<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1997
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 0-22015
STORAGE DIMENSIONS, INC.
DELAWARE 77-0324887
(State of Incorporation) (IRS Employer ID No.)
1656 McCARTHY BLVD., MILPITAS, CALIFORNIA 95035
(Address of principal offices)
Registrant's telephone number, including area code: (408) 954-0710
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
The number of shares outstanding of the Registrant's Common Stock as of March
31, 1997 was 7,837,110, $0.005 par value.
<PAGE> 2
STORAGE DIMENSIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
PAGE
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 8-15
Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities 16
Item 3. Defaults in Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16-17
</TABLE>
<PAGE> 3
STORAGE DIMENSIONS, INC.
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STORAGE DIMENSIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,487 $ 1,682
Accounts receivable, net 13,809 11,939
Inventories 6,465 6,304
Prepaid and other 886 858
------- -------
Total current assets 30,647 20,783
Property and equipment, net 2,039 2,115
------- -------
Total assets $32,686 $22,898
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,182 $ 5,061
Accrued liabilities 3,763 3,580
Short-term borrowings 683 9,629
------- -------
Total current liabilities 10,628 18,270
Total stockholders' equity 22,058 4,628
------- -------
Total liabilities and stockholders' equity $32,686 $22,898
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE> 4
STORAGE DIMENSIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
-------- --------
<S> <C> <C>
Net sales $ 20,881 $ 15,932
Cost of sales 13,278 10,112
-------- --------
Gross profit 7,603 5,820
Operating expenses
Research and development 1,491 1,340
Sales and marketing 3,917 3,130
General and administrative 886 876
Advisory fee -- 91
-------- --------
Total operating expenses 6,294 5,437
-------- --------
Operating income 1,309 383
Other income (expense), net (243) (255)
-------- --------
Income before provision for income taxes 1,066 128
Provision for income taxes 298 9
-------- --------
Net income $ 768 $ 119
======== ========
Net income per share $ 0.13 $ 0.02
======== ========
Weighted average common and
common equivalent shares outstanding 5,977 5,496
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE> 5
STORAGE DIMENSIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 768 $ 119
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation and amortization 305 279
Compensation expense from stock and stock options 34 2
Changes in assets and liabilities:
Accounts receivable (1,870) (602)
Inventory (161) 1,187
Prepaid expenses and other assets (28) (82)
Accounts payable 1,121 (390)
Accrued liabilities 183 (938)
-------- -------
Net cash provided by (used in) operating activities 352 (425)
-------- -------
Cash flows from investing activities:
Acquisition of property and equipment (229) (204)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 16,628 --
Payments to repurchase Series A Preferred Stock -- (71)
Proceeds (repayments) from short-term borrowings (8,946) 773
-------- -------
Net cash provided by financing activities 7,682 702
-------- -------
Net increase in cash and cash equivalents 7,805 73
Cash and cash equivalents at beginning of period 1,682 363
-------- -------
Cash and cash equivalents at end of period $ 9,487 $ 436
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 90 $ 120
======== =======
Cash paid during the period for income taxes $ 20 $ 9
======== =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE> 6
STORAGE DIMENSIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared by Storage Dimensions, Inc. (the "Company") in accordance with
generally accepted accounting principles for interim financial information and,
pursuant to rules and regulations of the Securities and Exchange Commission,
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and results of operations of the Company for the interim
periods presented. The results of operations for the three month period ended
March 31, 1997 are not necessarily indicative of the operating results to be
expected for the full fiscal year or future operating periods. The information
included in this report should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year ended
December 31, 1996 which are contained in the Company's Registration Statement on
Form S-1, effective March 11, 1997.
2. INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------- -----------
<S> <C> <C>
Inventory:
Raw material and purchased components $2,845 $2,539
Work in progress 1,407 1,639
Finished goods 2,213 2,126
------ ------
$6,465 $6,304
====== ======
</TABLE>
3. STOCKHOLDERS' EQUITY
On March 11, 1997 the Company effected its initial public offering of
2,700,000 shares of common stock at an offering price of $7.00 per share
(the "Offering"). The net proceeds from the Offering were $16,627,000 after
payment of underwriting discounts and Offering expenses. Net proceeds were used
to pay down the Company's short-term line of credit and pay off the Company's
subordinated promissory note to Maxtor Corporation, a stockholder.
In conjunction with the Offering, the Company effected a one-for-four
reverse stock split of all outstanding Common Stock, an increase in the
authorized Common Stock to 40,000,000 shares (and a corresponding adjustment to
the conversion ratio of the then outstanding Preferred Stock) and authorized
10,000,000 shares of undesignated Preferred Stock, par value $0.005.
<PAGE> 7
4. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the periods presented
assuming the conversion of all shares of the Company's Series A Convertible
Preferred Stock into Common Stock which occurred upon the consummation of the
Company's 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 3. 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 the 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.
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." This statement
is effective for the Company's year ending December 31, 1997. The statement
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic earnings
per share and fully diluted earnings per share is replaced by diluted earnings
per share. If the Company had adopted the statement for the three month periods
ended March 31, 1997 and 1996, the Company's net income per share would have
been as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
-------- --------
<S> <C> <C>
Basic net income per share $ 0.26 $ 0.07
Diluted net income per share $ 0.13 $ 0.02
</TABLE>
<PAGE> 8
STORAGE DIMENSIONS, INC.
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements included elsewhere herein.
IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Predictions of future events are
inherently uncertain. Actual events could differ materially from those predicted
in the forward looking statements as a result of the risks set forth in the
following discussion, and in particular, the risks discussed below under the
caption "Additional Factors that Could Affect Operating Results." Readers are
also encouraged to refer to the Company's Registration Statement on Form S-1 for
a further discussion of the Company's business and the risks and opportunities
attendant thereto.
OVERVIEW
Storage Dimensions designs, manufactures, markets, and supports
high-performance data storage systems for open systems network applications. The
Company focuses on the PC-LAN market by developing and marketing a broad family
of disk and tape storage systems designed to satisfy the high-performance,
fault-tolerance, and high-availability requirements of its customers, while at
the same time reducing the life-cycle cost of ownership. In line with its open
systems strategy, the Company also develops and supports selected products for
the Unix market. Storage Dimensions' products are sold through its own field
sales force in combination with multi-tiered distribution channels.
RESULTS OF OPERATIONS
Net Sales. Net sales increased 31.1% to $20.9 million for the three months
ended March 31, 1997, compared to $15.9 million for the three months ended March
31, 1996. This growth in sales came primarily from the enterprise and OEM
product lines and was made possible by the expansion and productivity increases
of the direct sales force, the introduction of several award winning new
products and the addition of a significant new OEM customer. Sales of enterprise
and OEM products accounted for 98% of the total Company net sales in the first
quarter of 1997 compared to 92% in the first quarter of 1996. Sales of the
Company's aging desktop products, continuing its trend, declined to
approximately 2% of sales in the first quarter of 1997. The Company believes
that sales of its desktop products will represent an immaterial portion of
revenues in future periods.
<PAGE> 9
Gross Profit. Gross profit for the first quarter of 1997 was $7.6 million,
or 36.4% of net sales, compared to $5.8 million, or 36.5% in the first quarter
of 1996. Enterprise product margins strengthened slightly with the introduction
of new products, including SuperFlex products incorporating 9 gigabyte drives
and DGR (Dynamic Growth and Reconfiguration) capability. OEM margins trended
down slightly with higher volumes, but this trend was partially offset by
improvements in related operating efficiencies. 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 established products; and the cost and availability of
components.
Research and Development. Research and development expenses consist
primarily of employee compensation, prototype expenses and fees paid to outside
consultants. Research and development expenses for the first quarter of 1997
totaled $1.5 million, or 7.1% of net sales, compared to $1.3 million or 8.4% of
net sales in the first quarter of 1996. This increase of 11.3% in absolute
dollar amount is primarily the result of increased product development efforts
related to the Company's RAIDPro product line. The decrease as a percentage of
net sales is a result of the more rapid increase in revenues between the two
periods 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 will fluctuate as a percentage of net
sales.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions, advertising, promotional costs, and customer service
and support expenses. Sales and marketing expenses for the first quarter of 1997
totaled $3.9 million, or 18.8% of net sales, compared with $3.1 million, or
19.6% of net sales in the first quarter of 1996. This increase of 25.1% in
absolute dollar spending is largely attributable to the expansion of the direct
sales force, which accelerated in late 1996. The decrease in sales and marketing
expense as a percentage of net sales in the first quarter of 1997 resulted from
increased productivity of the sales and marketing organization. There can be no
assurance that this productivity will continue to increase and, as a result,
sales and marketing expenses as a percentage of net sales are expected to
fluctuate in future periods.
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 the first
quarter of 1997 totaled $900,000 or 4.2% of net sales, compared to a similar
level of $900,000 or 5.5% of net sales in the first quarter of 1996. The Company
was able to grow its revenues without adding any further administrative costs.
The Company believes that it will incur increased administrative expenses in the
future associated with operating as a public company.
Advisory Fee. The advisory fee consists of amounts payable to a stockholder
pursuant to an Advisory Agreement. This agreement was terminated in the fourth
quarter of 1996 with a one time payment.
Other Income (Expense), Net. Other Income (Expense), net consists primarily
of interest payments on outstanding debt partially offset by interest income
earned by the investment of cash and cash equivalents. These net expenses of
$243,000 in the first quarter of 1997 were down slightly from the $255,000
incurred in the first quarter of 1996. This decrease was largely the result of
the repayment of debt with proceeds from the Company's Offering and interest
income earned from investment of the remaining Offering proceeds.
Provision for Income Taxes. In the first quarter of 1997 the effective tax
rate was 28%, as compared to an effective tax rate in the first quarter of 1996
of 7%. The increase in the effective tax rate is a result of increasing levels
of profitability, as well as a reduction in the amount of net operating loss
carryforward credits available to offset current income partially offset by a
reduction in the valuation allowance.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997 cash and cash equivalents amounted to $9.5 million
compared to $1.7 million as of December 31, 1996.
The Company generated cash from operating activities totaling $352,000
during the three months ended March 31, 1997 and used cash for operating
activities totaling $425,000 during the three months ended March 31, 1996. Net
cash provided by operating activities in the first quarter of 1997 is
principally related to increases in accounts payable, accrued liabilities and
operating income, partially offset by an increase in accounts receivable. The
use of cash for operating activities in the first quarter of 1996 was primarily
attributable to decreases in accounts payable and other accrued liabilities,
partially offset by the decrease in inventories.
The Company used approximately $229,000 and $204,000 of cash during the
three months ended March 31, 1997 and March 31, 1996, respectively, to purchase
capital equipment. Financing activities provided $7.7 million and $0.7 million
during the first quarter of 1997 and 1996, respectively, due primarily to net
proceeds from the Company's initial public offering and reduced by the repayment
of short-term borrowings in the first quarter of 1997 and further borrowings
from Congress Financial net of repurchases of preferred stock from employees in
the first quarter of 1996.
The Company currently has no significant capital commitments. The Company
believes that its existing cash, together with borrowing capacity and cash
generated from operations, will satisfy the Company's projected working capital
and other cash requirements for at least the next twelve months. There can be no
assurance, however, that the Company will not need additional capital before
such time.
ADDITIONAL FACTORS THAT COULD AFFECT FUTURE OPERATING RESULTS
The Company's future operating results are subject to a number of risks and
uncertainties including those listed below.
HISTORY OF OPERATING LOSSES; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
While the Company generated net income in 1996 and the first quarter of
1997, 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.
<PAGE> 11
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 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.
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, an OEM customer, and Tech Data Corporation, 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
<PAGE> 12
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 second
quarter 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 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.
<PAGE> 13
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.
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, Hewlett-Packard Company and International Business
Machines Corporation, 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.
<PAGE> 14
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. and
Micropolis Corporation, DLT tape drives exclusively from Quantum Corporation and
DGR (Dynamic Growth and Reconfiguration) RAID controllers exclusively from
American Megatrends, Inc. 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.
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 Corporation 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
<PAGE> 15
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.
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.
<PAGE> 16
STORAGE DIMENSIONS, INC.
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material legal
proceedings at this time.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* Second Amended and Restated Certificate of
Incorporation of the Registrant.
3.2* By-laws of the Registrant.
4.1* Form of Registrant's Common Stock Certificate.
10.1* Form of Director and Officer Indemnification
Agreement.
10.2* 1996 Stock Plan.
10.3* 1996 Employee Stock Purchase Plan.
10.4* Loan and Security Agreement, dated May 16, 1996,
by and between Congress Financial Corporation
(Western) and the Registrant.
10.5* Stockholders Agreement, dated December 26, 1992,
among the Registrant, Gene E. Bowles, Jr., David
A. Eeg, CP Acquisition, L.P. No. 4A, CP
Acquisition, L.P. No. 4B, Capital Partners, Inc.,
FGS, Inc., Maxtor Corporation, and certain other
management investors.
10.6* Lease, dated October 8, 1993, between Registrant
and Callahan-Pentz Properties, McCarthy Four.
<PAGE> 17
10.7* First Amendment to Lease, dated June 28, 1995,
between Registrant and Callahan-Pentz Properties,
McCarthy Four.
10.8* Form of employment agreement between the
Registrant and certain employees.
11.1 Statement of computation of net income per share.
27.1 Financial Data Schedule.
* Incorporated by reference from the Registrant's
Registration Statement on Form S-1, effective
March 11, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Storage Dimensions, Inc.
(Registrant)
/s/ Robert E. Bylin
-------------------------------------
Date: May 12, 1997 By: Robert E. Bylin
Senior Vice President, Finance and
Chief Financial Officer
/s/ Gene E. Bowles
------------------------------------
Date: May 12, 1997 By: Gene E. Bowles, Jr.
Executive Vice President,
Marketing and Customer Services
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
11.1 Statement of computation of net income per share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
STORAGE DIMENSIONS, INC.
FORM 10-Q
EXHIBIT 11.1
STORAGE DIMENSIONS, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
----- ------
<S> <C> <C>
Net income $ 768 $ 119
------ ------
Shares utilized in calculating net income per share:
Weighted average common shares outstanding 2,969 1,608
Common Stock equivalent shares outstanding
during the period 277 461
Effect of conversion of Series A Preferred Stock 2,731 3,427
------ ------
Weighted average common and common equivalent
shares outstanding 5,977 5,496
====== ======
Net income per share $ 0.13 $ 0.02
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF STORAGE DIMENSIONS,
INC. FOR THE QUARTER ENDED MARCH 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,487
<SECURITIES> 0
<RECEIVABLES> 13,809
<ALLOWANCES> 0
<INVENTORY> 6,465
<CURRENT-ASSETS> 30,647
<PP&E> 2,039
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,686
<CURRENT-LIABILITIES> 10,628
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 22,019
<TOTAL-LIABILITY-AND-EQUITY> 32,686
<SALES> 20,881
<TOTAL-REVENUES> 20,881
<CGS> 13,278
<TOTAL-COSTS> 13,278
<OTHER-EXPENSES> 6,294
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 260
<INCOME-PRETAX> 1,066
<INCOME-TAX> 298
<INCOME-CONTINUING> 768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 768
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
