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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-11578
DISC, Inc.
(Exact name of Registrant as specified in its charter)
California 77-0129625
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
372 Turquoise Street, Milpitas, CA 95035
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 934-7000
Securities registered pursuant to Section 12(b)of the Act:
Title of each class Name of each exchange on which registered
Common Stock, no par value None
Warrants, each to purchase one share of Common Stock
---------------------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock as of March
24, 1997 as quoted on the NASDAQ Small-Cap Market, was approximately $8,510,000.
The number of outstanding shares of the Registrant's Common Stock as of March
24, 1997 was 3,288,162.
Page 1 of 70 Pages
Exhibit Index appears on Page 24
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DISC, INC.
FORM 10-K
INDEX
Page
Part I:
Item 1. Business 3
Item 2. Facilities 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote 7
of Security Holders
Part II:
Item 5. Market for Registrant's Common
Equity and Related Shareholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 11
Part III:
Item 10. Directors and Executive Officers of the Registrant 12
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners and
Management 16
Item 13. Certain Relationships and Related Transactions 18
Part IV:
Item 14: Exhibits and Reports on Form 8-K 20
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PART I
Introductory Note
This Annual Report on Form 10-K contains certain 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 and the Company intends that such
forward-looking statements are subject to the safe harbors created thereby.
These forward-looking statements include (i) the existence and development of
the Company's technical and manufacturing capabilities, (ii) anticipated
competition, (iii) potential future growth in revenues and income, (iv)
potential future decreases in costs, and (v) the need for, and availability of,
additional financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business, which
involve judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, the business and operations of the Company are subject to substantial
risks which increase the uncertainty inherent in such forward-looking statements
(see "Certain Considerations" on pages 5 and 6). In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
ITEM 1. BUSINESS
General
DISC, Inc. ("DISC" or the "Company") was incorporated under the laws of the
State of California in 1986. The Company operates in one business segment, the
computer mass storage system business. The Company designs, manufactures, and
markets a family of high-end computer mass storage systems which use 5.25 inch
rewritable, magneto optical disks (MO) and CD-ROM disks. The Company believes it
is the only supplier of information storage products currently offering a range
of storage capacities up to 2.7 terabytes in the 5.25 inch optical disk
libraries and up to 1,470 CD-Rom platters.
Products
Products consist of a family of optical disk storage libraries based on the 5.25
inch optical or CD media and drive form factor. Their capabilities cover the
spectrum of high performance, transaction-oriented information systems such as
archival storage, imaging, COLD, network file server and video/multimedia
servers.
DISC'S modular automated library design houses a combination of optical disks,
disk drives and an advanced robotic picking mechanism. Each library contains an
array of cubes, each of which can hold either a group of disks or one to two
optical disk drives. The modular design of DISC'S libraries allows users to
choose the configuration which best suits their needs. By adding more cells of
either optical disks or drives, users can easily expand the system as storage
requirements grow. The modular design of the system also caters to various types
of drives or media, allowing users the opportunity to easily upgrade their
systems as higher performance drives and media are introduced. Software,
developed by and proprietary to the Company, allows a user's computer to
communicate with the DISC library and command a high performance robotic device
to select a desired disk from the array and insert it into a drive. Once in the
drive, the information access time for optical disks is approaching that of
magnetic disks.
The Company is currently shipping four different sizes of frames for the arrays,
to allow for different sized applications in the user's operation. The 5.25 inch
optical disk libraries cover the range of 130 to over 1,050 optical disks
stored. The CD-ROM Libraries range in capacity from 300 CD's to 1400 CD's and
can handle up to 48 CD-ROM readers. List prices for the Company's products range
from approximately $40,000 to $140,000 not including the costs of media.
All of the Company's products have been designed to meet high duty cycles while
achieving high levels of reliability and
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ease of serviceability.
Marketing and Sales
Applications for the Company's products include federal and local government and
military applications and insurance, banking, legal, entertainment and medical
applications on a worldwide basis. Sales of the Company's initial product line
commenced in 1991 and have been primarily to distributors, value added resellers
(VARs), original equipment manufacturers (OEMs), and system integrators (SIs),
who combine DISC libraries with software and/or other products and resell the
combination to the end-user or other members of the supply channel.
The Company's products are installed and serviced by an international network of
Tab or IBM maintenance technicians. Technical assistance and second level
support is provided by the Company's support staff located in Milpitas,
California.
The Company's sales offices are located in Milpitas, California, Boston,
Massachusetts, Washington, DC, Dallas, Texas, Minneapolis, Minnesota and
Guildford, England. The Company's sales staff currently consists of six
professional salespersons.
The Company has not experienced, and does not expect, sales of the Company's
products to be subject to seasonality in any material respect.
Competition
The computer information storage industry is highly competitive and price
erosion is typical over the life of a product. The Company's products compete
directly with other data storage products, including optical media, magnetic
tape cartridges and magnetic disk subsystems. The Company's competitors include
Hewlett-Packard Co., Storage Technology Corporation, ATG/Cygnet, Kodak, Plasmon
and Sony. Other companies, including computer manufacturers and other peripheral
manufacturers, could enter the market at any time. Such competitors may compete
with the Company's products with lower prices for similar products or by
introducing new products which provide greater storage capacity, faster access
time or other improved features, any of which could reduce demand for the
Company's products or require the Company to reduce its prices. Such competition
could have a materially adverse effect on the Company's results of operations.
Many of the Company's competitors have significantly greater financial,
technical, manufacturing and marketing resources than the Company, as well as
significant market shares and installed customer bases in certain market areas
addressed by the Company. As a result, the Company may not have the ability to
keep pace with rapid technological advances to the same extent as its
competitors.
However, the Company maintains an active program of research and development in
an effort to keep pace with potential competition. In addition, the Company has
expanded its marketing capabilities and its trade show coverage, but has engaged
in only limited advertising.
The principal market requirements for the Company's products are large storage
capacity, high recording speeds, reliability, compact physical size and low cost
per megabyte of storage. While desired capabilities generally vary by product
family and end user application, the Company believes that, because of its
modular design, easy scalability, high performance and reliability, DISC will
compete favorably with respect to requirements of the secondary mass data
storage market.
Manufacturing and Components
The Company's manufacturing operations consist of final system assembly and
product test activities. The majority of the parts and subassemblies in the DISC
libraries are standard, off-the-shelf components or are fabricated to DISC's
manufacturing documentation. These include power supplies, castings, motors,
bearings, timing belts and electronic components. The Company's proprietary
components, such as the frame, backplate, printed circuit assemblies and other
machined and fabricated parts are subcontracted out to independent vendors.
Certain components used by the Company are purchased from a single source of
supply. Where it relies on single sources of supply, the Company has been able
to obtain supplies of these components in a timely manner and maintains an
adequate inventory of components to meet its needs. The Company believes
alternative supplies for all such components are
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available on reasonable terms. However, failure of sources of supply and the
inability of the Company to develop alternative sources of supply as required in
the future could have a material adverse effect on the Company's operations.
Research and Development
The Company has an active program of research and development consisting of 11
full-time employees in the areas of mechanical and electrical engineering and
software design and one part-time consultant in the mechanism design area. The
Company's research and development activities include robotics design and mass
storage drive and technology design and development. The Company expended
$1,297,000, $1,336,000, and $1,414,000 on research and development for the years
ended December 31, 1996, 1995, and 1994, respectively. The Company has completed
its major development efforts with respect to its 5.25" optical and CD products.
The Company intends to continue to expand its research and development
activities team in order to conduct on-going development of existing products
and to develop new products similar to its current products.
Backlog
The Company's backlog at December 31, 1996 was approximately $840,000 as
compared to a backlog of approximately $521,000 at December 31, 1995. The
Company includes in backlog only orders for products which are believed to be
firm and which are due to be shipped within 12 months. The Company includes in
backlog orders which may be canceled by customers upon payment of cancellation
charges which vary depending on the scheduled shipment date of the order.
Because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may not
be indicative of actual revenues for any specific future period. Although the
Company has never experienced material cancellation problems, no assurance can
be given that the Company will continue to avoid cancellation problems in the
future.
Patents and Other Intellectual Property
The Company has received U.S. patents covering various aspects of its
technology, including its overall system design. There can be no assurance that
any subsequent patent applications will be granted. However, the Company
believes that the improvement of its existing products, reliance upon trade
secrets and copyrights and on unpatented proprietary know-how and innovation in
the development of new products are generally as important as patent protection
in establishing and maintaining the Company's technological advantage. The
Company believes that the value of its products is partly dependent upon its
proprietary confidentiality and invention assignment agreements with its
employees. While the Company believes that copyright and trade secret laws
should afford adequate protection of its proprietary technology, there can be no
assurance the Company's proprietary technology will remain a trade secret or
that others will not develop a similar technology and use such a technology to
compete with the Company. Such competition could have a material adverse effect
on the Company. In addition, policing unauthorized use of the Company's
technology, particularly in foreign countries, may be difficult. The Company has
not received claims from third parties alleging that the Company's products
infringe the proprietary rights of third parties, or seeking indemnification
against such infringements and knows of no basis for any such claims. However,
there can be no assurance that such claims will not be made in the future. Such
claims, if asserted, may involve costly and protracted litigation and there can
be no assurance that the Company would be able to obtain licenses from third
parties on commercially reasonable terms.
Employees
As of February 28, 1997, the Company employed 56 people on a full-time basis,
including eight employees in administration and accounting, 10 employees in
marketing and sales, 11 employees in engineering, 20 employees in manufacturing,
two employees in Quality Control and five in service. The Company also employed
one part-time consultant in engineering. The Company believes that its relations
with all employees are satisfactory. None of the employees are covered by a
collective bargaining agreement.
Additional Factors that May Affect Future Operating Results
The Company's future operating results, and stock price, may be affected by a
number of factors that could cause actual results to differ from those stated
herein. These factors include the following:
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Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results fluctuate in part due to new product enhancements and to the
timing of product shipments, marketing and product development expenditures and
promotional programs. Accordingly, 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 indication of future performance. A significant
portion of the Company's operating expenses are relatively fixed, and planned
expenditures, such as the expansion of the Company's direct sales force, are
based primarily on sales forecasts. If revenues do not meet the Company's
expectations in any given quarter, operating results may be adversely affected.
There can be no assurance that the Company will be profitable in any quarter or
at all.
Volatility of Stock Price; NASDAQ Delisting; Low Stock Prices. The
securities of computer and technology companies have experienced extreme price
and volume fluctuations, which have often been unrelated to the companies'
operating performance. Announcements of technological innovations for new
commercial products by the Company or its competitors, developments concerning
proprietary rights or general conditions in the software and computer industries
may have a significant effect on the Company's business and on the market price
of the Company's securities. Sales of a substantial number of shares of Common
Stock by existing security holders could also have an adverse effect on the
market price of the Company's securities. The trading of the Company's Common
Stock and Warrants on the on the NASDAQ System is conditioned upon the Company
meeting certain asset, revenues and stock price tests. If the Company fails any
of these tests, Common Stock and Warrants may be delisted from trading on the
NASDAQ System, which could materially adversely affect the trading market and
prices for such securities. In addition, low price stocks are subject to
additional risks including additional state regulatory requirements and the
potential loss of effective trading markets.
Highly Competitive Industry. The Company's products compete with those
offered by larger companies which possess substantially greater financial,
technical, and marketing resources than those of the Company. Competition from
computer companies and others diversifying into the field is expected to
increase as the market develops. The Company may face substantial competition
from new entrants in the industry and from established and emerging companies in
related industries. There is no assurance the Company will not experience
increased competition in the future from these or other companies which would
adversely affect the Company's ability to successfully market its products.
Rapid Changes in Technology; Maintenance of Technological Advantage.
The technology underlying the Company's products and services is subject to
rapid change. The Company maintains an ongoing research and development program,
and its success will depend in part upon its continuing ability to respond
quickly and successfully to technological advances by developing and introducing
new or improved products. There can be no assurance that the Company will be
able to foresee and respond to such advances or that competitors will now
succeed in developing technologies and products that are more effective than any
which have been or are being developed by the Company. In the past, the Company
has experienced delays in the introduction of some new products. There can be no
assurance that the Company will be able to introduce new products on schedule or
that such new products will achieve market acceptance.
History of Losses and Expectations of Future Losses; Need for
Additional Financing. The Company has experienced significant operating losses
since its inception, and as of December 31, 1996 had an accumulated deficit of
$20,235,000. The Company expects to continue to incur net losses for the
foreseeable future, and the Company's ability to sustain its operations for a
significant period after December 31, 1997 will depend on the Company's ability
to significantly increase sales or raise significant additional debt or equity
financing. There can be no assurance that the Company will be able to increase
sales or that additional financing will be available on acceptable terms, or at
all.
ITEM 2. FACILITIES
The Company's executive offices and engineering/manufacturing operations are
located in approximately 17,000 square feet of space in Milpitas, California.
The Company leases the facility pursuant to a lease which will expire on October
31, 2000, and the Company believes that this facility will be sufficient to
support operations for the foreseeable future. However, the Company believes
that, if necessary, additional space will be available in the area to house the
Company's operations.
ITEM 3. LEGAL PROCEEDINGS
In December 1993, Standard Platforms, Ltd. filed a complaint in the U.S.
District Court for the Northern District of
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California, asserting breach of contract, breach of warranty and
misrepresentations allegedly arising out of defects in the Company's products.
The Company filed counterclaims against Standard Platforms for breach of
contract and other similar claims. In addition, the Company instituted a third
party complaint against Maxoptix Corporation as the Company believes that any
defects in the products related not to the Company's products but to the optical
disk drives supplied by Maxoptix and incorporated in the Company's products. In
March 1996, the matter was settled and all parties involved executed a mutual
release. Under the terms of the settlement, the Company paid Standard Platforms,
Ltd. $150,000 in cash and agreed to provide spare parts and supplies to Standard
Platforms Ltd. until March 1997 at the Company's cost less a $25,000 discount.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
DISC, INC.'s stock is traded on the NASDAQ Small-cap Market under the symbol
DCSR. The high and low sales prices set forth below are as reported by the
NASDAQ Small Cap Market System.
1996 1995
HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
First quarter ended $6 3/4 $2 $6 1/2 $4 1/2
Second quarter ended 4 7/8 2 3/4 6 4
Third quarter ended 5 3/4 4 1/8 5 1/2 3 7/8
Fourth quarter ended 6 3 1/2 6 11/16 5
- --------------------------------------------------------------------------------
As of March 24, 1997, the Company had approximately 400 shareholders. The
Company has never paid cash dividends and has no present plans to pay dividends.
See Note 5 of Notes to Financial Statements regarding dividend requirements on
the Redeemable Convertible Preferred Stock.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
For the years ended December 31, 1996 1995 1994 1993 1992
- ---------------------------------------------- ------- ------- ------- ------- -------
Net sales $ 7,761 $ 6,605 $ 4,326 $ 3,425 $ 635
Cost of sales 6,549 5,478 3,727 3,063 812
Research and development 1,297 1,336 1,414 1,392 1,231
Marketing and sales 2,155 1,295 1,146 1,008 333
General and administrative 984 1,195 962 750 452
------- ------- ------- ------- -------
Loss from operations (3,224) (2,699) (2,923) (2,788) (2,193)
Interest and other income (expense), net (118) (127) (22) 37 (454)
------- ------- ------- ------- -------
Net loss $(3,342) (2,826) $(2,945) $(2,751) $(2,647)
------- ------- ------- ------- -------
Net loss per share $ (1.08) $ (0.94) $ (0.99) $ (0.94) $ (1.45)
Weighted average common shares and equivalents 3,106 3,005 2,963 2,932 1,827
======= ======= ======= ======= =======
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At December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------- ------ ------ ------- ------- ------
Working capital $ 691 $ 567 $ 264 $ 1,186 $3,420
Total assets 4,110 3,781 2,675 2,783 4,675
Long-term obligations, excluding current portion -- -- 43 97 23
Mandatorily Redeemable Convertible Preferred Stock -- -- 2,089 1,977 1,861
Shareholders' equity (deficit) $1,132 $1,004 $(1,501) $ (426) $1,766
------ ------ ------- ------- ------
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Annual Report on Form 10-K contains certain forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934 and the Company intends that such forward-looking
statements are subject to the safe harbors created thereby. See "Introductory
Note" page 3 hereof and "Certain Considerations" on page 6 hereof.
The Company had net sales of $7,761,000 in 1996, $6,605,000 in 1995 and
$4,326,000 in 1994. Management believes that the increase in sales is due to an
expanded customer base resulting from an increase in the Company's direct sales
personnel. This increase was offset by a change over in the industry to new
higher capacity optical drives and the federal government shutdown which began
in late fourth quarter 1995 and continued until March 1996. This shutdown
delayed the sales of several large capacity units into 1997 as projects had to
be restudied and justified. Management believes that the change to the higher
capacity drives is substantially complete in the market and that the Federal
market is returning to normal conditions. The general sales cycles for
distribution of the Company's products are similar to those of most businesses
selling products designed for use as part of large systems, and range from three
to six months for Value Added Resellers (VAR) and small System Integrators and
from one to two years for Original Equipment Manufacturers (OEM), Product
Integrators and large System Integrators.
Cost of sales, as a percentage of sales, was approximately 84% in 1996, 83% in
1995 and 86% in 1994. Cost of sales in 1996 was principally impacted by a price
reduction for all units of 15% in the fourth quarter of 1995 and a shift in
product mix towards higher sales of smaller capacity units which have lower
margins than the larger capacity units. This shift was due in part to the
federal government shutdown previously discussed. In addition, gross margins
were also affected by an increase in manufacturing engineering personnel to
allow for a shift of sustaining product responsibility from research and
development to manufacturing. The Company's relatively low gross margins reflect
the Company's low levels of net sales, which have resulted in unabsorbed
manufacturing costs and high costs of materials due to the inability to achieve
purchasing economies of scale due to low sales volume. The Company expects that,
as product sales continue to increase, costs of sales per unit of product will
decrease because fixed manufacturing costs will be distributed over the larger
sales volume, and material costs will decrease as the result of volume
purchases.
Research and development expenses were $1,297,000 in 1996, $1,336,000 in 1995
and $1,414,000 in 1994. Expenses remained relatively flat in 1996 as compared to
1995 as an increase in headcount was offset by a decrease in development
materials. The Company has restructured its research and development group and
is focused on building core competencies internally and new product development.
The Company believes that research and development expenses will increase
moderately in 1997 due to current projects under development.
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Marketing and sales expenses were $2,155,000 in 1996, $1,295,000 in 1995 and
$1,146,000 in 1994. The primary reason for the increase was the expansion of the
Company's direct sales personnel. The Company believes that marketing and sales
expenses will continue to increase in connection with the Company's continued
efforts to broaden market acceptance of its products.
General and administrative expenses were $984,000 in 1996, $1,195,000 in 1995
and $962,000 in 1994. The primary reason for the decrease in expenses was due to
a decrease in legal expenses related to litigation that was resolved at the end
of 1995.
Interest and other expense was $122,000 in 1996, $130,000 in 1995 and $28,000 in
1994. The decrease in 1996 is a result of payment on fewer capital lease
agreements as several of the agreements expired in 1996.
During 1996, 1995, and 1994, the Company used $3,545,000, $3,088,000, and
$2,388,000, respectively primarily to fund operating losses. In 1996, the
Company raised $950,000 through the issuance of Series G Preferred Stock. Also
in March 1996, the Company entered into an agreement to raise an additional
$1,400,000 through the issuance of subordinated convertible debentures. In
December 1996, the agreement was amended to increase the amount of convertible
debentures available to issue up to $3,400,000 of which $2,430,000 was received
by December 31, 1996. In April, 1997, the agreement was amended again to
increase the amount of convertible debentures available for issuance to
$4,430,000 of which $750,000 was received by March 31, 1997. The Company
believes this cash together with borrowing from the credit line, which allows
it to borrow the lesser of $1,500,000 or 80% of eligible receivables, and cash
generated from operations will be sufficient to meet its operating requirements
at least through the end of 1997, although the Company anticipates that it will
continue to incur net losses for the foreseeable future. The ability to sustain
its operations for a significant period after December 31, 1997, will depend on
the Company's ability to significantly increase sales or raise significant
additional equity or debt financing. There is no assurance that any of these
conditions will be achieved. In particular, the Company expects to require
increasing amounts of cash to finance the Company's efforts to increase sales,
which the Company plans to achieve by increasing selling efforts to large
system integrators and OEMs by hiring additional sales and sales support staff
and by making evaluation units available. In addition, the Company intends to
expand its current network of resellers. The Company may require cash to
finance purchases of inventory to satisfy anticipated increased sales as the
Company's products achieve market acceptance.
Although the Company has not committed to make any material capital
expenditures, the budget for capital equipment expenditures for 1997 is
approximately $220,000 The majority of these purchases are expected to be in the
areas of process and molding tooling to improve the cost and producibility of
the Company's products.
The terms of the Series C Preferred Stock and outstanding warrants may limit the
availability of financing for the Company, particularly equity financing.
Holders of Series C Preferred Stock are entitled to receive cumulative dividends
in the amount of approximately $112,000 per year. The Company has never paid
cash dividends and has no present plans to pay dividends.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements required by this item are submitted as a
separate section of this Form 10-K. See Item 14.(a)1. For a listing of financial
statements provided in the section titled "Financial Statements".
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
J. RICHARD ELLIS, 51, joined the Company as President and Chief
Operating Officer in July 1994 and became Chief Executive Officer in January
1995. Mr. Ellis was appointed to the Board of Directors on July 13, 1994 and
became Chairman of the Board of Directors in August 1996. From November 1993 to
June 1994, Mr. Ellis worked as an independent management consultant. From June
1991 to October 1993, Mr. Ellis was employed by Cygnet Systems Inc. ("Cygnet"),
a manufacturer of optical disk library units as President and Chief Executive
Officer. From December 1988 to May 1991, Mr. Ellis was employed by Cygnet as
Vice President of Operations and then as Chief Operating Officer. In June 1993,
Cygnet filed a voluntary petition of bankruptcy under Chapter 11 of the federal
bankruptcy law. The plan of reorganization was approved and the bankruptcy
proceedings terminated in October 1993.
FRANK T. CONNORS, 63, has been Secretary of the Company since May 1990 and was
Chairman of the Board of Directors of the Company from June 1988 to August 1996,
Chief Executive Officer of the Company from May 1990 to December 1994. Since
October 1994, Mr. Connors has been Vice Chairman of the Board of Directors and
Executive Vice President of STM Wireless, Inc., a publicly held manufacturer of
satellite communication networks.
MICHAEL D. KAUFMAN, 56, became a director of the Company in December 1988. Since
October 1987, he has been the Managing General Partner of each of MK Global
Ventures, MK Global Ventures II, and MK GVD FUND, Palo Alto, California, venture
capital firms specializing in early-stage and start-up financing of high
technology companies. From August 1981 until October 1987, Mr. Kaufman was
General Partner and Special Limited Partner of Oak Investment Partners I, II,
and III, venture capital firms, which also focused on the formation of high
technology companies. Mr. Kaufman also serves on the Boards of Directors of
Davox Corp., a telecommunications company, Document Technologies, Inc., which
also develops and sells high resolution document image processing subsystems,
Hypermedia Communications, Inc., which publishes Newmedia magazine, a periodical
dedicated to interactive multimedia technology, and Proxim, Inc., a wireless
communications company.
F. RIGDON CURRIE, 66, became a director of the Company in December 1988. Since
February 1988, he has been Special Limited Partner of MK Global Ventures II and
MK GVD FUND. Mr. Currie serves on the Boards of Directors of Document
Technologies and Wonderware Corporation, a supplier of software to the process
control and industrial automation maker.
ARCH J. MCGILL, 64, became a director of the Company in August 1993. Since
October 1985, he has been President of Chardonnay, Inc., a venture capital
investment and executive business advisory services company. From March 1983 to
October 1985, Mr. McGill was President and Chief Executive Officer of Rothchild
Ventures, Inc., a venture capital fund. From January 1981 to March 1983, Mr.
McGill was President of AIS/American Bell, a subsidiary of AT&T. Mr. McGill
serves on the Boards of Directors of Apertus Technologies, Inc., a data
networking company, and Employee Benefit Plans, Inc., a managed health-care
company.
MICHAEL A. MCMANUS, JR., 53, became a director of the Company in August 1993.
Since November 1991, he has been President and Chief Executive Officer of New
York Bancorp, Inc., the holding company for Home Federal Savings Bank. From July
1990 to October 1991, Mr. McManus was President and Chief Executive Officer of
Jencor Pharmaceuticals, Inc., a pharmaceutical company. From July 1986 to July
1990, Mr. McManus was Vice President, Business Planning & Development for the
Consumer Division of Pfizer, Inc., a health-care company. Mr. McManus also
serves on the Board of Directors of New York Bancorp, Inc.
HENRY MADRID, 40, joined the Company as Vice President of Finance and Chief
Financial Officer in January 1990. From July 1987 to December 1989, Mr. Madrid
was employed by Zentec Corporation, a manufacturer of computer terminals, as
Controller and later Vice President, Finance. From August 1979 to May 1987, Mr.
Madrid was employed by Price Waterhouse, San Jose, California, in various
positions, the last of which was as manager in the Audit Department. Mr. Madrid
is a Certified Public Accountant.
12
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WAYNE F. AUGSBURGER, 47, joined the Company in May 1993 as Vice President of
Sales and Marketing and, subsequently left the Company in January 1997. From
November 1987 to May 1993, Mr. Augsburger was employed by Cygnet Systems Inc., a
manufacturer of optical disk library units, in various positions, the last of
which was Vice President of Sales and Marketing. In June 1993, Cygnet filed a
voluntary petition of bankruptcy under Chapter 11 of the federal bankruptcy law.
The plan of reorganization was approved and the bankruptcy proceedings
terminated in October 1993.
WILLIAM F. TOTH, 38, joined the Company in June, 1996, as Vice President of
Manufacturing. From July 1994 to May 1996, Mr. Toth operated a residential
property management business. From August 1992 to July 1994, Mr. Toth served as
Vice President of Manufacturing of the Company. From March 1984 to April 1992,
Mr. Toth was employed by Doelz Networks, Inc., a manufacturer of fast packet
networking equipment in various positions in Manufacturing and Finance,
including Vice President of Manufacturing and Customer Support.
RONALD F. REYNOLDS, 59, joined the Company in February 1996, as Vice President
of Sales. From March 1995 to February 1996, Mr. Reynolds was an independent
consultant for start-up companies. From December 1992 to February 1995, Mr.
Reynolds served as Vice President of Sales for the Lago Division of Storage Tek,
a manufacturer of storage products for the Unix marketplace. From January 1988
to November 1992, Mr. Reynolds was Chief Executive Officer of Century Financial,
a leasing and consulting company for computer related products.
There are no family relationships between any director, executive officer or
person nominated or chosen by the Company to become a director or executive
officer.
Based upon its review of the copies of reporting forms furnished to the Company,
the Company believes that all filing requirements under Section 16(a) of the
Securities Exchange Act of 1934 applicable to its directors, officers, and any
persons holding ten percent or more of the Company's Common Stock with respect
to the Company's fiscal year ended December 31, 1996, were satisfied.
13
14
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table shows compensation paid by the Company
for services rendered during fiscal years 1996, 1995, and 1994 to the person who
was the Company's Chief Executive Officer and the other executive officers of
the Company who received salary and bonus compensation which exceeded $100,000
in fiscal year 1996.
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation Awards
------------------------------- --------- -------------------------
Name and
Principal Position Year Salary($) Options(1) All Other Compensation($)
- ------------------------------ ------------- -------- --------- -------------------------
J. Richard Ellis 1996 152,000 50,000 1,000(2)
President and Chief 1995 152,000 -- 1,000(2)
Executive Officer 1994 58,000 100,000 500(2)
- ------------------------------ ------------- ------- ------- -----
Wayne F. Augsburger 1996 120,000 -- 1,000(2)
Vice President-Sales and 1995 113,000 -- 1,000(2)
Marketing 1994 121,000 -- 1,000(2)
- ------------------------------ ------------- ------- ------- -----
Henry Madrid 1996 110,000 -- 1,000(2)
Vice President - Finance 1995 111,000 -- 1,000(2)
1994 99,000 -- 1,000(2)
- ------------------------------ ------------- ------- ------- -----
Ronald F. Reynolds
Sr. Vice President, Sales 1996 118,000 100,000 1,000(2)
and Marketing (3)
- ------------------------------ ------------- ------- ------- -----
(1) Options are awarded pursuant to the Company's Stock Plan, which is
administered by the Board of Directors. The Board of Directors
determines the eligibility of employees and consultants, the number of
shares to be granted and the terms of such grants.
(2) The amounts shown represent life insurance premiums paid by the
Company.
(3) Mr. Reynolds joined the Company in February 1996.
14
15
OPTION GRANTS IN LAST FISCAL YEAR
Percent of Total
Securities Underlying Options Granted to Exercise
Name Options Granted (#) Employees in FY 1996 Price ($/sh) Expiration Date
---- ------------------- -------------------- ------------ ---------------
J. Richard Ellis 50,000 13.8% $5.38 November 2001
Ronald F. Reynolds 50,000 13.8% $5.38 November 2001
Ronald F. Reynolds 50,000 13.8% $3.88 May 2001
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information on the value of unexercised
in-the-money options held by the named executive officers as of December 31,
1996.
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Number of Unexercised Value of Unexercised
Acquired on Value Options In-the-Money Options at
Name Exercise (#) Realized ($) at December 31, 1996 December 31, 1996(1)
- ---------------------- ------------- -------------- -------------------- -----------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
- ---------------------- ------------- --------------
J. Richard Ellis --- --- 61,459 88,541 $ --- $ ---
- ---------------------- ------------- -------------- ----------- ------------- ----------- --------------
Wayne F. Augsburger --- --- 46,979 3,021 --- ---
- ---------------------- ------------- -------------- ----------- ------------- ----------- --------------
Henry Madrid 23,884 98,641 12,833 1,167 --- ---
- ---------------------- ------------- -------------- ----------- ------------- ----------- --------------
Ronald F. Reynolds --- --- 8,334 41,666 --- ---
- ---------------------- ------------- -------------- ----------- ------------- ----------- --------------
(1) Market value of underlying securities at year-end minus the exercise
price of "in-the-money" options. The closing sale price for the
Company's Common Stock as of December 31, 1996 on the NASDAQ Small Cap
Market System was $3.625.
COMPENSATION OF DIRECTORS
Pursuant to the Company's 1995 Stock Option Plan for Non-Employee Directors,
each non-employee director receives an initial grant of options to purchase
25,000 shares of the Company's Common Stock upon commencement of service as a
director. In addition to such initial grant of 25,000 options, each non-employee
director is granted an option to purchase 5,000 shares of the Company's Common
Stock during each year of service as a director commencing with fiscal year
1995.
TEN-YEAR OPTION REPRICINGS
Length of
Number of Original
Securities Market Price Option Term
Underlying of Stock Exercise Price New Remaining
Options at the time at Time Exercise at Date of
Name Date Repriced(#) of Repricing of Repricing Price Repricing
---- ---- ----------- ------------ ------------ ----- ----------
F. Rigdon Currie May 20, 1996 25,000 $3.88 $6.00 $3.88 16 months
Michael Kaufman May 20, 1996 25,000 $3.88 $6.00 $3.88 16 months
Arch McGill May 20, 1996 25,000 $3.88 $6.00 $3.88 16 months
Michael A. McManus Jr. May 20, 1996 25,000 $3.88 $6.00 $3.88 16 months
Michael A. McManus Jr. May 20, 1996 5,000 $3.88 $4.50 $3.88 32 months
15
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COMPENSATION COMMITTEE REPORT ON OPTION REPRICING
On May 20, 1996, the Compensation Committee approved the repricing of 411,850
options granted pursuant to the Company's 1990 Stock Plan and 1995 Stock Option
Plan for Non-Employeee Directors, including an aggregate of 219,000 options
granted to the Named Executive Officers, and an aggregate of 120,000 options
granted to members of the Board of Directors. Such options had exercise prices
ranging from $4.25 to $6.25. Such repricing was effected by offering to exchange
new options with an exercise price of $3.88 per share, but with a new four-year
vesting period, for the options then held by such optionees.
The Compensation Committee approved the repricing because it believes that
equity interests are a significant factor in the company's ability to attract
and retain directors, executive officers and employees, by providing an
incentive to all such personnel to devote their utmost effort and skill to the
advancement and betterment of the Company by permitting them to participate in
the success and increased value of the Company. Following the grant of such
options, however, the price per share of the Company's Common Stock declined to
approximately $4.00 as a result of unforeseen market factors. The Compensation
Committee believed, that as a result of this relatively sudden decline, the
options so granted would not have the desired motivational effect on the
optionees. Accordingly, the Compensation Committee approved the repricing as a
means of ensuring that such optionees have a meaningful equity interest in the
Company.
Respectfully submitted,
Frank T. Connors
Michael A. McManus Jr.
F. Rigdon Currie
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of March 31, 1997, as to (a) all
directors, (b) the named executive officers identified in the Summary
Compensation Table located at page 14, (c) all directors and executive officers
as a group, and (d) each person known to the Company to be the beneficial owner
of more than 5% of the company's voting securities. Each share of the Company's
Series C, Series D, Series E, Series I and Series J Preferred Stock is
convertible into one share of Common Stock and is entitled to one vote per
share. Each share of the Company's Series F Preferred Stock is convertible into
two shares of Common Stock and is entitled to two votes per share. Each share of
Series G and Series H Preferred Stock is convertible into ten shares of Common
Stock and is entitled to ten votes per share. Because the Company's outstanding
Preferred Stock votes together with and has the same rights to cumulative voting
as the Common Stock, the number of shares held by such owner, includes all
shares of Common Stock and Preferred Stock on an as-if-converted basis, and
"Percentage of Class" represents the total Common and outstanding Preferred
Stock, on an as-if-converted basis, of the Company issued and outstanding as of
March 31, 1997. Except as otherwise indicated, the Company believes, based on
information furnished by such owners, that the beneficial owners of the Common
Stock and Preferred Stock have sole investment and voting power with respect to
such shares, subject to applicable community property laws.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
- ------------------- -------------------- --------
MK Global Ventures 773,744 (1) 11.4%
2471 E. Bayshore Road
Palo Alto, CA 94303
16
17
MK Global Ventures II 913,982 (2) 13.1%
2471 E. Bayshore Road
Palo Alto, CA 94303
MK GVD FUND 3,516,527 (3) 46.6%
2471 E. Bayshore Road
Palo Alto, CA 94303
J.F. Shea Co, Inc. 509,682 (4) 7.4%
655 Brea Canyon Road
Walnut, CA 91789
Michael D. Kaufman 5,237,170 (5)(8) 67.5%
2471 E. Bayshore Road
Palo Alto, CA 94303
Frank T. Connors 107,558 (6) 1.6%
J. Richard Ellis 77,083 (7) 1.1%
F. Rigdon Currie 32,917 (8) *
Arch J. McGill 32,917 (8) *
Michael A. McManus, Jr. 32,917 (8) *
Wayne F. Augsburger 52,708 (9) *
Ronald F. Reynolds 18,750 (10) *
Henry Madrid 44,661 (11) *
Directors and Executive 5,642,931 (12) 78.8%
Officers as a group (10) persons
* Less than 1%
(1) According to a report filed with the Securities and Exchange
Commission, MK Global Ventures beneficially owns 759,093 shares of the
Company's Common Stock and 10,465 Shares of the Company's Series C
Preferred Stock. Also includes warrants for 4,186 shares of Common
Stock exercisable during the 60-day period ending May 31, 1997.
(2) According to a report filed with the Securities and Exchange
Commission, MK Global Ventures II beneficially owns 310,462 shares of
the Company's Common Stock, 361,831 shares of the company's Series C
Preferred Stock, and 77,566 shares of the Company's Series I Preferred
Stock. Also includes warrants for 164,123 shares of Common Stock
exercisable during the 60-day period ending May 31, 1997.
(3) According to a report filed with the Securities and Exchange
Commission, MK GVD FUND beneficially owns 333,333 shares, or 75%, of
the Company's Series D Preferred Stock, 375,000 shares, or 75%, of the
Company's Series E Preferred Stock, 250,000 shares, or 100%, of the
Company's Series F Preferred Stock, 97,500 shares, or 89%, of the
Company's Series G Preferred Stock, 26,109 shares, or 100%, of the
Company's Series H Preferred Stock, 84,999 shares, or 54%, of the
Company's Series I Preferred Stock and 244,966 shares, or 100%, of the
Company's Series J Preferred Stock. Shares of Series C, D, E, I and J
Preferred Stock are convertible into Common Stock on a one to one basis
and Series F Preferred Stock is convertible on a two to one basis and
Series G and H stock are convertible on a ten to one basis at the
option of the holder. Also includes warrants for 737,639 shares of
Common Stock exercisable during the 60-day period ending May 31, 1997.
(4) According to a report filed with the Securities and Exchange
Commission, J.F. Shea Co., Inc. beneficially owns 33,571 shares of the
Company's Common Stock, 111,111 shares, or 25%, of the Company's Series
D Preferred
17
18
Stock, 125,000 shares, or 25%, of the Company's Series E Preferred
Stock and 12,500 shares, or 11%, of the Company's Series G Preferred
Stock. Shares of Series D and E Preferred Stock are convertible into
Common Stock on a one to one basis and Series G Preferred Stock is
convertible on a ten to one basis at the option of the holder. Also
includes warrants for 115,000 shares of Common Stock exercisable during
60-day period ending May 31, 1997.
(5) Includes 759,093 shares of Common Stock owned by MK Global Ventures,
310,462 shares of Common Stock owned by MK Global Ventures II, 10,465
shares of Series C Preferred Stock owned by MK Global Ventures, 361,831
shares of Series C Preferred Stock owned by MK Global Ventures II,
333,333 shares of Series D Preferred Stock, 375,000 shares of Series E
Preferred Stock, 250,000 shares of Series F Preferred Stock, 97,500
shares of Series G Preferred Stock, 26,109 shares of Series H Preferred
Stock, and 244,966 shares of Series J Preferred Stock owned by MK GVD
Fund and 77,566 shares of Series I owned by MK Global Ventures II and
89,499 shares of Series I Preferred Stock owned by MK GVD Fund. Also
includes warrants for 905,948 shares of Common Stock exercisable during
the 60-day period ending May 31, 1997. Mr. Kaufman, a director of the
Company, is a general partner of these funds and may be deemed to have
voting and investment power with respect to such shares. Mr. Kaufman
disclaims beneficial ownership of all shares of Common Stock and
Preferred Stock so owned; however, the aggregate voting power
represented by Mr. Kaufman's beneficial ownership of all such Common
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock,
Series H Preferred Stock, Series I Preferred Stock and Series J
Preferred Stock is indicated in the appropriate column.
(6) Includes 50,000 shares issuable upon exercise of stock options
exercisable during the 60-day period ending May 31, 1997.
(7) Includes 77,083 shares issuable upon exercise of stock options
exercisable during the 60-day period ending May 31, 1997.
(8) Includes 32,917 shares issuable upon exercise of stock options
exercisable during the 60-day period ending May 31, 1997.
(9) Includes 52,708 shares issuable upon exercise of stock options
exercisable during the 60-day period ending May 31, 1997.
(10) Includes 18,750 shares issuable upon exercise of stock options
exercisable during the 60-day period ending May 31, 1997.
(11) Includes 14,000 shares issuable upon exercise of stock options
exercisable during the 60-day period ending May 31, 1997.
(12) Includes 350,459 shares issuable upon exercise of stock options
exercisable during the 60-day period ending May 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Preferred Stock
On March 29, 1996, the Company entered into a Series G Preferred Stock Purchase
Agreement with MK GVD FUND whereby MK GVD FUND agreed to purchase 47,500 shares
of Series G Preferred Stock, each initially convertible into ten (10) shares of
Common Stock at a price of $20.00 per share and 118,750 warrants to purchase
additional shares of Common Stock at an exercise price of $2.50 per share, at a
price of $.01 per warrant.
In connection with such sale, in satisfaction of the Company's antidilution
obligations under the Series F Purchase Agreement, the Company issued to J.F.
Shea Co., Inc. an additional 12,500 shares of Series G Preferred Stock. J.F.
Shea Co., Inc. is a holder of more than 5% of the voting stock of the Company.
Also in connection with such sale, in satisfaction of the Company's antidilution
obligations under the Series E and Series F Purchase Agreement, the Company
issued to MK GVD FUND an additional 93,750 and 50,000 shares of Series F and
Series G Preferred Stock, respectively. Michael D. Kaufman, a director of the
Company, is a general partner of MK GVD FUND, and is a beneficial owner of more
than 5% of the voting stock of the Company.
On March 29, 1996, the Company entered into a Convertible Debenture Purchase
Agreement with MK GVD FUND whereby MK GVD FUND agreed to purchase an aggregate
of $1,400,000 in principal amount of subordinated convertible debentures, each
mandatorily convertible into shares of Preferred Stock and Warrants to Purchase
18
19
Common Stock at a conversion price based on the average closing price for the
Common Stock for the five trading days ended three days prior to the conversion
date. In December 1996, the agreement was amended to increase the amount to a
total of $3,400,000 and the Conversion Price was changed to the closing bid
price of the Company's Common Stock on the last day of the calendar quarter.
During the quarters ended June 30, September 30 and December 31, 1996, the
Company issued $1,000,000, $700,000 and $730,000 in principal amount of such
debentures. On June 30, September 30 and December 31, 1996 such debentures were
converted by MK GVD Fund into 26,109; 89,499 and 244,966 shares of Series H,
Series I and Series J Preferred Stock and MK Global Ventures II converted into
77,566 shares of Series I Preferred Stock at $38.30, $4.19 and $2.98 for Series
H, Series I and Series J Preferred Stock, respectively. In addition, MK GVD Fund
received for Series H, Series I and Series J Preferred Stock warrants to
purchase 65,272; 22,375 and 61,241 shares of Common Stock at exercise prices of
$4.85, $5.24 and $3.73 per share, respectively. MK Global Ventures II received
with Series I Preferred Stock a warrant to purchase 19,291 shares of Common
Stock at an exercise price of $5.24 per share.
In April 1997, the agreement was amended to increase to $4,430,000 the total
principal amount of subordinated debentures which MK GVD FUND has agreed to
purchase.
The above transactions were unanimously approved by the Board of Directors of
the Company. One of the directors of the Company was, and continues to be, an
affiliate of MK GVD FUND. However, the Company believes that the terms and
provisions of the above transactions were as fair to the Company as they could
have been if made with unaffiliated third parties.
19
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The Financial Statements of the Company as set forth under
Item 8 of this Annual Report on Form 10-K are presented herein at the pages
noted.
Page Numbers
------------
Report of Independent Accountants 39
Balance Sheet - December 31, 1996 and 1995 25
Statement of Operations - For the Three Years Ended 26
December 31, 1996
Statement of Shareholders' Equity (Deficit) - For the Three 27
Years Ended December 31, 1996
Statement of Cash Flows - For the Three Years Ended 28
December 31, 1996
Notes to Financial Statements 29-38
2. Exhibits.
The Exhibits set forth below, and listed on the accompanying index to
exhibits are filed as part of, or incorporated by reference into, this Annual
Report on Form 10-K.
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation as filed with
the California Secretary of State on December 15, 1992,
incorporated herein by this reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No. 33-52144
(the "S-1 Registration Statement").
3.2 Certificate of Determination of Preferences of Series D
Preferred Stock, as filed with the California Secretary of
State on April 15, 1994, incorporated herein by this reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (the "1994 Form 10-K").
3.3 Certificate of Determination of Preferences of Series E
Preferred Stock, as filed with the California Secretary of
State on March 30, 1995, incorporated herein by this reference
to Exhibit 3.3 to the Company's 1994 Form 10-K.
3.4 Certificate of Amendment to Amended and Restated Articles of
Incorporation, as filed with the California Secretary of State
on September 18, 1995, incorporated herein by this reference
to Exhibit 3.4 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (the "1995 Form 10-K").
3.5 Certificate of Determination of Preferences of Series F
Preferred Stock, as filed with the California Secretary of
State on September 18, 1995, incorporated herein by this
reference to Exhibit 3.5 to the Company's 1995 Form 10-K.
20
21
3.6 Certificate of Determination of Preferences of Series G
Preferred Stock, as filed with the California Secretary of
State on February 22, 1996, incorporated herein by this
reference to Exhibit 3.6 to the Company's 1995 Form 10-K.
3.7 Certificate of Amendment to Certificate of Determination of
Preferences of Series G Preferred Stock, as filed with the
California Secretary of State on April 1, 1996, incorporated
herein by this reference to Exhibit 3.7 to the Company's 1995
Form 10-K.
3.8 Certificate of Determination of Preference of Series H
Preferred Stock, as filed with the California Secretary of
State on November 18, 1996.
3.9 Certificate of Determination of Preferences of Series I
Preferred Stock, as filed with the California Secretary of
State on November 18, 1996.
3.10 Certificate of Amendment to Amended and Restated Articles of
Incorporation, as filed with the California Secretary of
State on April 14, 1997.
3.11 Certificates of Determination of Preferences of Series J
Preferred Stock, as filed with the California Secretary of
State on April 14, 1997.
3.12 Bylaws, incorporated herein by this reference to Exhibit 3.3
to the S-1 Registration Statement
10.1 DISC, Inc. 1990 Stock Option, Plan, as amended (the "Plan"),
incorporated by reference to Exhibit 10.1 to the S-1
Registration Statement.
10.2 Form of Stock Option Agreement for use with the Plan,
incorporated herein by this reference to Exhibit 10.2 to the
S-1 Registration Statement.
10.3 Form of Stock Bonus Agreement for use with the Plan,
incorporated herein by this reference to Exhibit 10.3 to the
S-1 Registration Statement.
10.4 Form of Stock Purchase Agreement for use with the Plan,
incorporated herein by this reference to Exhibit 10.4 to the
S-1 Registration Statement.
10.5 DISC, Inc. 1995 Stock Option Plan for Non-Employee Directors
(the "Director Plan"), incorporated herein by this reference
to Exhibit 10.5 to the Company's 1995 Form 10-K.
10.6 Form of Stock Option Agreement for use with the Director Plan,
incorporated herein by this reference to Exhibit 10.6 to the
Company's 1995 Form 10-K.
10.7 Form of Indemnification Agreement entered into by the Company
and its executive officers and directors, incorporated by
reference to Exhibit 10.5 to the S-1 Registration Statement.
10.8 Series D Preferred Stock Purchase Agreement dated April 14,
1994, incorporated herein by this reference to Exhibit 10.6 to
the Company's 1994 Form 10-K.
10.9 Series E Preferred Stock Purchase Agreement dated March 31,
1995, incorporated herein by this reference to Exhibit 10.7 to
the Company's 1994 Form 10-K.
10.10 Series F Preferred Stock Purchase Agreement dated September
29, 1995, incorporated herein by this reference to Exhibit
10.10 to the Company's 1995 Form 10-K.
10.11 Series G Preferred Stock Purchase Agreement dated March 29,
1996, incorporated herein by this reference to Exhibit 10.11
to the Company's 1995 Form 10-K.
10.12 Convertible Debenture Purchase Agreement dated March 29, 1996,
incorporated herein by this reference to Exhibit 10.12 to the
Company's 1995 Form 10-K.
10.13 Sublease dated October 19, 1994, between the Company and Dolch
American Instruments, Inc., for property located in Milpitas,
California, incorporated herein by this reference to Exhibit
10.8 to the Company's 1994 Form 10-K.
21
22
10.14 Loan and Security Agreement dated December 14, 1994 between
the Company and CoastFed Business Credit Corporation, as
amended to date, incorporated herein by this reference to
Exhibit 10.14 to the Company's 1995 Form 10-K.
10.15 First Amendment to Convertible Debenture Purchase Agreement,
dated December 31, 1996.
10.16 Second Amendment to Convertible Debenture Purchase Agreement,
dated April 11, 1997.
23 Consent of Price Waterhouse LLP.
25 Power of Attorney (included on Signature Page).
Executive Compensation Plans and Arrangements
- ---------------------------------------------
10.1 DISC, Inc. 1990 Stock Option, Plan, as amended (the "Plan"),
incorporated by reference to Exhibit 10.1 to the S-1
Registration Statement.
10.2 Form of Stock Option Agreement for use with the Plan, ,
incorporated herein by this reference to Exhibit 10.2 to the
S-1 Registration Statement.
10.3 Form of Stock Bonus Agreement for use with the Plan,
incorporated herein by this reference to Exhibit 10.3 to the
S-1 Registration Statement.
10.4 Form of Stock Purchase Agreement for use with the Plan,
incorporated herein by this reference to Exhibit 10.4 to the
S-1 Registration Statement.
10.5 DISC, Inc. 1995 Stock Option Plan for Non-Employee Directors
(the "Director Plan"), incorporated herein by this reference
to Exhibit 10.5 to the Company's 1994 Form 10-K.
10.6 Form of Stock Option Agreement for use with the Director Plan,
incorporated herein by this reference to Exhibit 10.6 to the
Company's 1994 Form 10-K.
10.7 Form of Indemnification Agreement entered into by the Company
and its executive officers and directors, incorporated by
reference to Exhibit 10.5 to the S-1 Registration Statement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1996.
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23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, at
Sunnyvale, California this 14th day of April, 1997.
DISC, Inc.
By /s/ J. Richard Ellis
--------------------------------------
J. Richard Ellis
President and Chief Executive Officer
POWER OF ATTORNEY
I, the undersigned director and officer of DISC, Inc., do hereby constitute and
appoint our true and lawful attorney and agent with power of substitution, to do
any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorney and agent, may deem
necessary or advisable to enable said corporation to comply with the Securities
Exchange Act of 1934, as amended and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto: and we do hereby
ratify and confirm all that said attorney and agent, shall do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
/s/ J. Richard Ellis President, Chief Executive Officer April 14, 1997
- --------------------------- and Chairman of the Board of Directors
(J. Richard Ellis) (Principal Executive Officer)
/s/ Henry Madrid Vice President of Finance April 14, 1997
- --------------------------- and Chief Financial Officer
(Henry Madrid) (Principal Financial and Accounting Officer)
/s/ Frank T. Connors Director April 11, 1997
- ---------------------------
(Frank T. Connors)
/s/ F. Rigdon Currie Director April 4, 1997
- ---------------------------
(F. Rigdon Currie)
/s/ Michael D. Kaufman Director April 14, 1997
- ---------------------------
(Michael D. Kaufman)
/s/ Arch J. McGill Director April 14, 1997
- ---------------------------
(Arch J. McGill)
/s/ Michael A. McManus, Jr. Director April 14, 1996
- ---------------------------
(Michael A. McManus, Jr.)
23
24
DISC, INC.
FORM 10-K
EXHIBIT INDEX
SEQUENTIAL
PAGE NUMBER
-----------
3.8 Certificate of Determination of Preference of Series H Preferred Stock,
as filed with the California Secretary of State on November 18, 1996. 41
3.9 Certificate of Determination of Preference of Series I Preferred Stock,
as filed with the California Secretary of State on November 18, 1996. 47
3.10 Certificate of Amendment to Amended and Restated Articles of
Incorporation, as filed with the California Secretary of State on April
14, 1997. 53
3.11 Certificate of Determination of Preference of Series J Preferred Stock,
as filed with the California Secretary of State on April 11, 1997. 55
10.15 First Amendment to Convertible Debenture Purchase Agreement, dated
December 31, 1996. 61
10.16 Second Amendment to Convertible Debenture Purchase Agreement, dated
April 11, 1997. 64
11. Computation of Net Loss Per Share. 67
23. Consent of Price Waterhouse LLP 69
25. Power of Attorney (included on Signature Page).
24
25
FINANCIAL STATEMENTS
As required under Item 8. Financial Statements and Supplementary Data, the
financial statements of the Company are provided in this separate section. The
financial statements included in this section are as follows:
DISC, INC.
BALANCE SHEET
December 31,
- ----------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $305,000 $298,000
Accounts receivable, net of allowance for doubtful accounts 1,430,000 1,144,000
Inventories 1,862,000 1,822,000
Prepaids and deposits 72,000 80,000
----------- ----------
Total current assets 3,669,000 3,344,000
Property and equipment, net 441,000 437,000
----------- ----------
$4,110,000 $3,781,000
=========== ==========
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,585,000 $1,527,000
Borrowings under credit line 1,087,000 731,000
Other accrued liabilities 211,000 365,000
Accrued warranty 95,000 106,000
Current portion of capitalized lease obligations --- 48,000
----------- ----------
Total current liabilities 2,978,000 2,777,000
Shareholders' equity:
Series C Convertible Preferred Stock; no par value,
372,296 shares authorized, issued and outstanding 1,861,000 1,861,000
Series D Convertible Preferred Stock; no par value,
600,000 shares authorized; 444,444 shares
issued and outstanding 1,971,000 1,971,000
Series E Convertible Preferred Stock; no par value,
500,000 shares authorized, issued and outstanding 1,980,000 1,980,000
Series F Convertible Preferred Stock; no par value,
250,000 shares authorized, issued and outstanding 1,250,000 1,250,000
Series G Convertible Preferred Stock; no par value,
110,000 shares authorized, issued and outstanding 950,000
Series H Convertible Preferred Stock; no par value,
26,109 shares authorized, issued and outstanding 1,000,000
Series I Convertible Preferred Stock; no par value,
167,065 shares authorized, issued and outstanding 700,000
Series J Convertible Preferred Stock; no par value,
244,966 shares authorized, issued and outstanding 730,000
Common Stock; no par value, 20,000,000 shares
authorized; 3,279,532 and 3,034,545 shares
issued and outstanding 10,925,000 10,835,000
Accumulated deficit (20,235,000) (16,893,000)
----------- -----------
Total shareholders' equity 1,132,000 1,004,000
----------- -----------
$ 4,110,000 $ 3,781,000
=========== ===========
See accompanying notes to financial statements.
25
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DISC, INC.
STATEMENT OF OPERATIONS
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ 7,761,000 $6,605,000 $4,326,000
------------------------------------------------------------
Costs and expenses:
Cost of sales 6,549,000 5,478,000 3,727,000
Research and development 1,297,000 1,336,000 1,414,000
Marketing and sales 2,155,000 1,295,000 1,146,000
General and administrative 984,000 1,195,000 962,000
------------------------------------------------------------
Total costs and expenses 10,985,000 9,304,000 7,249,000
------------------------------------------------------------
Loss from operations (3,224,000) (2,699,000) (2,923,000)
Interest income 5,000 3,000 6,000
Interest and other expense (123,000) (130,000) (28,000)
------------------------------------------------------------
Net loss $(3,342,000) $(2,826,000) $(2,945,000)
------------------------------------------------------------
Net loss per share $ (1.08) $(0.94) $(0.99)
------------------------------------------------------------
Weighted average common shares and equivalents 3,106,000 3,004,923 2,962,960
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
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DISC, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Accretion of
Mandatorily
Redeemable
Convertible
Preferred Stock
Preferred Stock Common Stock Redemption
Shares Amount Shares Amount Value
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $ -- 2,946,096 $10,812,000 $(116,000)
Issuance of Series D Convertible
Preferred Stock, net 400,000 1,971,000
Exercise of Common Stock options 33,560 11,000
Exercise of Warrant 8,629
Accretion of Series C Redeemable
Convertible Preferred Stock
redemption value (Note 5) (112,000)
Net loss for the period
------------------------------------------------------------------------------------
Balance at December 31, 1994 400,000 $1,971,000 2,988,285 $10,823,000 $(228,000)
Exercise of Common Stock options 41,260 12,000
Exercise of Warrant 5,000
Issuance of Series D Preferred
Stock 44,444
Issuance of Series E Convertible
Preferred Stock, Net 500,000 1,980,000
Issuance of Series F Convertible
Preferred Stock, Net 156,250 1,250,000
Series C Preferred Stock (Note 5) 372,296 1,861,000
Series C Accretion (Note 5) 228,000
Net loss for the period
------------------------------------------------------------------------------------
Balance at December 31, 1995 1,472,990 $7,062,000 3,034,545 $10,835,000 $ --
Exercise of Common Stock Options 90,000
244,987
Issuance of Series F Convertible
Preferred Stock, net 93,750
Issuance of Series G Convertible
Preferred Stock, net 110,000 950,000
Issuance of Series H Convertible
Preferred Stock, net 26,109 1,000,000
Issuance of Series I Convertible
Preferred Stock, net 167,065 700,000
Issuance of Series J Convertible
Preferred Stock, net 244,966 730,000
Net Loss for Period
------------------------------------------------------------------------------------
Balance at December 31, 1996 2,114,880 $10,442,000 3,279,532 $10,925,000 $ --
==========================================================================================================================
Accumulated
Deficit Total
- ---------------------------------------------------------------------
Balance at December 31, 1993 $(11,122,000) $(426,000)
Issuance of Series D Convertible
Preferred Stock, net 1,971,000
Exercise of Common Stock options 11,000
Exercise of Warrant
Accretion of Series C Redeemable
Convertible Preferred Stock
redemption value (Note 5) (112,000)
Net loss for the period (3,945,000) (2,945,000)
-------------------------------
Balance at December 31, 1994 $(14,067,000) $(1,501,000)
Exercise of Common Stock options 12,000
Exercise of Warrant
Issuance of Series D Preferred
Stock
Issuance of Series E Convertible
Preferred Stock, Net 1,980,000
Issuance of Series F Convertible
Preferred Stock, Net 1,250,000
Series C Preferred Stock (Note 5) 1,861,000
Series C Accretion (Note 5) 228,000
Net loss for the period (2,826,000) $(2,826,000)
-------------------------------
Balance at December 31, 1995 $(16,893,000) $1,004,000
Exercise of Common Stock Options 90,000
Issuance of Series F Convertible
Preferred Stock, net --
Issuance of Series G Convertible
Preferred Stock, net 950,000
Issuance of Series H Convertible
Preferred Stock, net 1,000,000
Issuance of Series I Convertible
Preferred Stock, net 700,000
Issuance of Series J Convertible
Preferred Stock, net 730,000
Net Loss for Period (3,342,000) (3,342,000)
-------------------------------
Balance at December 31, 1996 $(20,235,000) $1,132,000
=====================================================================
See accompanying notes to financial statements.
27
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DISC, INC.
STATEMENT OF CASH FLOWS
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(3,342,000) $(2,826,000) $(2,945,000)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation expense 226,000 299,000 245,000
Changes in assets and liabilities:
Accounts receivable (286,000) (85,000) (275,000)
Inventories (40,000) (852,000) 63,000
Prepaids and deposits 8,000 86,000 (112,000)
Accounts payable 58,000 292,000 601,000
Other accrued liabilities (154,000) 57,000 84,000
Accrued warranty (11,000) (59,000) (49,000)
--------------------------------------------
Cash used in operating activities (3,541,000) (3,088,000) (2,388,000)
--------------------------------------------
Cash used in investing activities for capital expenditures (230,000) (369,000) (150,000)
--------------------------------------------
Cash flows from financing activities:
Borrowings under bank line of credit, net 356,000 459,000 272,000
Proceeds from issuance of Common Stock 90,000 12,000 11,000
Proceeds from issuance of Preferred Stock 3,380,000 3,230,000 1,971,000
Repayment of capitalized lease obligations (48,000) (59,000) (53,000)
--------------------------------------------
Cash provided by financing activities 3,778,000 3,642,000 2,201,000
--------------------------------------------
Net increase (decrease) in cash 7,000 185,000 (337,000)
Cash at beginning of the year 298,000 113,000 450,000
--------------------------------------------
Cash at end of the year $ 305,000 298,000 $ 113,000
--------------------------------------------
Supplemental disclosure of cash flow information: Interest paid $ 122,000 130,000 $ 15,000
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
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DISC, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
DISC, INC. ("the Company") is engaged in the marketing, development and
manufacturing of optical disk storage units.
Subsequent to year end, the Company amended its agreement to raise funds
through the issuance of subordinated convertible debentures. The
Company will receive $2,000,000 in installments during 1997, $750,000 of
which was received by March 31, 1997 (See Note 5). The Company believes
that this cash, together with cash generated from operations, will be
sufficient to meet its operating requirements at least through the end of
1997, although the Company anticipates that it will continue to incur net
losses for the foreseeable future. The ability to sustain its operations
for a significant period after December 31, 1997, will depend on the
Company's ability to significantly increase sales or raise significant
additional equity or debt financing.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of the product
when the Company has no significant obligations remaining and collection
of the resulting receivable is probable.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight line method over the shorter of the estimated useful lives
of the assets, which range from three to five years, or the lease term of
the respective assets, if applicable.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
STOCK COMPENSATION PLANS
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock compensation plans. Accordingly, the Company
does not recognize compensation cost related to these plans. In 1996,
the Company adopted Statement of Financial Accounting Standards No. 123
("SFAS 123") for disclosure purposes only. The appropriate disclosures,
in accordance with SFAS 123 have been included in the footnotes to the
financial statements.
29
30
NOTES TO FINANCIAL STATEMENTS
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109") "Accounting for
Income Taxes." SFAS 109 accounts for income taxes under an asset and
liability approach, which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of
assets and liabilities.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average
number of shares of Common Stock outstanding plus Common Stock
equivalents related to stock options and Warrants outstanding unless
anti-dilutive.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and
accompanying notes. Actual results could differ from these estimates.
NOTE 3 - BALANCE SHEET DETAILS:
December 31,
- ---------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------
Accounts Receivable:
Trade accounts receivable $ 1,544,000 $ 1,248,000
Less: Allowance for doubtful accounts (114,000) (104,000)
------------------------------------------
$ 1,430,000 $ 1,144,000
==========================================
Inventories:
Raw materials $ 1,286,000 $ 1,163,000
Work-in-process 545,000 541,000
Finished goods 31,000 118,000
------------------------------------------
$ 1,862,000 $ 1,822,000
==========================================
Property and Equipment:
Computer and other equipment $ 667,000 $ 618,000
Tooling 203,000 160,000
Evaluation units 607,000 479,000
Leasehold Improvements 22,000 22,000
Furniture and fixtures 58,000 48,000
------------------------------------------
1,557,000 1,327,000
Less: Accumulated depreciation and amortization (1,116,000) (890,000)
------------------------------------------
$ 441,000 $ 437,000
=========================================================================================================
30
31
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - DEBT:
During 1994, the Company entered into a line of credit agreement with a bank
and, in 1995, amended that agreement to extend the expiration date to December
31, 1997, and to modify certain other provisions of the agreement. Borrowings
under this facility are limited to the lesser of $1,500,000 or 80% of eligible
receivables through December 31, 1996, and to the lesser of $2,000,000 or 80% of
eligible receivables thereafter. At December 31, 1996 and 1995, $1,087,000 and
$731,000, respectively, was outstanding under the line. Borrowings under this
facility bear interest at the bank's prime rate plus 2% (10.25% at December 31,
1996) with a minimum of 9% and are secured by substantially all of the assets of
the Company. In addition, the agreement requires a minimum interest charge of
$9,000 per month.
NOTE 5 - CONVERTIBLE PREFERRED STOCK:
There are 5,000,000 shares of Preferred Stock authorized, which are designated
in series as follows: Series C: 372,296 shares; Series D: 600,000 shares; Series
E: 500,000 shares; Series F: 250,000 shares; Series G: 110,000 shares; Series H:
26,109 shares; Series I: 167,065 shares; Series J: 244,966 shares and
undesignated: 2,729,564 shares.
In December 1992, 372,296 shares of Series C Preferred Stock were issued upon
the conversion of $1,675,000 of notes payable to shareholders. Under the terms
of the Series C Preferred Stock when issued, the holders of Series C Preferred
Stock, at their option could require the Company, under certain conditions, to
redeem all or part of the Series C Preferred Stock at $5.00 per share plus any
accrued but unpaid dividends. In March 1995, the sole holder of the Company's
outstanding Series C Preferred Stock irrevocably waived its right to cause the
Company to redeem these shares. In consideration for this waiver, the Company
issued a warrant to the holder to purchase 148,918 shares of Common Stock of the
company at a price of $5.50 per share. This warrant expires on April 1, 2000. At
its Annual Meeting of Shareholders on August 20, 1995, the Company's
shareholders, including the holder of Series C Preferred Stock, approved an
amendment to the Company's Amended and Restated Articles of Incorporation to
delete the redemption Provisions of the Series C Preferred Stock and the Amended
and Restated Articles of Incorporation were so amended on September 18, 1995.
As a result of the waiver, the Company no longer records accretion for the
Series C Preferred Stock Agreement, has reclassified the Series C Mandatorily
Redeemable Preferred Stock on its balance sheet to Shareholders' Equity and has
eliminated the Accretion of Mandatorily Redeemable Convertible Preferred Stock
redemption value as a line item on the balance sheet.
In April through September 1994, 400,000 shares of Series D Preferred Stock were
issued at a price of $ 5.00 per share. In addition, holders of Series D
Preferred Stock received one redeemable Common Stock Purchase Warrant (the
"Warrants") for every two shares of Series D Preferred Stock purchased. The
Warrants expire five years from the date of issuance and each Warrant entitles
the holder to purchase one share of Common Stock at an exercise price of $5.50
per share, subject to adjustment for dilution. In March 1995, pursuant to the
anti-dilution provisions of the Series D Stock agreement, triggered by the
issuance of Series E Preferred Stock discussed below, the Company issued an
additional 44,444 shares of Series D Preferred Stock and 60,000 Warrants each of
which is to purchase one share of Common Stock at an exercise price of $5.50 per
share. In addition, the exercise price of Warrants originally issued under the
Series D Stock agreement was changed from $6.50 to $5.50 per share. Series D
Preferred Stock has no further anti-dilution rights.
31
32
NOTES TO FINANCIAL STATEMENTS
In March through September 1995, 500,000 shares of Series E Preferred Stock were
issued at a price of $4.00 per share. In addition, holders of Series E Preferred
Stock received two redeemable Common Stock Purchase Warrants for every five
shares of Series E Preferred Stock purchased. The Warrants expire five years
from the date of issuance and entitle the holder to purchase one share of Common
Stock at an exercise price of $5.50, subject to adjustment for dilution.
In September through December 1995, 156,250 shares of Series F Preferred Stock
were issued at a price of $8.00 per share. In addition, holders of Series F
Preferred Stock received four redeemable Common Stock Purchase Warrants for
every five shares of Series F Preferred Stock purchased. The Warrants expire
five years from the date of issuance and entitle the holder to purchase one
share of Common Stock at an exercise price of $5.50, subject to adjustment for
dilution.
In March 1996, 47,500 shares of Series G Preferred Stock were issued at a price
of $20.00 per share. In addition, holders of Series G Preferred Stock received
five redeemable Common Stock Purchase Warrants for every two shares of Series G
Preferred Stock purchased. The Warrants expire five years from the date of
issuance and entitle the holder to purchase one share of Common Stock at an
exercise price of $2.50 per share, subject to adjustment for dilution.
The issuance of the Series G Preferred Stock triggered the anti-dilution
provisions of the Series E and Series F Preferred Stock. Because there were
insufficient shares of authorized and unissued Series E and Series F Preferred
Stock to fulfill the anti-dilution requirements, holders of Series E Preferred
Stock received 50,000 shares of Series G Preferred Stock and holders of Series F
Preferred Stock received an additional 93,750 shares of Series F and 12,500
shares of Series G Preferred Stock. Series E Preferred Stock has no further
anti-dilution rights and the Series F anti-dilution rights expired in September
1996.
In March 1996 and in December 1996, the Conversion Price was changed to the
closing bid price of the Company's Common Stock on the last day of the calendar
quarter, the Company entered into an agreement with one of its shareholders
under which the Company could issue subordinated convertible debentures in the
aggregate principal amount of $1,400,000. In September and December 1996, the
agreement was amended to increase the amount to a total of $3,400,000 During
the quarters ended June 30, September 30 and December 31, 1996, the Company
issued $1,000,000, $700,000 and $730,000 in principal amount for such
debentures to its shareholder. On June 30, September 30, and December 31, 1996
such debentures were converted into 26,109, 167,065 and 244,966 shares of
Series H, Series I and Series J Preferred Stock at $38.30, $4.19 and $2.98 per
share, respectively. In addition holders of Series H Preferred Stock received
five redeemable Common Stock Purchase Warrants for every two shares of Series H
Preferred Stock purchased. The Warrants expire five years from the date of
issuance and entitle the holder to purchase one share of Common Stock at an
exercise price of $4.85 per share, subject to adjustment for dilution. Holders
of Series I Preferred Stock received one redeemable Common Stock Purchase
Warrant for every four shares of Series I Preferred Stock purchased. The
Warrants expire five years from the date of issuance and entitle the holder to
purchase one share of Common Stock at an exercise price of $5.24 per share,
subject to adjustment for dilution. Holders of Series J Preferred Stock
received one redeemable Common Stock Purchase Warrant for every four shares of
Series J Preferred Stock purchased. The Warrants expire five years from the
date of issuance and entitle the holder to purchase one share of Common Stock
at an exercise price of $3.73 per share, subject to adjustment for dilution.
The Series C, Series D, Series E, Series F, Series G, Series H, Series I and
Series J Preferred Stock have certain rights, preferences and restrictions with
respect to conversion, redemption, dividends, liquidation and voting.
32
33
NOTES TO FINANCIAL STATEMENTS
The holders of Series C Preferred Stock are entitled to receive $0.30 per share
per annum cumulative dividends prior and in preference to Common Shareholders.
Such dividends are cumulative whether or not declared by the Board of Directors.
The holders of Series D, Series E, Series I and Series J Preferred Stock are
entitled to receive, when and if declared by the Board of Directors, dividends
in the same amount per share as declared on the Company's Common Stock with each
share of Preferred Stock being treated for this purpose as the number of shares
of Common Stock into which it is convertible. The holders of Series F Preferred
Stock are entitled to receive when and if declared by the Board of Directors
dividends at two times the amount per share as declared on the Company's Common
Stock. The holders of Series G and Series H Preferred Stock are entitled to
receive when and if declared by the Board of Directors dividends at ten times
the amount per share as declared on the Company's Common Stock.
Upon liquidation, holders of Series C Preferred Stock are entitled to receive
$5.00 per share plus cumulative dividends before any distributions may be made
to Common Shareholders, Series D, Series E, Series F, Series G, Series H, Series
I and Series J Preferred Shareholders. Upon liquidation, after payment of the
liquidation amounts of the Series C Preferred Stock, holders of Series D, Series
E, Series F, Series G, Series H, Series I and Series J Preferred Stock are
entitled to receive $5.00, $4.00, $8.00, $20.00, $38.30, $4.19 and $2.98 per
share, respectively, plus any declared and unpaid dividends on such shares,
prior to any distribution to Common Shareholders.
At the sole option of the holder and subject to certain adjustments for
dilution, each share of Series C, Series D, Series E Series I and J Preferred
Stock is convertible into one share of Common Stock and Series G and Series H
Preferred Stock are convertible into ten shares of Common Stock. Each share of
Series C, Series D, Series E, Series F, Series G, Series H, Series I and Series
J Preferred Stock has the number of votes equal to the number of common Stock
into which it is then convertible.
SUBSEQUENT EVENT
In April 1997, the Company amended the March 1996 agreement, as amended
December 1996, with one of its shareholders to increase the total amount of
principal to be received to $4,430,000 in exchange for subordinated convertible
debentures. The Company will receive $2,000,000 in installments during 1997 in
exchange for subordinated convertible debentures. The debentures will convert
to Preferred Stock at March 31, 1997; June 30, 1997, September 30, 1997 and
December 31, 1997, in amounts to be determined and at a price per share based
on the closing bid price of the Company's Common Stock on the last day of the
calendar qyarter.
NOTE 6 - COMMON STOCK:
In addition to the Common Stock Purchase Warrants issued in connection with the
sales of Preferred Stock described in Note 5, the Company has issued Warrants to
purchase its Common Stock at various times in conjunction with its initial
public offering ("IPO"), in connection with the issuance of promissory notes and
in conjunction with various employment and consulting service agreements.
Information with regard to the Warrants outstanding as of December 31, 1996 is
summarized in the following table.
33
34
NOTES TO FINANCIAL STATEMENTS
Date Issued Number Exercise Price Expiration
Issued In Connection With of Shares per Share Date
------ ------------------ --------- --------- ----
8/92-9/92 Promissory notes 228,000 $3.93 8/97-9/97 (1)
10/92 Employment agreement 8,630 .02 11/97
12/92 IPO 1,440,000 7.50 12/97 (2)
12/92 IPO - to Underwriter 65,000 12.38 12/96 (2)
2/94 Consulting Services 11,666 5.50 2/99
8/94 Consulting Services 10,000 5.25 8/99
(1) Redeemable in whole, but not in part, for $.001 per Warrant if,
subsequent to the company's IPO, the Company's Common Stock trades at
least four times the exercise price of the Warrants for a period of 30
trading days ending within 15 days of the notice of redemption, or the
Company effects a private placement of Common Stock aggregating at
least $5,000,000 at a price per share equal to at least four times the
exercise price of the Warrants.
(2) Redeemable beginning one year from date of issuance for $.05 per
Warrant upon 30 days written notice at any time after the closing bid
price of the Company's Common Stock is at least $10.00 per share for 30
consecutive business days ending within 15 days of the Notice of
Redemption.
In 1994, a former employee and founder of the Company exercised Warrants to
purchase 8,629 shares of Common Stock at $.02 per share. In 1995, Warrants
issued in connection with consulting services were exercised to purchase 5,000
shares of Common Stock at $.05 per share.
All warrants outstanding as of December 31, 1996 are exercisable.
NOTE 7 - STOCK OPTION PLAN:
At December 31, 1996, the Company had two stock-based compensation plans, which
are described below:
THE 1990 PLAN
Under the 1990 Stock Option Plan, as amended in 1995 (the "1990 Plan"),
employees, consultants and non-employee directors (prior to 1995) may be granted
options for up to 1,150,000 shares of Common Stock which vest over a four year
period from the date of grant. The options vest equally on a monthly basis
unless it is the employee's or consultant's first stock grant, in which case
vesting commences six months from the date of grant.
At December 31, 1996, 102,452 shares were available for grant under the 1990
Plan.
On May 20, 1996, the Company canceled options to purchase 72,600 shares
of common stock with exercise prices ranging from $4.25 to $6.25, previously
granted to employees and reissued all such options at an exercise price of
$3.88 the fair market value of the stock on that date. The reissued options
vest over a four year period from the date of reissuance.
34
35
NOTES TO FINANCIAL STATEMENTS
THE NON-EMPLOYEE OPTION PLAN
In 1995, the Board of Directors adopted and the Shareholders approved, the 1995
Stock Option Plan for Non-Employee Directors (the "Non-Employee Option Plan").
The Company has reserved 150,000 shares of Common Stock for issuance under this
Plan. Under the Non-Employee Option Plan, each newly-elected non-employee
director of the Company will be granted a non-statutory option to purchase
25,000 shares of the Company's Common Stock. This option vests over a six year
period. In addition, each non-employee director of the Company will be granted a
non-statutory option to purchase 5,000 shares of the Company's Common Stock
during each year of service as a director of the Company commencing in 1995.
These options vest immediately upon grant and are immediately exercisable.
At December 31, 1996, 100,000 shares were available for grant under the
Non-Employee Option Plan.
Under both plans, the options will be granted at prices equal to the fair market
value on the date of grant and expire five years from the date of grant.
The following table summarizes the activity for the 1990 Plan for the years
ended December 31, 1996, 1995 and 1994:
1996 1995 1994 1994
--------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTION
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES PRICE
- ------------- ------ -------------- ------ -------------- ------ -----
Outstanding at beginning
of year 786,661 $4.05 799,892 $3.79 715,037
Granted 361,600 4.52 132,150 5.61 154,500 $5.25-6.00
Exercised (244,987) 0.37 (41,281) 0.29 (33,560) .07-.37
Forfeited (181,674) 5.25 (104,100) 5.49 (36,085) .07-.37
---------------------------------------------------------------------------------------------------
Outstanding at end of year 721,600 $5.24 786,661 $4.05 799,892
===================================================================================================
Options Exercisable at
year-end 333,130 481,015 382,111
Weighted-average fair
value of options
granted during the
year $2.35 $2.96
The following table summarizes information about options outstanding under the
1990 Plan at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------------
RANGE NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
$3.88 to $4.81 209,850 4.3 $ 4.22 32,926 $ 4.23
$5.13 to $5.75 302,650 2.9 $ 5.33 155,091 $ 5.31
$6.00 to $7.13 209,100 2.2 $ 6.12 145,113 $ 6.11
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NOTES TO FINANCIAL STATEMENTS
The following table summarizes the activity for the Non-Employee Option Plan for
the years ended December 31, 1996 and 1995:
1996 1995
------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------- ------ -------------- ------ --------------
Outstanding at beginning of year 25,000 $5.25 - $-
Granted 25,000 4.64 25,000 5.25
Exercised - - - -
Forfeited - - - -
-------------------------------------------------------------------------
Outstanding at end of year 50,000 $4.95 25,000 $5.25
=========================================================================
Options Exercisable at year-end 50,000 25,000
Weighted-average fair value of
options granted during the year $2.69 $3.01
The following table summarizes information about options outstanding under the
Non-Employee Option Plan at December 31, 1996:
Options Outstanding Options Exercisable
Range of Number Weighted-Average
Exercise Outstanding Remaining Weighted Average Number Exercisable Weighted Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
$4.25 to $6.38 50,000 4.3 $4.95 50,000 $4.95
The Company applies APB Opinion No. 25 ("APB 25") and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's two
stock-based compensation plans been determined consistent with FASB Statement
No. 123 ("FAS 123"), the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net Income As Reported $(3,342,000) $(2,826,000)
Pro Forma $(3,456,000) $(2,962,000)
Primary Loss Per Share As Reported $(1.08) $(0.94)
Pro Forma $(1.11) $(0.99)
Because the Company is in its initial year of adoption of FAS 123, the
compensation cost calculated is based on options granted in 1995 and 1996 and
because additional option grants are expected to be made each year, the above
pro forma disclosures are not representative of the pro forma effects of option
grants on reported net income for future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: expected volatility of 60.9% for
all years; risk-free interest rates for the last day of the month in which the
options were granted; and expected lives of 4 years for the 1990 Option Plan and
5 years for the Non-Employee Option Plan.
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37
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES:
Deferred income taxes reflect the tax effects of differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. Significant components of the Company's deferred tax assets are as
follows:
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
Net operating loss carryforwards 6,763,000 $ 5,719,000
Credit carryforwards 789,000 630,000
Capitalized research and development expenses 179,000 407,000
Reserves and other 213,000 (118,000)
--------------------------------------------------------
Gross deferred tax assets 7,944,000 6,638,000
Valuation allowance (7,944,000) (6,638,800)
--------------------------------------------------------
$ --- $ ---
- --------------------------------------------------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company occupies its facility under a non-cancelable lease agreement which
expires October 31, 2000. The lease requires the Company to pay property taxes
and insurance.
In addition, the Company leased certain property and equipment under capital
leases which expired in 1996. Computer and other equipment under capital leases
total $0 and $205,000, with related accumulated amortization of $0 and $99,000
at December 31, 1996 and 1995 respectively.
The aggregated minimum rental commitments at December 31, 1996, excluding
insurance, normal maintenance and certain property taxes, are payable as
follows:
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38
NOTES TO FINANCIAL STATEMENTS
FISCAL YEAR OPERATING LEASE
- -------------------------------------------------------------------------------
1997 $152,000
1998 $155,000
1999 $158,000
2000 $134,000
2001 $ ---
--------
Total minimum lease payments $599,000
- -------------------------------------------------------------------------------
Total rental expense under non-capitalized leases, including
month-to-month rentals, was $164,000, $154,000, and $105,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
CONTINGENCIES
The Company was involved in litigation with a former customer. In March
1996, the litigation was settled and the parties involved executed a
mutual release. Under the terms of the settlement, the Company paid its
former customer $150,000 in cash and will provide the former customer
with spare parts and supplies for twelve months following the settlement
at the Company's cost less a $25,000 discount.
NOTE 10 - GEOGRAPHIC SALES AND MAJOR CUSTOMERS:
The Company sells its products predominately in the United States. No
other geographic region accounted for more than 10% of net sales in 1996,
1995 or 1994.
No customer accounted for 10% of net sales in 1996. One customer
accounted for 10% of net sales in 1995. Two customers accounted for 15%
and 14% of net sales in 1994.
At December 31, 1996, one customer represented 10%, of the accounts
receivable balance. At December 31, 1995, four customers represented 13%,
12%, 11% and 11% of the accounts receivable balance.
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF DISC, INC.
In our opinion, the accompanying balance sheet and the related statements
of operations, shareholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of DISC, INC. at
December 31, 1996 and 1995, and the results of its operations and its
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.
Price Waterhouse LLP
San Jose, California
April 11, 1997
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STOCK MARKET INFORMATION.
DISC, Inc.'s stock is traded on the NASDAQ Small-Cap Market under the symbol
DCSR. The high and low prices set forth below are as reported by the NASDAQ
Small Cap Market System.
1996 1995
HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------------------------------------------------------
First quarter ended $6 3/4 $2 $6 1/2 $4 1/2
Second quarter ended 4 7/8 2 3/4 6 4
Third quarter ended 5 3/4 4 1/8 5 1/2 3 7/8
Fourth quarter ended 6 3 1/2 6 11/16 5
- -------------------------------------------------------------------------------------------------------------------------------
As of March 23, 1997, the Company had approximately 400 shareholders. The
Company has never paid cash dividends and has no present plans to pay dividends.
See Note 5 of Notes to Financial Statements regarding dividend requirements on
the Redeemable Convertible Preferred Stock.
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