The 1993 Stock Option Plan (the "1993 Plan") provides for the granting of
nonstatutory stock options for the purchase of up to an aggregate of 555,555
shares of the Company's common stock by officers, employees, consultants and
directors of the Company. The Board of Directors is responsible for
administration of the 1993 Stock Option Plan. The Board of Directors determines
the term of each option, option exercise price, number
F-12
<PAGE> 66
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of shares for which each option is granted and the rate at which each option is
exercisable. Options granted under the 1993 Stock Option Plan generally vest
over a four year period.
Nonstatutory stock options may be granted at an exercise price per share of
not less than 100% of the fair value per common share on the date of the grant
(not less than 110% of the fair value in the case of holders of more than 10% of
the Company's voting stock). Options granted under the 1993 Stock Option Plan
generally expire ten years from the date of the grant.
Transactions under the 1993 Stock Option Plan are summarized as follows (in
thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period........................ 465 $0.20 451 $0.20 457 $0.20
Granted....................... 109 0.20 167 0.20 185 1.12
Exercised..................... -- -- (8) 0.20 (70) 0.20
Canceled...................... (123) 0.20 (153) 0.20 (115) 0.23
----- ----- -----
Outstanding at period end....... 451 0.20 457 0.20 457 0.57
===== ===== =====
Options exercisable at period
end........................... 173 0.20 233 0.20 224 0.21
===== ===== =====
Weighted average grant date fair
value of options granted
during the year............... $ 3.48
=====
Weighted average grant date fair
value of options granted
during the year at exercise
prices below market prices.... $ 3.48
=====
</TABLE>
During the year ended December 31, 1996, the Company granted options to
purchase 185,125 shares of Common Stock to employees at exercise prices ranging
from $0.20 to $3.00 per share. Management will amortize approximately $540,000
of compensation expense over the vesting period relating to these options, of
which $54,000 has been recorded during the year ended December 31, 1996.
Options outstanding at December 31, 1996 exclude a commitment to issue an
option to purchase 25,000 shares of Common Stock (See Note 11).
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -----------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1996 LIFE (YEARS) PRICE 1996 PRICE
- ------------------------------ --------------- ------------ --------- --------------- ---------
<S> <C> <C> <C> <C> <C>
$0.20......................... 310 7.3 $0.20 222 $0.20
1.00......................... 120 9.6 1.00 2 1.00
3.00......................... 27 9.9 3.00 -- 3.00
--- ---
457 8.1 0.57 224 0.21
=== ===
</TABLE>
F-13
<PAGE> 67
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair value disclosures
Had compensation cost for options granted in 1995 and 1996 under the
Company's option plan been determined based on the fair value at the grant
dates, as prescribed in FAS 123, the Company's net income (loss) and pro forma
net income per share would have been as follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996
----- ------
<S> <C> <C>
Net income (loss):
As reported.............................................. $(636) $1,195
Pro forma................................................ (638) 1,186
Net income per share:
As reported.............................................. $ 0.22
Pro forma................................................ 0.21
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
the applicable period: dividend yield of 0.0% for both periods; risk-free
interest rates of 5.86% to 7.05% for options granted during the year ended
December 31, 1995 and 5.36% to 6.60% for options granted during the year ended
December 31, 1996; and a weighted average expected option term of 5 years for
both periods.
Because the determination of the fair value of all options granted after
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding paragraph and, because
additional option grants are expected to be made each year, the above pro forma
disclosures are not representative of pro forma effects of reported net income
for future years.
8. EMPLOYEE BENEFIT PLANS:
Profit sharing
Employees of the Company are entitled to receive compensation under a
profit sharing agreement that is based upon attaining specific profit goals.
Profit sharing expense totaled $180,000, $20,000 and $231,000 in 1994, 1995 and
1996, respectively.
401(k) Plan
The Company maintains a 401(k) Tax Deferred Savings Plan (the Plan) which
covers all full-time employees of the Company who are at least 21 years of age.
Under the Plan, employees may elect to contribute up to 15% of their pre-tax
compensation to the Plan. The Company matches contributions under the Plan at
the rate of 50% of the employee's contributions up to a specified maximum. The
Company's contributions to the Plan were $38,000, $75,000 and $94,000 for 1994,
1995 and 1996, respectively.
F-14
<PAGE> 68
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EXPORT SALES AND CONCENTRATIONS OF CREDIT RISK:
The Company markets its products both domestically and internationally.
Export sales are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Europe....................................... $3,655 $4,597 $4,676
Other........................................ 2,563 1,010 543
------ ------ ------
$6,218 $5,607 $5,219
====== ====== ======
</TABLE>
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and accounts
receivable. Substantially all of the Company's cash is invested in high credit
quality financial institutions. The Company performs ongoing credit evaluations
of its customers' financial conditions and maintains an allowance for
uncollectible accounts receivable based upon expected write-offs. At December
31, 1996, one customer accounted for 12% gross accounts receivable. Revenues
from significant customers which represented 10% or more of total revenues for
the respective periods were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Customer A.......................................... 6% 11% 13%
Customer B.......................................... 11% 15% 8%
</TABLE>
10. COMMITMENTS:
The Company leases its offices and operating facilities under various
noncancelable renewable operating leases. The Company's future minimum
commitments at December 31, 1996 under all operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
1997........................................................ $ 913
1998........................................................ 800
1999........................................................ 64
2000........................................................ 13
2001........................................................ 11
------
$1,801
======
</TABLE>
Rental expense under noncancelable operating leases totaled $918,000,
$862,000 and $904,000 in 1994, 1995 and 1996, respectively.
11. SUBSEQUENT EVENTS:
Reverse stock split
In 1996, the Board of Directors authorized the Company to file a
registration statement with the Securities and Exchange Commission under the
Securities Act of 1933 to sell Common Stock of the Company in an initial public
offering ("IPO"). In December 1996, the Board also approved a one-for-four
reverse stock split of all outstanding Common Stock of the Company to be
effected prior to the closing of the IPO and an increase in the authorized
Common Stock to 40,000,000 shares. At the time the reverse stock split is
effected, the conversion price of the Series A Convertible Preferred Stock will
be adjusted such that each four shares of Series A Convertible Preferred Stock
shall be convertible into one share of Common Stock. In
F-15
<PAGE> 69
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition, the Board authorized 10,000,000 shares undesignated Preferred Stock,
par value $0.005, effective upon the conversion of the Series A Convertible
Preferred Stock which will occur automatically upon the closing of the IPO. All
outstanding share and per share data have been restated to reflect the reverse
stock split.
Grant of stock option
Upon consummation of the IPO, in accordance with a previous commitment, the
Company will grant a nonqualified option to purchase 25,000 shares of Common
Stock at an exercise price of $0.20 per share in exchange for financial planning
and management services. The option only becomes exercisable upon consummation
of an initial public offering or sale of a controlling interest of the Company's
stock. The Company recorded $175,000 in estimated compensation expense in 1996
in connection with this option based on the estimated fair value of the
Company's Common Stock at December 31, 1996. When the financial statements were
originally issued on January 16, 1997, the Company had not recorded any expense
in 1996 related to this stock option.
F-16
<PAGE> 70
Storage Dimensions' Systems, Programs and Services
Lower Life-Cycle Cost of Ownership
-------------------------------------------------
Typical client/server budget over 3 years
<TABLE>
<S> <C> <C> <C> <C>
Hardware and software
costs 20
Operations, maintenance,
support, and training
costs 80
</TABLE>
ONE OF THE KEY ISSUES FACING END-USERS OF PC-LAN NETWORKS IS THE ONGOING
COST OF NETWORK MAINTENANCE AND ADMINISTRATION. THE GARTNER GROUP HAS ESTIMATED
THAT THE PURCHASE PRICE OF HARDWARE AND SOFTWARE COMPRISES ONLY 20% OF THE
THREE-YEAR COST OF NETWORK OWNERSHIP. THE REMAINING 80% OF A NETWORK'S
LIFE-CYCLE COST OF OWNERSHIP CONSISTS OF OTHER ASSOCIATED EXPENSES, SUCH AS
DOWNTIME, TROUBLESHOOTING, REPAIR, ADMINISTRATION, TRAINING AND USER SUPPORT.
STORAGE DIMENSIONS HAS DESIGNED AN INNOVATIVE PORTFOLIO OF SYSTEMS, PROGRAMS AND
SERVICES FOCUSED ON LOWERING THE LIFE-CYCLE COST OF NETWORK OWNERSHIP.
- --------------------------------------------------------------------------------
TECHCONNECT(SM) Knowledgebase TechConnect is an artificial intelligence
knowledgebase that employs dynamic feedback loops
to provide customers with the most likely
solutions to system problems based upon the
symptoms described by the user. TechConnect is
accessible 24 hours-a-day over the Internet.
- --------------------------------------------------------------------------------
VANTAGEPOINT STORAGE
MANAGEMENT SOFTWARE VantagePoint storage management software provides
centralized management of storage systems
distributed across the enterprise network.
- --------------------------------------------------------------------------------
SPEEDEXCHANGE(SM) SpeedExchange provides warranty replacement of
components overnight, minimizing potential
downtime and on-site inventory requirements.
- --------------------------------------------------------------------------------
7X24 PRIORITY SERVICE AND PARTSFor an annual fee, the Company provides priority
access to technical support personnel during
business hours and access within 20 minutes via a
pager after hours. In addition, the Company
provides replacement of failed parts 24 hours-
a-day by counter-to-counter air freight with
courier delivery.
- --------------------------------------------------------------------------------
TECHASSIST(SM) EMERGENCY
OFF-HOURS SUPPORT For a one-time fee, the Company provides access
to technical support personnel after hours to
customers who need emergency help, but have not
contracted for the 7x24 Priority Service.
- --------------------------------------------------------------------------------
FLEXGUARD(SM) FlexGuard bundles optional services into
comprehensive site service and support
arrangements to meet the special needs of large
organizations.
- --------------------------------------------------------------------------------
TAPE MAINTENANCE For an annual fee per tape drive, the Company
will provide for overnight shipment of a
replacement unit for drives that fail and are not
covered by the Company's or manufacturer's
standard warranty.
- --------------------------------------------------------------------------------
WORLD WIDE WEB-BASED
TECHNICAL SUPPORT Storage Dimensions' easy-to-use World Wide Web
site provides customers with quick access to
TechConnect, as well as access to technical,
product and service information.
- --------------------------------------------------------------------------------
FREE ON-SITE SERVICE On-site service provided by IBM is free for one
year.
- --------------------------------------------------------------------------------
<PAGE> 71
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 72
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 12
Dividend Policy........................ 12
Capitalization......................... 13
Dilution............................... 14
Selected Consolidated Financial Data... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 25
Management............................. 38
Certain Transactions................... 45
Principal Stockholders................. 46
Description of Capital Stock........... 48
Shares Eligible for Future Sale........ 49
Underwriting........................... 50
Legal Matters.......................... 51
Experts................................ 51
Additional Available Information....... 52
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
UNTIL APRIL 5, 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
2,700,000 SHARES
LOGO
COMMON STOCK
------------
PROSPECTUS
MARCH 11, 1997
------------
SMITH BARNEY INC.
SALOMON BROTHERS INC
======================================================
