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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________.
COMMISSION FILE NUMBER: 1-11578
DISC, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0129625
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
372 TURQUOISE STREET 95035
MILPITAS, CALIFORNIA (Zip Code)
(Address of principal office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 934-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, NO PAR VALUE
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock as of
March 21, 2001 as quoted on the Nasdaq Small-Cap Market was approximately
$5,700,000.
The number of outstanding shares of the registrant's Common Stock as of
March 21, 2001 was 3,849,637.
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DISC, INC.
FORM 10-K
INDEX
PAGE
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PART I
Item 1. Business......................................................................... 1
Item 2. Properties....................................................................... 10
Item 3. Legal Proceedings................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............ 12
Item 6. Selected and Supplementary Financial Data........................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 13
Item 7A. Quantitative And Qualitative Disclosures About Market Risk ...................... 15
Item 8. Financial Statements and Supplementary Data...................................... 15
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure..................................................................... 15
PART III
Item 10. Directors and Executive Officers of the Registrant.............................. 16
Item 11. Executive Compensation.......................................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 19
Item 13. Certain Relationships and Related Transactions.................................. 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 23
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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, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
we intend that such forward-looking statements are subject to the safe harbors
created by those provisions. These forward-looking statements include (i) the
existence and development of our technical and manufacturing capabilities, (ii)
anticipated competition, (iii) potential future growth in revenues and income,
(iv) potential future decreases in costs, (v) potential future entry into new
markets, and (vi) the need for, and availability of, additional financing. For
this purpose, any statements contained in this Annual Report on Form 10-K except
for historical information may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may", "will",
"expect", "believe", "anticipate", "intend", "could", "estimate" or "continue",
or the negative or other variations those terms, or comparable terminology are
intended to identify forward-looking statements.
The forward-looking statements included in this Annual Report on Form
10-K are based on current expectations that involve a number of risks and
uncertainties. These forward-looking statements are based on assumptions,
regarding our 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 our control. Although we believe 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, our business and operations are subject to substantial risks which
increase the uncertainty inherent in the forward-looking statements (see
"ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE MARKET
PRICE OF OUR STOCK" in Item 1 and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"). In light of the significant
uncertainties inherent in the forward-looking information included in this
Annual Report on Form 10-K, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives or
plans will be achieved or that expectations will be realized.
ITEM 1. BUSINESS.
GENERAL
DISC, Inc. was incorporated under the laws of the State of California
in 1986. We operate in one business segment, the computer mass storage system
business. We design, manufacture, and market a family of high-end computer
nearline storage systems, which use 5.25 inch rewritable, magneto optical disks
(MO), DVD-RAM, and CD-ROM disks. We believe we are the only supplier of
information storage products currently offering a range of storage capacities up
to 9.5 terabytes in the 5.25-inch optical disk libraries and up to 1,470 CD-ROM
platters.
PRODUCTS
We have spent most of 2000 redefining our product offering to address
the storage requirements of today's enterprise storage networks. Traditionally,
applications for our products include federal and local government, military
applications, insurance, banking, legal, multimedia, medical applications and
network storage environments on a worldwide basis. Sales of our initial product
line commenced in 1991 and have been primarily to distributors, value added
resellers (VARs), original equipment manufacturers (OEMs) and
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system integrators (SIs), who combine DISC nearline storage systems with
software and/or other products and resell the combination to the end-user or
other members of the supply channel.
However, to implement our new strategy and vision of delivering storage
solutions for enterprise networks, a refocusing of our product lines and sales
and marketing efforts was required. As the demand for storage in traditional
networking environments grows at unprecedented rates, the capacity points have
reached the levels of the niche markets that we have historically served. Our
new product lines are built around the fact that we build storage devices that
add capacity to networks for a fraction of the cost of RAID (Redundant Array of
Intelligent Disks.) In addition to offering cost-effective nearline storage
devices, we have spent a considerable amount of our resources designing and
delivering network attach storage (NAS) servers to enable seamless connectivity
of our storage devices.
Our products, which add storage capacity to networks for a fraction of
the cost of RAID, are based upon reliable, industry proven storage technologies.
The underlying technologies are DVD-RAM and 5.25-inch Magneto-optical. With a
shelf life exceeding 30 years, random access reading and writing, the DISC
family of products is suited for today's network storage environments.
We are currently shipping three classes of products that provide
nearline storage solutions for mainstream network environments. The first class
is our Orion series, an automated library system built around the
magneto-optical technology. These enterprise level products scale in capacity
from 180 gigabytes (GB) of storage to 9.59 terabytes (TB) of storage. The Orion
D-1050 is largest of these products and provides 9.59 TB of storage in 13.75
square feet of floor space, with an end-user price per megabyte as little 3.5
cents.
The second class of product that we offer is the DV Series, an
automated library system built around DVD-RAM and CD technology. These DV Series
scale in capacity from 40 GB of storage to 2.8TB of storage and give our
customers an entry-level storage solution that was not previously available. The
DV Series product line is based on a modular technology that allows the same
options and upgrades to be used throughout the DV-Series product line. The DV
Series offers some of the most cost-effective storage in the industry with an
end-user cost per megabyte as little as 1.2 cents.
The third class of products that we offer is our DISCstor/NAS product
line of network-attach storage (NAS) products. These products allow all of our
products to be seamlessly connected to multiple network environments. The
DISCstor/NAS product line allows users to attach our storage products to
networks with a simplicity that has not previously existed. The DISCstor/NAS
product line gives us the ability to sell complete storage solutions into any
networking environments and allows users to add multi-terabyte storage solutions
to their networks with an unprecedented level of simplicity.
The DISC family of products is designed to provide additional storage
capacity to networks for a fraction of the cost of RAID, and is built with the
high quality and reliability that is demanded at the enterprise storage level.
MARKETING AND SALES
Over the last year we have made considerable investments in sales and
marketing. Our marketing efforts have been fortified with new personnel, new
company image and a new web presence. Along these same lines we have added a
host of new sales tools that will allow us to penetrate the new markets of
mainstream data storage.
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We have also re-vamped our entire sales organization by adding sales
professionals that are focused on selling solutions for data storage. The entire
sales force is focused on growing our channel of storage VARs and providing them
with better data storage solutions to offer their customer.
Our products are installed and serviced by an international network of
maintenance technicians from Kodak and Anacomp Inc. Our support staff, located
strategically across the country, provides technical assistance and second level
support.
Our sales offices are located in Milpitas, California; Boston,
Massachusetts; Washington, District of Columbia; Dallas, Texas; Phoenix,
Arizona; Chicago, Illinois and Crowborough, East Sussex, England. Our sales
staff currently consists of ten professional salespersons.
COMPETITION
We are currently selling nearline storage solutions for networks. While
there are few direct competitors selling the type of solutions that we sell,
there are many indirect competitors. Our main competition in this new market is
the end-users next purchase of storage capacity for their network storage
system. As end-users need to increase their pool of available storage, our
products are one of the most cost-effective alternatives. This being said, our
competitors include the top vendors that supply enterprise-level storage. These
companies are EMC, Dell, Sun Microsystems, Hewlett-Packard and IBM.
In the traditional automated library business, our competitors are
Hewlett-Packard, Plasmon, Advanced Digital Information Corporation (ADIC), JVC
and Pioneer.
All of these competitors may compete with us by selling similar
products for lower prices or by introducing new products that provide greater
storage capacity, faster access time or other improved features, any of which
could reduce demand for our products or require us to reduce its prices. This
competition could have a material adverse effect on our results of operations.
Many of our competitors have significantly greater financial, technical,
manufacturing and marketing resources than our company, as well as significant
market shares and installed customer bases in certain market areas addressed by
us. As a result, we may not have the ability to keep pace with rapid competitive
developments and technological advances to the same extent as its competitors.
However, we maintain an active program of research and development in
an effort to keep pace with potential competition and we have close
relationships with companies developing new high-density optical storage
technologies.
The principal market requirements for our products are large storage
capacity, low cost per megabyte, reliability, compact physical size and random
access. While desired capabilities generally vary by product family and end user
application, we believe that, because of its modular design, easy scalability,
high performance and reliability, DISC products will compete favorably with
respect to the requirements of the secondary mass data storage market.
Further discussion relating to the competitive conditions in the
computer mass storage system industry and our competitive position in the
marketplace may be found in "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING
RESULTS AND THE MARKET PRICE OF OUR STOCK" under the heading "COMPETITION IN THE
COMPUTER INFORMATION STORAGE MARKET MAY LEAD TO REDUCED MARKET SHARE, DECLINING
PRICES AND REDUCED PROFITS."
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MANUFACTURING AND COMPONENTS
Our 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. Our proprietary components,
such as the frame, backplate, printed circuit assemblies and other machined and
fabricated parts are subcontracted out to independent vendors.
We purchase certain components from a single source of supply. Where we
rely on single sources of supply, we generally have been able to obtain supplies
of these components in a timely manner and maintain an adequate inventory of
components to meet our needs. We believe alternative supplies for several
components are available on reasonable terms. However, failure of sources of
supply and an inability of to develop alternative sources of supply as required
in the future could have a material adverse effect on our operations.
RESEARCH AND DEVELOPMENT
We have focused our research and development programs to provide
software storage solutions for our automated library systems. Network attached
storage (NAS) server development has been the most important aspect of our
development efforts over the past year. These efforts have yielded products that
allow our customers to seamlessly connect our storage products to networks. Our
efforts continue to be active and consist of nine full-time employees in the
areas of mechanical and electrical engineering and software design. One of the
keys to our success going forward is continued improvement of our storage
connectivity solutions. We expended $1,158,000 $1,111,000 and $1,290,000 on
research and development for the years ended December 31, 2000, 1999 and 1998,
respectively. We have completed our major development efforts with respect to
our 5.25 inch optical and CD products. We intend to continue to expand research
and development activities in order to conduct on-going development of existing
products and to develop new products targeted at the general storage market.
SALES AND BACKLOG
Our quarterly revenue and operating results have been affected by
seasonal trends. These trends often result in lower revenue in the first quarter
of each fiscal year compared to the fourth quarter of the previous fiscal year
due to customer purchasing and budgetary practices.
Our backlog at December 31, 2000 was approximately $245,000 as compared
to a backlog of approximately $75,000 at December 31, 1999. We include in
backlog only orders for products which are believed to be firm and which are due
to be shipped within 12 months. We include in backlog orders that 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, our backlog as
of any particular date may not be indicative of actual revenues for any specific
future period. Although we have never experienced material cancellation
problems, no assurance can be given that we will continue to avoid cancellation
problems in the future.
PATENTS AND OTHER INTELLECTUAL PROPERTY
We have received U.S. patents covering various aspects of our
technology, including the overall system design of our products. Our existing
patents expire between 2007 and 2014. There can be no assurance that any
subsequent patent applications will be granted. We believe that ownership of our
patents is
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an important factor in our business and our success does depend in part on the
ownership of them. However, we believe 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 our
technological advantage. We believe that the value of our products is partly
dependent upon our confidentiality and invention assignment agreements with our
employees. While we believe that patent, copyright and trade secret laws should
afford adequate protection of our proprietary technology, there can be no
assurance that our proprietary technology will remain a trade secret or that
others will not develop a similar technology and use that technology to compete
with us. Such competition could have a material adverse effect on us. In
addition, policing unauthorized use of our technology, particularly in foreign
countries, may be difficult. We have not received claims from third parties
alleging that our products infringe the proprietary rights of third parties or
seeking indemnification against such infringements and know 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 we may be required to license proprietary rights from third
parties. There can be no assurance that we would be able to obtain licenses from
third parties on commercially reasonable terms.
ENVIRONMENTAL LAWS
Compliance with U.S. federal, state and local laws enacted for the
protection of the environment has to date had no material effect upon our
capital expenditures, earnings or competitive position. Although we do not
anticipate any material adverse effects in the future based on the nature of our
operations and the thrust of those laws, no assurance can be given that such
laws, or any future laws enacted for the protection of the environment, will not
have a material adverse effect on us.
EMPLOYEES
As of February 28, 2001, we employ 54 people on a full-time basis,
including 6 employees in administration and accounting, 12 employees in
marketing and sales, 10 employees in engineering, 18 employees in manufacturing,
3 employees in quality assurance and 5 employees in customer support. Our future
success is dependent, in part, on our continued ability to attract, retain and
motivate highly skilled personnel. We believe that our relations with all
employees are satisfactory. None of our employees are covered by a collective
bargaining agreement.
OTHER MATTERS
Compaq Computer Corporation and Commvault Systems Inc., two OEM
customers, accounted for 14% and 13%, respectively, of our total revenue in
2000. Commvault Systems Inc. accounted for 23% of our total revenue in 1999. No
single customer accounted for 10% or more of our total revenue in 1998.
No material portion of our business is subject to renegotiation of
profits or contract termination at the election of the U.S. government.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE MARKET PRICE
OF OUR STOCK
Our future operating results and stock price, may be affected by a
number of factors, many of which are beyond our control. These factors include
the following:
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OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE FOR A NUMBER OF
REASONS, WHICH MAY CAUSE OUR STOCK PRICE TO FLUCTUATE.
Our quarterly operating results have varied in the past and are likely
to vary significantly in the future due to several factors, including:
- the size and timing of significant customer orders;
- shifts in product or distribution channel mix;
- increased competition and pricing pressure;
- timing of new product announcements and releases by us or our
competitors;
- new product developments by storage device manufacturers;
- the rate of growth in the data storage market;
- market acceptance of new and enhanced versions of our products;
- timing and levels of our operating expenses;
- gain or loss of significant customers or distributors; and
- personnel changes
Our quarterly revenue and operating results have been affected by
seasonal trends. These trends often result in lower revenue in the first quarter
of each fiscal year compared to the fourth quarter of the previous fiscal year
due to customer purchasing and budgetary practices.
Operating results in any period should not be considered indicative of
the results investors can expect for any future period. We cannot assure you
that we will be able to increase or even sustain our recent levels of quarterly
revenue and net sales, as normalized for unusual or one-time items, or that we
will attain or maintain profitability in any future period. Any unfavorable
change in the factors described above or any other factors could adversely
affect our operating results for a particular quarter. In addition, it is likely
that in some future quarters our operating results will be below the
expectations of public market analysts and investors. In any of these events,
the price of our common stock would likely decline.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
The market price of our common stock has experienced fluctuations and
is likely to fluctuate significantly in the future. Our stock price can
fluctuate for a number of reasons, including:
- announcements about us or our competitors;
- quarterly variations in operating results;
- the introduction of new technologies or products;
- changes in product pricing policies by us or our competitors;
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- comments regarding us and the data storage market made on Internet
bulletin boards; and
- changes in earnings estimates by analysts or changes in accounting
policies.
In addition, stock markets have experienced extreme price and volume
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities of many smaller public companies for reasons
frequently unrelated or disproportionate to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our common stock.
IF OUR SECURITIES ARE DELISTED FROM NASDAQ, THE TRADING MARKET AND PRICES OF OUR
SECURITIES WOULD BE HARMED.
The trading of our common stock on the NASDAQ System is conditioned
upon our meeting certain asset, revenues and stock price tests. If we fail any
of these tests, our common stock may be delisted from trading on the NASDAQ
System, which could materially adversely affect the trading market and prices
for those securities. In addition, low price stocks are subject to additional
risks including additional state regulatory requirements and the potential loss
of effective trading markets.
COMPETITION IN THE COMPUTER INFORMATION STORAGE MARKET MAY LEAD TO REDUCED
MARKET SHARE, DECLINING PRICES AND REDUCED PROFITS.
The markets for data storage solutions are intensely competitive,
fragmented and characterized by rapidly changing technology and evolving
standards. These conditions could render our products less competitive or
obsolete and could harm our business, financial condition and ability to market
our products. Some of our competitors have significantly more financial,
technical, manufacturing, marketing and other resources than we have. As a
result, our competitors may be able to respond more quickly than we can to new
or changing opportunities, technologies, standards or customer requirements.
Competitors may develop products and technologies that are less expensive or
technologically superior to our products. In addition, our competitors may
manufacture and market their products more successfully than we do our products.
Competition from computer companies and others diversifying into the field is
expected to increase as the market develops. We may face substantial competition
from new entrants in the industry and from established and emerging companies in
related industries. There is significant price competition in the markets in
which we compete, and we believe that pricing pressures are likely to continue.
Certain competitors may reduce prices in order to preserve or gain market share.
This pricing pressure could result in significant price erosion, reduced gross
profit margins and loss of market share, any of which could negatively affect
our business, financial condition and operating results.
THE STORAGE DEVICE MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL EVOLUTION, AND
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW PRODUCTS.
The market for our products is characterized by rapidly changing
technology and evolving industry standards and is highly competitive with
respect to timely innovation. At this time, the data storage market is
particularly subject to change with the emergence of Fibre Channel protocol and
new storage solutions such as storage area networks, or SANs, and network
attached storage, or NAS, devices. The introduction of new products embodying
new or alternative technology or the emergence of new industry standards could
render our existing products obsolete or unmarketable. Our future success will
depend in part on our ability to anticipate changes in technology, to gain
access to such technology for incorporation into our products and to develop new
and enhanced products on a timely and cost-effective basis. Risks inherent in
the development and introduction of new products include:
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- the difficulty in forecasting customer demand accurately;
- the possibility that sales of new products may cannibalize sales
of our current products;
- delays in our initial shipments of new products;
- competitors' responses to our introduction of new products; and
- the desire by customers to evaluate new products for longer
periods of time before making a purchase decision.
In addition, we must be able to maintain the compatibility of our
products with significant future device technologies, and we must rely on
producers of new device technologies to achieve and sustain market acceptance of
those technologies. Development schedules for high-technology products are
subject to uncertainty, and we may not meet our product development schedules.
We have in the past experienced delays in the introduction of some new products.
If we are unable, for technological or other reasons, to develop products in a
timely manner or if the products or product enhancements that we develop do not
achieve market acceptance, our business will be harmed.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO INCUR FUTURE LOSSES.
We have experienced significant operating losses since our inception,
and as of December 31, 2000 had an accumulated deficit of $30,956,000. We expect
to continue to incur net losses for the foreseeable future, and our ability to
sustain our operations for a significant period after December 31, 2001 will
depend on our ability to significantly increase sales or raise significant
additional debt or equity financing. There can be no assurance that we will be
able to increase sales or that additional financing will be available on
acceptable terms, or at all.
ANY INABILITY TO MEET OUR FUTURE CAPITAL REQUIREMENTS WOULD LIMIT OUR ABILITY TO
GROW.
We may need, or could elect, to seek additional funding in the future.
In the event we need to raise additional funds, we may not be able to do so on
favorable terms, if at all. We have a commitment from our largest investor to
invest up to $3,900,000 during 2001, if needed, to help fund our capital
requirements. However there can be no assurance that this investor, or any of
our other investors, will be willing to make similar commitments in the future.
Further, if we issue equity securities, shareholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of our existing securities. If we cannot raise funds on
acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL SHAREHOLDERS MAY PREVENT OTHER INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.
As of February 28, 2001, our executive officers, directors and
principal shareholders will beneficially own, in the aggregate, approximately
90% of our outstanding common stock and preferred stock, on an as-if-converted
basis. As a result, these shareholders, if acting together, will be able to
exercise control over all matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership could be a disadvantage to other shareholders with
interests different from those of our officers, directors and principal
shareholders. For example, our officers,
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directors and principal shareholders could delay or prevent an acquisition or
merger even if the transaction would benefit other shareholders.
BECAUSE WE OPERATE WITH LITTLE BACKLOG, OUR OPERATING RESULTS COULD BE ADVERSELY
AFFECTED IF WE DO NOT ACCURATELY ANTICIPATE FUTURE SALES LEVELS.
Historically, we have operated with little order backlog and, due to
the nature of our business, do not anticipate that we will have significant
backlog in the future. Consequently, a large portion of our revenue in each
quarter results from orders placed during that quarter. Because of the
relatively large dollar size of orders from our distributors and customers,
delay in the placing of a small number of orders by a small number of purchasers
could negatively affect our operating results for a particular period. In
addition, our operating expense levels are, in the short term, largely fixed and
are based, in part, on expectations regarding future sales. Thus, our operating
results could be disproportionately affected if we do not receive the expected
number of orders in a given quarter and our net sales falls below our
expectations.
WE DEPEND ON CERTAIN KEY SUPPLIERS.
We do not possess proprietary optical disk, high-density disk or other
storage technologies and, consequently, we depend on a limited number of
third-party manufacturers to supply us with the devices that we incorporate into
our products. In some cases, these manufacturers are sole-source providers of
the device technology. Our suppliers have in the past been, and may in the
future be, unable to meet our supply needs, including our needs for timely
delivery, adequate quantity and high quality. We do not have long-term contracts
with any of our significant suppliers. If these suppliers were to decide to
pursue the disc library market directly, they may cease supplying us with disc
drives and media, in which case we may be unable to obtain adequate supplies of
disc drives and media at acceptable prices, if at all. The partial or complete
loss of any of our suppliers could result in significant lost sales, added costs
and production delays or may otherwise harm our business, financial condition,
operating results and customer relationships.
WE HAVE A CONCENTRATED CUSTOMER BASE, AND THEREFORE THE LOSS OF A SINGLE
CUSTOMER COULD NEGATIVELY AFFECT OUR OPERATING RESULTS.
The majority of our end users purchase our products from distributors,
value-added resellers, original equipment manufacturers, and systems
integrators. In fiscal 2000, Compaq Computers Corporation and Commvault Systems
Inc. accounted for 14% and 13% of our total revenue. We have no long-term orders
with any of our significant customers or distributors. Generally we sell
products pursuant to purchase orders. In addition, our distributors carry
competing product lines which they may promote over our products. A distributor
may not continue to purchase our products or market them effectively. Moreover,
certain of our contracts with our distributors contain "most favored nation"
pricing provisions which mandate that we offer our products to these customers
at the lowest price offered to other similarly situated customers. Our operating
results could be adversely affected if any of the following factors were to
occur relating to one or more of our significant resellers:
- the reduction, delay or cancellation of orders or the return of a
significant amount of products;
- the loss of one or more of such resellers; or
- any financial difficulties of those resellers that result in their
inability to pay amounts owed to us.
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WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the state of California fall below certain
critical levels, California has on some occasions implemented, and may in the
future continue to implement, rolling blackouts throughout California. We
currently do not have backup generators or alternate sources of power in the
event of a blackout, and our current insurance does not provide coverage for any
damages we or our customers may suffer as a result of any interruption in our
power supply. If blackouts interrupt our power supply, we would be temporarily
unable to continue operations at our California facilities. Any such
interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996
by the California government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over the past
year. If wholesale prices continue to increase, the operating expenses
associated with our facilities are located in California will likely increase
which would harm our results of operations.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN OUR DATA STORAGE PRODUCTS.
We face potential liability for performance problems of our products
because our end users employ our storage technologies for the storage and backup
of important data. Although we maintain general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
that is not covered by insurance or is in excess of our insurance coverage could
harm our business.
A NUMBER OF KEY PERSONNEL ARE CRITICAL TO THE SUCCESS OF OUR BUSINESS.
Our future success depends in large part on our ability to retain
certain key executives and other personnel, some of whom have been instrumental
in establishing and maintaining strategic relationships with key suppliers and
customers. We do not have any employment agreements with our employees. Our
future growth and success will depend in large part on our ability to hire,
motivate and retain highly qualified management, technical, operations and sales
and marketing personnel. Competition for such personnel is intense in the
high-technology industry, particularly in the San Francisco Bay area. We may not
be able to retain our existing personnel or attract additional qualified
personnel in the future. In addition, companies in our industry whose employees
accept positions with competitors frequently claim that their competitors have
engaged in unfair hiring practices. We may receive such claims in the future as
we seek to hire qualified personnel, and such claims could result in litigation.
Regardless of the merits of these claims, we could incur substantial costs in
defending ourselves against these claims.
ITEM 2. PROPERTIES.
Our executive offices and engineering/manufacturing operations are
located in approximately 17,000 square feet of space in Milpitas, California. We
lease the facility pursuant to a lease that will expire on October 31, 2005. We
believe that the lease can be renewed at satisfactory terms and that this
facility will be
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13
sufficient to support operations for the foreseeable future. In addition, we
believe that, if necessary, additional space will be available in the area to
house our operations.
ITEM 3. LEGAL PROCEEDINGS.
We are not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our Annual Meeting of Shareholders on November 9, 2000. Matters
voted upon at the meeting, and the number of shares cast for, against or
withheld were as follows:
1. Election of Directors.
ABSTENTIONS AND
FOR AGAINST SHARES NOT VOTED
---------- ------- ----------------
J. Richard Ellis........................... 15,149,540 -- 10,916
Michael D. Kaufman......................... 15,149,540 -- 10,916
Frank Connors.............................. 15,149,540 -- 10,916
F. Rigdon Curries.......................... 15,149,540 -- 10,916
Arch J. McGill............................. 15,149,540 -- 10,916
Michael A. McManus, Jr. ................... 15,149,540 -- 10,916
2. To increase the number of shares of common stock reserved for issuance
under our 1990 Stock Plan to 1,600,000.
ABSTENTIONS AND
FOR AGAINST SHARES NOT VOTED
---------- ------- ----------------
13,925,883 56,483 1,178,090
3. To increase the number of shares of common stock reserved for issuance
under our 1995 Stock Plan for non-employee Directors to 250,000.
ABSTENTIONS AND
FOR AGAINST SHARES NOT VOTED
---------- ------- ----------------
13,926,581 55,785 1,178,090
4. To increase the authorized number of shares of common stock to
40,000,000.
ABSTENTIONS AND
FOR AGAINST SHARES NOT VOTED
---------- ------- ----------------
15,096,159 50,960 13,337
5. Approval of PricewaterhouseCoopers LLP as independent auditors for the
fiscal year ending December 31, 2000.
ABSTENTIONS AND
FOR AGAINST HARES NOT VOTED
---------- ------- ----------------
15,135,869 15,150 9,437
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common 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.
2000 1999
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First quarter ended March 31 ......... $9.750 $1.500 $3.250 $0.500
Second quarter ended June 30 ......... 5.875 2.063 3.500 1.563
Third quarter ended September 30 ..... 4.500 1.750 2.688 1.125
Fourth quarter ended December 31 ..... 3.500 2.125 2.375 0.719
The closing price of our common stock on March 21, 2001, as reported by
the NASDAQ Small Cap Market System was $2.75. As of March 21, 2001, according to
the records of our transfer agent, we had approximately 40 shareholders of
record. Because many of our shares are held by brokers and other institutions on
behalf of stockholders, the number of record holders is not necessarily
indicative of the total number of stockholders. As of September 27, 2000 (the
record date for our 2000 annual meeting), we had over 1,000 shareholders, and we
believe that we presently have over 1,000 shareholders. We have never paid cash
dividends and has no present plans to pay dividends. See "LIQUIDITY AND CAPITAL
RESOURCES" in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and Note 5 of Notes to Financial Statements
regarding dividend requirements on the Convertible Preferred Stock.
RECENT SALES OF UNREGISTERED SECURITIES
See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for a
description of equity securities we sold during the last fiscal year that were
not registered under the Securities Act. The sales of preferred stock and
convertible debentures during the last fiscal year were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, as transactions by an
issuer not involving a public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transaction.
ITEM 6. SELECTED AND SUPPLEMENTARY FINANCIAL DATA.
The following selected financial information has been derived from our
audited financial statements. The information set forth below is not necessarily
indicative of results of future operations, and should be read in conjunction
with "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and the financial statements and related notes to the
financial statements included in Item 8 of this Form 10-K in order to fully
understand factors that may affect the comparability of the information
presented below.
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YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ................................... $ 6,821 $ 9,746 $ 9,145 $ 8,655 $ 7,761
Cost of sales ............................... 5,775 7,315 6,924 6,704 6,549
Research and development .................... 1,158 1,111 1,290 1,439 1,297
Marketing and sales ......................... 2,665 2,169 2,011 1,960 2,155
General and administrative .................. 1,048 1,085 1,030 924 984
------- ------- ------- ------- -------
Loss from operations ........................ (3,825) (1,934) (2,110) (2,372) (3,224)
Interest and other expense, net ............. (113) (125) (125) (117) (118)
------- ------- ------- ------- -------
Net loss .................................... $(3,938) $(2,059) $(2,235) $(2,489) $(3,342)
Basic and diluted net loss per share ........ $ (1.04) $ (0.56) $ (0.64) $ (0.75) $ (1.08)
Weighted average common shares for
basic and diluted net loss per
share calculation ........................ 3,803 3,700 3,515 3,308 3,106
======= ======= ======= ======= =======
AT DECEMBER 31,
-----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Working capital ........................... $1,664 $1,600 $1,611 $ 689 $ 691
Total assets .............................. 3,885 4,848 4,970 4,144 4,110
Shareholders' equity ...................... 2,096 2,069 2,041 1,071 1,132
SUPPLEMENTARY QUARTERLY FINANCIAL DATA
FISCAL 2000 QUARTER ENDED
-------------------------------------------
MAR. 31 JUNE 30 SEP. 30 DEC. 30
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ................................. $ 1,615 $ 1,457 $ 1,838 $ 1,911
Gross margin .............................. 241 133 388 284
Income (loss) from operations ............. (804) (1,095) (868) (1,058)
Net income (loss) ......................... (831) (1,123) (895) (1,089)
Basic and diluted earnings (loss)
per share ............................... (0.22) (0.29) (0.25) (0.28)
FISCAL 1999 QUARTER ENDED
-------------------------------------------
MAR. 31 JUNE 30 SEP. 30 DEC. 30
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ................................. $ 2,704 $ 2,331 $ 2,206 $ 2,505
Gross margin .............................. 801 648 392 590
Income (loss) from operations ............. (263) (535) (669) (467)
Net income (loss) ......................... (299) (568) (697) (495)
Basic and diluted earnings (loss)
per share ............................... (0.08) (0.15) (0.19) (0.14)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This section and other parts of this Annual Report on Form 10-K contain
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and we intend that such forward-looking statements are subject to
the safe harbors created thereby. See "INTRODUCTORY NOTE" on page 3 hereof.
Forward-looking statements involve risks and uncertainties, and our actual
results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed in the subsection entitled "ADDITIONAL
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE MARKET PRICE OF OUR
STOCK" in Item 1 above and elsewhere in this Annual Report on Form 10-K. The
following discussion should be read in conjunction with the financial statements
and notes thereto included in Item 8 of this Form 10-K.
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RESULTS OF OPERATIONS
Net Sales. We had net sales of $6,821,000 in 2000, $9,746,000 in 1999
and $9,145,000 in 1998. The decrease in net sales in 2000 as compared to 1999
was due in part to one of our major customers changing their focus from selling
integrated storage solutions, which included the DISC product line as a major
component, to software-only sales. In addition, although units sales in 2000
remained relatively flat as compared to 1999, our average selling price
decreased due to a shift in the product mix towards our lower priced units.
Also, the units sold in 2000 generally had fewer media slots, and our revenue
from the sale of media decreased. Our traditional customers moved to purchasing
lower end units because the storage capacity is greater than the capacity of
lower end units in prior years because of technological improvements. In
response to the decline in demand in our traditional markets, we are pursuing
new markets, including corporate environments requiring nearline solutions. We
believe that these new markets have a growing requirement for the high capacity
nearline storage solutions that we offer. In 1999, the number of units sold was
relatively flat as compared to 1998 as customers deferred spending on new
information storage systems while they completed their year 2000 testing
activities. The increase in net sales in 1999 as compared to 1998 was primarily
due to our renewed emphasis on selling media along with our products. The
general sales cycles for distribution of our 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. Cost of sales, as a percentage of sales, was
approximately 85% in 2000, 75% in 1999 and 76% in 1998. Our relatively low gross
margins reflect our low sales volumes, 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. If we are able to
increase sales, then we expect 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. Research and development expenses
were $1,158,000 in 2000, $1,111,000 in 1999 and $1,290,000 in 1998. Although
expenses remained relatively flat in 2000 as compared to 1999, expenses
decreased in 1999 as compared to 1998 primarily due to a reduction in headcount
due to attrition. We believe that research and development expenses will
increase moderately in 2001 due to current projects under development.
Marketing and Sales Expenses. Marketing and sales expenses were
$2,665,000 in 2000, $2,169,000 in 1999 and $2,011,000 in 1998. Expenses
increased in 2000 as compared to 1999 primarily due to an increase in head
count. Expenses increased in 1999 as compared to 1998 primarily due to increased
participation in industry trade shows. We believe that in 2001 marketing and
sales expenses will increase in connection with our continued efforts to broaden
market acceptance of our products. In particular, we intend to increase our
sales force and increase our spending on market awareness activities.
General and Administrative Expenses. General and administrative
expenses have remained relatively flat and were $1,048,000 in 2000, $1,085,000
in 1999 and $1,030,000. We believe that general and administrative expenses
continue to remain relatively flat during 2001.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, 1999 and 1998, we used cash of $3,565,000, $1,149,000 and
$2,816,000, respectively, primarily to fund operating losses. In fiscal 2000, we
raised $3,870,000 through the issuance of convertible preferred stock. At
December 31, 2000, we had a cash balance of approximately $128,000. In addition,
we have a commitment from our largest investor to invest up to $3,900,000, if
needed. We believe this committed future investment, together with borrowing
from a factoring agreement with a financial institution, which allows it to
borrow the lesser of $1,500,000 or 85% of eligible receivables, and cash
generated from operations, will be sufficient to meet its operating requirements
at least through the end of 2001, although we
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17
anticipate that we will continue to incur net losses for the foreseeable future.
The ability to sustain our operations for a significant period after December
31, 2001 will depend on our ability to significantly increase sales or raise
significant additional equity or debt financing on terms acceptable to us. There
is no assurance that any of these conditions will be achieved. In particular, we
expect to require increasing amounts of cash to finance our efforts to increase
sales, which we plan 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, we intend to expand our current
network of resellers. We may require cash to finance purchases of inventory to
satisfy anticipated increased sales as our products achieve market acceptance.
Although we have not committed to make any material capital
expenditures as of December 31, 2000, our budget for capital equipment
expenditures for 2001 is approximately $200,000. The majority of these purchases
are expected to be in the areas of process and molding tooling to reduce cost
and improve producibility of our products.
The terms of the Series C Preferred Stock and outstanding warrants may
limit the availability of financing for us, particularly equity financing,
because of the superior preferences of the Series C Preferred Stock and the
potential dilutive effect of the outstanding warrants. Holders of Series C
Preferred Stock are entitled to receive cumulative dividends in the amount of
approximately $112,000 per year [WHEN AND IF DECLARED]. We have never paid cash
dividends and have no present plans to pay dividends.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are not exposed to significant market risk related to fluctuations
in interest rates as we are not expected to have a significant investment
portfolio in fiscal 2001. In addition, we do not use derivative financial
instruments of any kind and currently all of our transactions are in U.S.
currency.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The 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."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
J. Richard Ellis, 55, is our Chairman of the Board and Chief Executive
Officer. Mr. Ellis joined us as President and Chief Operating Officer in July
1994 and became Chief Executive Officer in January 1995. Mr. Ellis was appointed
to our Board of Directors on July 13, 1994 and became Chairman of the Board of
Directors in August 1996.
Frank T. Connors, 67, has been our Secretary since May 1990, a member
of our Board of Directors since June 1988 and was Chairman of the Board of
Directors from June 1988 to August 1996 and our Chief Executive Officer from May
1990 to December 1994. Mr. Connors is Chairman of the Board of Directors of STM
Wireless, Inc., a publicly held manufacturer of satellite communication
networks.
Michael D. Kaufman, 60, became a member of our Board of Directors in
December 1988. Since October 1987, he has been the Managing General Partner of
MK Global Ventures, MK Global Ventures II and MK GVD Fund, in Palo Alto,
California, venture capital firms specializing in early-stage and start-up
financing of high technology companies. Mr. Kaufman also serves on the Boards of
Directors of Davox Corp., a telecommunications company, Syntellect Inc., a
telecommunications company, Asante Technologies Inc., a networking company, and
Human Pheromones Sciences, Inc., a company that develops and markets consumer
products containing human pheromones.
F. Rigdon Currie, 70, became member of our Board of Directors 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 Board of Directors
of Synbiotics Corporation, a manufacturer of animal health test kits and
instruments and several private companies.
Arch J. Mcgill, 68, became member of our Board of Directors in August
1993. Since October 1985, he has been President of Chardonnay, Inc., a venture
capital investment and executive business advisory services company. Mr. McGill
serves on the Board of Directors of CIBER, Inc., a provider of system
integration services.
Michael A. McManus, Jr., 57, became a member of our Board Directors in
August 1993. He is presently the President and Chief Executive Officer of
Misonix Inc., a medical device company. From November 1991 to March 1998, he was
President and Chief Executive Officer of New York Bancorp, Inc., the holding
company for Home Federal Savings Bank. Mr. McManus also serves on the Boards of
Directors of National Wireless Holdings Inc., a communications company, Novavax,
Inc., a biopharmaceutical company, and the United States Olympic Committee.
Henry Madrid, 44, is our Vice President, Finance and Chief Financial
Officer. Mr. Madrid, a certified public accountant, joined us as Vice President
of Finance and Chief Financial Officer in January 1990.
Brian Irvine, 55, is our Vice President, Engineering. Mr. Irvine joined
us in April 1990, and has held various engineering positions in our company
including Director of Engineering, before being promoted to Vice President of
Engineering in December 1997.
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Robert Cellucci, 58, joined us in February 1998 as our Vice President,
Operations. From September 1997 to January 1998 he served as Manufacturing and
Materials consultant for Cyberdent, a dental equipment start-up and from 1994 to
August 1997, Mr. Cellucci served as the Vice President of Operations at Ion
Systems, a manufacturer of static control equipment and systems.
Robert W. Riland III, 37, joined us in March 2000 as Vice President of
Marketing and was promoted to Vice President of Sales and Marketing in July
2000. From July 1997 to February 2000, Mr. Riland served as Vice President of
Sales at Maxoptix Corporation, a manufacturer of high capacity magneto-optical
drives and library systems, and from August 1989 to June 1997, served as
Director of Sales and Marketing for U-tron Technologies, Inc., a manufacturer of
personal computers, workstations and servers.
Each of our directors is elected at the annual meeting of shareholders
and holds office until the next annual meeting. Our executive officers are
appointed by our board of directors or our president and serve at the discretion
of our board of directors. There are no family relationships between any
director, executive officer or person nominated or chosen by us to become a
director or executive officer.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors, and persons who own more than ten percent
of a registered class of our equity securities, to file reports of securities
ownership and changes in such ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten percent shareholders also
are required by rules promulgated by the Securities and Exchange Commission to
furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to us,
the absence of a Form 3 or Form 5 or written representations that no Forms 5
were required, we believe that, during fiscal year 2000, our officers, directors
and greater than ten percent beneficial owners complied with all applicable
Section 16(a) filing requirements, except that the Form 4's required to be filed
by each of J. Richard Ellis, Henry Madrid, Brian Irvine, Robert Cellucci and
Robert Riland for a transaction occurring in November 2000 were filed late.
ITEM 11. EXECUTIVE COMPENSATION.
The following Summary Compensation Table shows compensation paid by us
for services rendered during fiscal years 2000, 1999 and 1998 to the person who
was our Chief Executive Officer and the other executive officers who received
salary and bonus compensation which exceeded $100,000 in fiscal year 2000.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) OPTIONS(2) COMPENSATION
- --------------------------- ---- ------------ ---------- ------------
J. Richard Ellis.............................. 2000 173,000 200,000 1,000(3)
President and Chief Executive Officer 1999 165,000 -- 1,000(3)
1998 157,000 225,000+ 1,000(3)
Henry Madrid.................................. 2000 126,000 100,000 1,000(3)
Vice President, Finance and 1999 116,000 -- 1,000(3)
Chief Financial Officer 1998 115,000 50,000+ 1,000(3)
Brian Irvine.................................. 2000 120,000 35,000 1,000(3)
Vice President, Engineering 1999 114,000 -- 1,000(3)
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LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) OPTIONS(2) COMPENSATION
- --------------------------- ---- ------------ ---------- ------------
1998 109,000 65,000+ 1,000(3)
Robert Cellucci(4)............................ 2000 122,000 35,000 1,000(3)
Vice President, Operations 1999 109,000 -- 1,000(3)
1998 97,000 50,000 1,000(3)
Robert W. Riland III(5)....................... 2000 143,000 240,000 1,000(3)
Vice President, Sales and Marketing 1999 -- -- --
1998 -- -- --
- ------------------
+ Option grants reflect repricing of options previously granted pursuant to
our 1990 Stock Plan.
(1) No bonuses were paid during 2000.
(2) Options are awarded pursuant to our Stock Plan, which is administered by
the Board of Directors. The Board of Directors determines the eligibility
of employees and consultants, the number of shares to be granted and the
terms of such grants.
(3) The amounts shown represent life insurance premiums paid by us.
(4) Mr. Cellucci joined us in February 1998.
(5) Mr. Riland joined us in March 2000.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL
-------------------------------------- REALIZABLE VALUE
PERCENT AT ASSUMED
OF TOTAL ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ----------- -------- ---------- -------- ---------
J. Richard Ellis...................... 200,000 22% $3.25 Nov. 2005 830,000 1,047,000
President and Chief Executive
Officer
Henry Madrid.......................... 100,000 11% $3.25 Nov. 2005 415,000 523,000
Vice President, Finance and
Chief Financial Officer
Brian Irvine.......................... 35,000 4% $3.25 Nov. 2005 145,000 183,000
Vice President, Engineering
Robert Cellucci....................... 35,000 4% $3.25 Nov. 2005 145,000 183,000
Vice President, Operations(3)
Robert W. Riland III.................. 240,000 27% $3.00 - May - 950,000 1,200,000
Vice President, Sales and $3.25 Nov. 2005
Marketing
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table provides information on the value of options
exercised in fiscal 2000 and the value of unexercised in-the-money options held
by the named executive officers as December 31, 2000
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 2000 AT DECEMBER 31, 2000(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
J. Richard Ellis......... -- -- 149,479 275,521 $200,000 $110,000
Henry Madrid............. -- -- 34,375 115,625 $ 44,000 $ 24,000
Brian Irvine............. -- -- 42,708 57,292 $ 58,000 $ 32,000
Robert Cellucci.......... -- -- 33,021 51,979 $ 44,000 $ 24,000
Robert W. Riland III..... -- -- 22,500 217,500 $ -- $ --
(1) Market value of underlying securities at year-end minus the exercise price
of "in-the-money" options. The closing sale price for our common stock as
of December 29, 2000 on the NASDAQ Small Cap Market System was $2.125.
COMPENSATION OF DIRECTORS
Pursuant to the our 1995 Stock Option Plan for Non-Employee Directors,
each non-employee director receives an initial grant of options to purchase
25,000 shares of our 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Frank T. Connors, Michael A. McManus, Jr. and F. Rigdon Currie
comprised the Board's Compensation Committee during fiscal 2000. Mr. Connors has
been our Secretary since May 1990 and was our Chief Executive Officer from May
1990 to December 1994. Neither Mr. McManus nor Mr. Currie has been an officer or
employee of our company. Please see "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" for a discussion of certain relationships and transactions between
Mr. Currie and DISC. During fiscal year 2000, none of our executive officers (i)
served as a member of the Compensation Committee (or other board committee
performing equivalent functions or, in the absence of any such committee, the
board of directors) of another entity, one of whose executive officers served on
our Compensation Committee, (ii) served as a director of another entity, one of
whose executive officers served on the Company's Compensation Committee, or
(iii) served as a member of the compensation committee (or other board committee
performing equivalent functions or, in the absence of any such committee, the
board of directors) of another entity, one of whose executive officers served as
a member of our Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of March 15, 2001, as to (a) all
directors, (b) the named executive officers identified in the Summary
Compensation Table located in Item 11, (c) all directors and executive officers
as a group, and (d) each person known to us to be the beneficial owner of more
than 5% of any class of our voting securities.
Each share of the our Series C, Series D, Series E and Series I through
Series O Preferred Stock is convertible into one share of common stock and is
entitled to one vote per share. Each share of our Series F
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Preferred Stock is convertible into two shares of common stock and is entitled
to two votes per share. Each share of Series G, Series H and Series P through
Series AA Preferred Stock is convertible into ten shares of common stock and is
entitled to ten votes per share. Because our outstanding Preferred Stock votes
together with and has the same rights to cumulative voting as the common stock,
the number of shares held by each beneficial owner includes all shares of common
stock and Preferred Stock on an as-if-converted basis, and "Percentage of Class"
represents the total of our common and Preferred Stock, on an as-if-converted
basis, issued and outstanding as of March 15, 2001. Except as otherwise
indicated, we believe, based on information furnished by these 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.
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ -------------------- ----------------
MK Global Ventures +............................................. 769,558(1) 4.0%
MK Global Ventures II +.......................................... 769,250(2) 4.0%
MK GVD Fund +.................................................... 15,319,605(3) 80.5%
Michael D. Kaufman +............................................. 16,430,736(4)(7) 88.6%
J. Richard Ellis ++.............................................. 199,063(5) 1.0%
Frank T. Connors ++.............................................. 137,558(6) *
F. Rigdon Currie ++.............................................. 55,000(7) *
Arch J. McGill ++................................................ 55,000(7) *
Michael A. McManus, Jr. ++....................................... 67,500(7) *
Brian Irvine ++.................................................. 55,751(8) *
Robert Cellucci ++............................................... 40,833(9) *
Henry Madrid ++.................................................. 94,583(10) *
Robert W. Riland III ++.......................................... 94,583(11) *
Directors and Executive Officers as a group
(ten (10) persons)............................................ 17,693,320(12) 89.79%
* Less than 1%
+ The address of such beneficial owner is 2471 E. Bayshore Road, Palo Alto,
CA 94303.
++ The address of such beneficial owner is c/o DISC, Inc., 372 Turquoise
Street, Milpitas, CA 95035.
(1) MK Global Ventures beneficially owns 759,093 shares of Common Stock and
10,465 shares of Series C Preferred Stock. See the first paragraph of this
Item 12 for a description of the conversion and voting rights with respect
to the Series C Preferred Stock.
(2) MK Global Ventures II beneficially owns 310,462 shares of Common Stock,
361,831 shares of Series C Preferred Stock and 77,566 shares of Series I
Preferred Stock. See the first paragraph of this Item 12 for a description
of the conversion and voting rights with respect to the Series C and Series
I Preferred Stock. Beneficial ownership also includes warrants for 19,391
shares of Common Stock exercisable on March 15, 2001 or within 60 days
thereafter.
(3) MK GVD Fund beneficially owns 595,049 shares of Common Stock; 333,333
shares of the Series D Preferred Stock; 375,000 shares of the Series E
Preferred Stock; 250,000 shares of the Series F Preferred Stock; 97,500
shares of the Series G Preferred Stock; 26,109 shares of the Series H
Preferred Stock; 84,999 shares of the Series I Preferred Stock; 244,966
shares of the Series J Preferred Stock; 235,110 shares of the Series K
Preferred Stock; 199,275 shares of the Series L Preferred Stock; 179,372
shares of the Series M Preferred Stock; 666,667 shares of the Series N
Preferred Stock; 1,320,755 shares of the Series O Preferred Stock; 36,585
shares of the Series P Preferred Stock; 112,097 shares of the Series Q
Preferred Stock; 86,207 shares of the Series R Preferred Stock; 96,875
shares of the Series S Preferred Stock; 16,089 shares of the Series T
Preferred Stock; 38,961 shares of the Series U Preferred Stock; 66,038
shares of the Series V Preferred Stock; 30,201 shares of the Series W
Preferred Stock; 32,800 of the Series X Preferred Stock; 57,592 of the
Series Y Preferred Stock; 39,906 of the Series Z Preferred Stock; and
60,774 of the Series AA Preferred Stock. See the first paragraph of this
Item 12 for a description of the conversion and voting rights with respect
to the different series of Preferred Stock. Beneficial ownership also
includes warrants for 2,603,240 shares of Common Stock exercisable on March
15, 2001 or within 60 days thereafter.
-20-
23
(4) Includes Common Stock, Preferred Stock and warrants beneficially owned by
MK Global Ventures, MK Global Ventures II and MK GVD Fund, as separately
described in notes (1), (2) and (3) above. Mr. Kaufman is the managing
general partner of each of those funds.
(5) Includes 189,063 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.
(6) Includes 80,000 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.
(7) Includes 55,000 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.
(8) Includes 51,771 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.
(9) Includes 40,833 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.
(10) Includes 48,958 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.
(11) Includes 44,583 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.
(12) Includes 670,208 shares of Common Stock issuable upon exercise of stock
options and warrants for 2,622,631 shares of Common Stock exercisable on
March 15, 2001 or within 60 days thereafter.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the quarter ended March 31, 2000, we issued $820,000 in
principal amount of subordinated convertible debentures to MK GVD Fund. On March
31, 2000, these debentures were converted into 32,800 shares of the Series X
Preferred Stock, each initially convertible into ten shares of common stock at a
price of $2.50 per share, and warrants to purchase 82,000 shares of common stock
at an exercise price of $3.13 per share.
During the quarter ended June 30, 2000, we issued $1,100,000 in
principal amount of subordinated convertible debentures to MK GVD Fund. On June
30, 2000, these debentures were converted into 57,592 shares of Series Y
Preferred Stock, each initially convertible into ten shares of common stock at a
price of $1.91 per share, and warrants to purchase 143,979 shares of common
stock at an exercise price of $2.39 per share.
During the quarter ended September 30, 2000, we issued $850,000 in
principal amount of subordinated convertible debentures to MK GVD Fund. On
September 30, 2000, these debentures were converted into 39,906 shares of Series
Z Preferred Stock, each initially convertible into ten shares of common stock at
a price of $2.13 per share, and warrants to purchase 99,765 shares of common
stock at an exercise price of $2.66 per share.
During the quarter ended December 31, 2000, we issued $1,100,000 in
principal amount of subordinated convertible debentures to MK GVD Fund. On
December 31, 2000, these debentures were converted into 60,774 shares of Series
AA Preferred Stock each initially convertible into ten shares of common stock at
a price of $1.81 per share, and warrants to purchase 151,933 shares of common
stock at an exercise price of $2.26 per share.
The above transactions were unanimously approved by our Board of
Directors. Michael D. Kaufman, a member of our Board of Directors, is the
managing general partner of MK GVD Fund, MK Global Ventures and MK Global
Ventures II. F. Rigdon Currie, a member of our Board of Directors, was, and
continues to be,
-21-
24
Special Limited Partner of MK GVD Fund and MK Global Ventures II. However, we
believe that the terms and provisions of the above transactions were as fair to
us as they could have been if made with unaffiliated third parties.
-22-
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements.
Our financial statements 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................................. 37
Balance Sheet at December 31, 2000 and December 31, 1999.......... 24
Statement of Operations For the Three Years Ended December 31,
2000........................................................... 25
Statement of Shareholders' Equity For the Three Years Ended
December 31, 2000.............................................. 26
Statement of Cash Flows For the Three Years Ended December 31,
2000........................................................... 27
Notes to Financial Statements..................................... 28
2. Financial Statement Schedules.
Financial statement schedules have been omitted as the information
required to be set forth therein is not applicable or is readily
available in the financial statements or notes to the financial
statements.
3. Exhibits.
The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by us during the quarter ended
December 31, 2000.
-23-
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FINANCIAL STATEMENTS
DISC, INC.
BALANCE SHEET
DECEMBER 31,
-----------------------------
2000 1999
------------ ------------
Assets
Cash ............................................................. $ 128,000 $ 1,126,000
Accounts receivable, net ......................................... 1,784,000 1,677,000
Inventories ...................................................... 1,465,000 1,447,000
Prepaids and deposits ............................................ 76,000 129,000
------------ ------------
Total current assets ...................................... 3,453,000 4,379,000
Property and equipment, net ...................................... 432,000 469,000
------------ ------------
$ 3,885,000 $ 4,848,000
============ ============
Liabilities and Shareholders' Equity:
Accounts payable ................................................. $ 1,159,000 $ 1,026,000
Borrowings under credit line ..................................... -- 1,165,000
Accrued expenses and other liabilities ........................... 630,000 588,000
------------ ------------
Total current liabilities ................................. 1,789,000 2,779,000
------------ ------------
Commitments and contingencies (Note 10)
Shareholders' equity:
Convertible Preferred Stock; no par value, 10,000,000
shares authorized; 5,141,573 and 4,950,501 shares
issued and outstanding ...................................... 20,892,000 17,022,000
Common Stock; no par value, 20,000,000 shares
authorized; 3,841,053 and 3,711,592 shares issued
and outstanding ............................................. 12,160,000 12,065,000
Accumulated deficit ........................................... (30,956,000) (27,018,000)
------------ ------------
Total shareholders' equity ................................ 2,096,000 2,069,000
------------ ------------
$ 3,885,000 $ 4,848,000
============ ============
See accompanying notes to financial statements.
-24-
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DISC, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net sales ........................................... $ 6,821,000 $ 9,746,000 $ 9,145,000
------------ ------------ ------------
Costs and expenses:
Cost of sales .................................... 5,775,000 7,315,000 6,924,000
Research and development ......................... 1,158,000 1,111,000 1,290,000
Marketing and sales .............................. 2,665,000 2,169,000 2,011,000
General and administrative ....................... 1,048,000 1,085,000 1,030,000
------------ ------------ ------------
Total costs and expenses ..................... 10,646,000 11,680,000 11,255,000
------------ ------------ ------------
Loss from operations ................................ (3,825,000) (1,934,000) (2,110,000)
Interest and other expense, net ..................... (113,000) (125,000) (125,000)
------------ ------------ ------------
Net loss ............................................ $ (3,938,000) $ (2,059,000) $ (2,235,000)
------------ ------------ ------------
Basic and diluted net loss per share ................ $ (1.04) $ (0.56) $ (0.64)
------------ ------------ ------------
Weighted average common shares for basic
and diluted net loss per share calculation ....... 3,803,000 3,700,000 3,515,000
See accompanying notes to financial statements.
-25-
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DISC, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
--------------------------- ------------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
---------- ------------ --------- ----------- ------------ -----------
Balance at December 31, 1997 .......... 3,395,304 $ 12,742,000 3,334,323 $11,053,000 $(22,724,000) $ 1,071,000
Conversion of Preferred Stock
into Common Stock .................. (248,611) (1,000,000) 361,111 1,000,000 -- --
Issuance of Series O Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 1,320,755 1,400,000 -- -- -- 1,400,000
Issuance of Series P Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 36,585 300,000 -- -- -- 300,000
Issuance of Series Q Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 112,097 695,000 -- -- -- 695,000
Issuance of Series R Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 86,207 500,000 -- -- -- 500,000
Issuance of Series S Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 96,875 310,000 -- -- -- 310,000
Net loss for the period ............... -- -- -- -- (2,235,000) (2,235,000)
---------- ------------ --------- ----------- ------------ -----------
Balance at December 31, 1998 .......... 4,799,212 14,947,000 3,695,434 12,053,000 (24,959,000) 2,041,000
Exercise of Common Stock
Options ............................ -- -- 16,158 12,000 -- 12,000
Issuance of Series T Convertible
referred Stock and Warrants
for Common Stock, net .............. 16,089 325,000 -- -- -- 325,000
Issuance of Series U Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 38,961 600,000 -- -- -- 600,000
Issuance of Series V Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 66,038 700,000 -- -- -- 700,000
Issuance of Series W Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 30,201 450,000 -- -- -- 450,000
Net loss for the period ............... -- -- -- -- (2,059,000) (2,059,000)
---------- ------------ --------- ----------- ------------ -----------
Balance at December 31, 1999 .......... 4,950,501 17,022,000 3,711,592 12,065,000 (27,018,000) 2,069,000
Exercise of Common Stock
Options ............................ -- -- 129,461 95,000 -- 95,000
Issuance of Series X Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 32,800 820,000 -- -- -- 820,000
Issuance of Series Y Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 57,592 1,100,000 -- -- -- 1,100,000
Issuance of Series Z Convertible
Preferred Stock and Warrants
for Common Stock, net .............. 39,906 850,000 -- -- -- 850,000
Issuance of Series AA Convertible
Preferred Stock and Warrants for
Common Stock, net .................. 60,774 1,100,000 -- -- -- 1,100,000
Net loss for the period ............... -- -- -- -- (3,938,000) (3,938,000)
---------- ------------ --------- ----------- ------------ -----------
Balance at December 31, 2000 .......... 5,141,573 $ 20,892,000 3,841,053 $12,160,000 $(30,956,000) $ 2,096,000
========== ============ ========= =========== ============ ===========
See accompanying notes to financial statements.
-26-
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DISC, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net loss ......................................... $(3,938,000) $(2,059,000) $(2,235,000)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation expense ............................. 270,000 134,000 263,000
Changes in assets and liabilities:
Accounts receivable ............................ (107,000) 420,000 (329,000)
Inventories .................................... (18,000) 65,000 (47,000)
Prepaids and deposits .......................... 53,000 (26,000) (30,000)
Accounts payable ............................... 133,000 254,000 (560,000)
Accrued expenses and other liabilities ......... 42,000 63,000 122,000
----------- ----------- -----------
Net cash used in operating activities ............... (3,565,000) (1,149,000) (2,816,000)
----------- ----------- -----------
Cash used in investing activities for capital
expenditures ..................................... (233,000) (173,000) (291,000)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under line of credit, net ............. (1,165,000) (467,000) 294,000
Proceeds from issuance of Common Stock ........... 95,000 12,000 --
Proceeds from issuance of Preferred Stock
and Warrants for Common Stock .................. 3,870,000 2,075,000 3,205,000
----------- ----------- -----------
Cash provided by financing activities ............... 2,800,000 1,620,000 3,499,000
----------- ----------- -----------
Net increase in cash ................................ (998,000) 298,000 392,000
Cash at beginning of the year ....................... 1,126,000 828,000 436,000
----------- ----------- -----------
Cash at end of the year ............................. $ 128,000 $ 1,126,000 $ 828,000
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Interest paid .................................... $ 113,000 $ 125,000 $ 125,000
=========== =========== ===========
See accompanying notes to financial statements.
-27-
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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 received a commitment from its
largest investor for additional equity financing of up to $3,900,000, if
necessary, through the issuance of Preferred Stock. 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 2001, 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, 2001, 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:
USE OF ESTIMATES
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CERTAIN RISKS AND CONCENTRATIONS
At December 31, 2000, substantially all of the Company's cash and cash
equivalents were invested with one financial institution.
The Company performs ongoing credit evaluations of its customers'
financial condition and, generally requires no collateral from its customers. At
December 31, 2000 two customers represented 15% and 11% respectively of the
accounts receivable balance. At December 31, 1999, two customers represented 29%
and 11%, respectively, of the accounts receivable balance. At December 31, 1998,
no customer represented 10% or more of the accounts receivable balance. The
Company maintains an allowance for doubtful accounts receivable based upon the
collectibility of all accounts receivable.
In 2000 two customers accounted for 14% and 13% of sales respectively.
In 1999, one customer accounted for 23% of net sales. No customer accounted for
more than 10% of net sales in fiscal 1998.
FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including
cash and equivalents, accounts receivable and accounts payable approximate fair
value due to their short maturities.
-28-
31
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase and money market funds to be cash
equivalents.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of its products to the
customer provided that the Company has received a signed purchase order, the
price is fixed and collection of the resulting receivable is probable.
Subsequent to the sale of the products, the Company has no obligation to provide
any modification or customization upgrades, enhancements or any post contract
customer support. Provisions for returns and allowances are recorded at the time
revenue is recognized based on the Company's historical experience.
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 accounts for stock-based compensation arrangements using
the intrinsic value method as prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations thereof. Compensation cost for stock grants is measured as the
excess, if any, of the market price of the Company's stock at the date of grant
over the stock exercise price. The Company's policy is to grant stock options
with an exercise price equal to the quoted market price of the Company's stock
on the date of grant. Accordingly, the Company does not have compensation cost
related to its stock compensation plans. In addition, the Company complies with
the disclosure provisions of Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
interpretation of APB Opinion No. 25." FIN 44 clarifies, among other issues (a)
the definition of employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a non compensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 was effective
July 1, 2000. The adoption of FIN 44 did not have a material effect on the
Company's financial position or results of operations.
-29-
32
INCOME TAXES
The Company accounts for income taxes under the asset and liability
approach, which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of timing differences between the
carrying amounts and the tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
COMPREHENSIVE INCOME (LOSS)
For the three years in the period ended December 31, 2000, there were
no elements of comprehensive income (loss), except for the net losses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the balance
sheet and measurement of those instruments at fair value. The Company will adopt
SFAS 133 in the first fiscal quarter of 2001 and does not expect the adoption to
have a material effect on its financial condition or results of operations.
NOTE 3 - BALANCE SHEET DETAILS:
DECEMBER 31,
---------------------------
2000 1999
----------- -----------
Accounts receivable:
Trade accounts receivable ........................... $ 1,965,000 $ 1,842,000
Less: Allowance for doubtful account ............. (181,000) (165,000)
----------- -----------
$ 1,784,000 $ 1,677,000
=========== ===========
Inventories:
Raw materials ....................................... $ 812,000 $ 824,000
Work-in-process ..................................... 574,000 546,000
Finished goods ...................................... 79,000 77,000
----------- -----------
$ 1,465,000 $ 1,447,000
=========== ===========
Property and equipment:
Computer and other equipment ........................ $ 705,000 $ 596,000
Tooling ............................................. 160,000 136,000
Evaluation units .................................... 655,000 555,000
Leasehold improvements .............................. 23,000 23,000
Furniture and fixtures .............................. 45,000 45,000
----------- -----------
$ 1,588,000 1,355,000
Less: Accumulated depreciation and amortization ..... (1,156,000) (886,000)
----------- -----------
$ 432,000 $ 469,000
=========== ===========
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33
NOTE 4 - DEBT:
In December 2000, the Company's line of credit agreement expired and
all outstanding debt was repaid. Also in December 2000, the Company entered into
a one year factoring agreement with another financial institution. Receivables
purchased under this agreement are limited to the lesser of $1,500,000 or 85% of
eligible receivables and are secured by substantially all of the assets of the
Company. Interest under the agreement is prime rate plus 4% and .825% of the
amount of receivables purchased, with a minimum charge of $7,500 per month. This
agreement requires the Company to comply with certain financial covenants all of
which the Company was in compliance with at December 31, 2000. At December 31,
2000 there were no borrowings under this agreement.
NOTE 5 - CONVERTIBLE PREFERRED STOCK:
Information with regard to the Company's Preferred Stock as of December
31, 2000 is summarized in the following table:
SHARES COMMON STOCK
SHARES ISSUED AND ISSUABLE UPON LIQUIDATION NET OF
SERIES AUTHORIZED UTSTANDING CONVERSION PREFERENCES ISSUANCE COST
------ ---------- ---------- ------------- ----------- -------------
C 372,296 372,296 372,296 $ 5.00 $ 1,861,000
D 600,000 333,333 333,333 5.00 1,471,000
E 500,000 375,000 375,000 4.00 1,480,000
F 250,000 250,000 500,000 8.00 1,250,000
G 110,000 97,500 975,000 20.00 950,000
H 26,109 26,109 261,090 38.30 1,000,000
I 167,065 167,065 167,065 4.19 700,000
J 244,966 244,966 244,966 2.98 730,000
K 235,110 235,110 235,110 3.19 750,000
L 199,275 199,275 199,275 2.76 550,000
M 179,372 179,372 179,372 2.23 400,000
N 666,667 666,667 666,667 0.90 600,000
O 1,320,755 1,320,755 1,320,755 1.06 1,400,000
P 36,585 36,585 365,850 8.20 300,000
Q 112,097 112,097 1,120,970 6.20 695,000
R 86,207 86,207 862,070 5.80 500,000
S 96,875 96,875 968,750 3.20 310,000
T 16,089 16,089 160,891 20.20 325,000
U 38,961 38,961 389,610 15.40 600,000
V 66,038 66,038 660,377 10.60 700,000
W 30,201 30,201 302,010 14.90 450,000
X 32,800 32,800 328,000 25.00 820,000
Y 57,592 57,592 575,920 19.10 1,100,000
Z 39,906 39,906 399,061 21.30 850,000
AA 60,774 60,774 607,740 18.10 1,100,000
---------- --------- ------------ ------------
5,545,740 5,141,573 12,571,178 $ 20,892,000
Undesignated 4,454,260 --
---------- --------- ------------
Total 10,000,000 5,141,573 $ 20,892,000
========== ========= ============
The holders of Series C Preferred Stock are entitled to receive $0.30
per share per annum cumulative dividends prior to and in preference to Common
Shareholders. Such dividends are cumulative whether or not declared by the Board
of Directors. The holders of Series D through AA 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 then convertible.
-31-
34
Each share of Preferred Stock has the number of votes equal to the
number of shares of Common Stock into which it is then convertible. The Company
has reserved sufficient shares of Common Stock to allow for the conversion of
all outstanding Preferred Stock.
Shares of Series H through AA Preferred Stock were issued pursuant to
an agreement entered into in March 1996, as amended, with the Company's largest
shareholder whereby the Company agreed to sell and the shareholder agreed to
purchase subordinated convertible debentures. The conversion price of the
debentures is 85% of the lower of the average closing price of the Company's
Common Stock for the five trading days ended three days prior to the end of the
quarter or the closing bid price on the last day of the quarter in which the
convertible debentures are issued.
The Company issued Warrants in conjunction with the issuance of
Preferred Stock. The Warrants entitle the holders to purchase the Company's
Common Stock.
Holders of Preferred Stock received Warrants for the purchases of
Common Stock as follows:
WARRANTS ISSUED EXERCISE PRICE DATE
SERIES AND OUTSTANDING PER SHARE ISSUED
- ------ --------------- -------------- --------
G 118,750 2.50 Mar 96
H 65,273 4.85 Jun 96
I 41,766 5.24 Sep 96
J 61,242 3.73 Dec 96
K 58,778 3.98 Mar 97
L 49,819 3.45 Jun 97
M 44,843 2.78 Sep 97
N 166,666 1.13 Dec 97
O 330,188 1.33 Feb 98
P 91,462 0.82 Mar 98
Q 280,242 0.78 Jun 98
R 215,517 0.73 Sep 98
S 242,187 0.40 Dec 98
T 40,222 2.53 Mar 99
U 97,402 1.93 Jun 99
V 165,094 1.33 Sep 99
W 75,503 1.86 Dec 99
X 82,000 3.13 Mar 00
Y 143,979 2.39 Jun 00
Z 99,765 2.66 Sep 00
AA 151,933 2.26 Dec 00
---------
2,622,631
=========
All Warrants expire five years from the date of issuance.
NOTE 6 - STOCK OPTION PLAN:
At December 31, 2000, the Company had two stock-based compensation
plans, which are described below:
THE 1990 PLAN
Under the 1990 Stock Option Plan, as amended in 1999 (the "1990 Plan"),
employees, consultants and non-employee directors (prior to 1995) may be granted
options for up to 2,800,000 shares of common stock which vest over a four year
period from the date of grant. The options vest equally on a monthly basis
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35
unless it is the employee's or consultant's first stock grant, in which case
vesting commences six months from the date of grant.
On November 9, 2000 our board of directors approved an increase of
1,200,000 shares in the number of shares of common stock reserved for issuance
under the 1990 Plan. This increase has not yet been approved by our
stockholders. Also on November 9, 2000 the board of directors granted options to
purchase 616,000 shares of common stock to all of our then current officers and
employees. These grants are contingent upon receiving stockholder approval of
the increase in the number of shares reserved for issuance under the 1990 Plan.
Assuming the effect of the increase in the number of shares reserved under the
1990 Plan and the grant of options to our officers and employees, at December
31, 2000, 975,000 shares were available for grant under the 1990 Plan.
On May 19, 1998 the Company canceled options to purchase 952,850 shares
of Common Stock with exercise prices ranging from $1.03 to $6.38 previously
granted to employees. The Company reissued all such options at an exercise price
of $0.75, the fair market value of the stock on that date. The reissued options
vest over a four year period from the date of reissuance.
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
three year period. In addition, commencing in 1995, 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. These options vest immediately upon grant and are immediately
exercisable.
At December 31, 2000, 100,000 shares were available for grant under the
Non-Employee Option Plan.
On May 19, 1998, the Company canceled options to purchase 75,000 shares
of Common Stock with exercise prices ranging from $1.16 to $6.38 previously
granted to the non-employee directors. The Company reissued all such options at
an exercise price of $0.75, the fair market value of the stock on that date. The
reissued options vest immediately.
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 combined activity of the 1990 Plan
and the Non-Employee Option Plan for the years ended December 31, 2000, 1999 and
1998:
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36
2000 1999 1998
-------------------------- --------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
FIXED OPTIONS SHARES AVE. EX PRICE SHARES AVE. EX PRICE SHARES AVE. EX PRICE
- ------------- ---------- ------------- ---------- ------------- ---------- -------------
Outstanding at beginning of year ..... 1,093,733 $0.80 1,098,000 $ .76 1,011,500 $3.80
Granted .............................. 925,000 3.24 89,000 1.61 1,162,850 .76
Exercised ............................ (125,857) 0.75 (16,158) .75
Forfeited/Canceled ................... (172,424) 1.19 (77,109) 1.08 (1,076,350) 3.62
---------- ----- ---------- ----- ---------- -----
Outstanding at end of year ........... 1,720,452 $2.08 1,093,733 $0.80 1,098,000 $0.76
========== ===== ========== ===== ========== =====
Options exercisable at year-end ...... 619,354 483,915 242,018
Weighted-average fair value of
options granted during the year... $ 2.91 $ 1.52 $ 0.59
The following table summarizes the combined information about options
outstanding under the 1990 Plan and Non-Employee Option Plan at December 31,
2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
NUMBER WT-AVERAGE NUMBER WT-AVERAGE
RANGE OF OUTSTANDING AT REMAINING WT-AVERAGE EXERCISABLE AT EXERCISE
EXERCISE PRICE 12/31/00 CONTRACT LIFE EXERCISE PRICE 12/31/00 PRICE
-------------- -------------- ------------- -------------- --------------- -----------
$0.47 to $0.75 752,539 2.4 $0.74 523,340 $0.74
$1.00 to $2.00 67,913 3.5 $1.48 42,535 $1.65
$2.80 to $3.38 874,500 4.8 $3.20 48,698 $3.11
$4.75 25,500 4.2 $4.75 5,181 $4.75
The Company applies APB 25 and related Interpretations in accounting
for its stock option plans. Since all of the Company's stock options were
granted at fair market value at the date of grant, 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
SFAS 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
2000 1999 1998
----------- ----------- -----------
Net loss As Reported $(3,938,000) $(2,059,000) $(2,235,000)
Pro Forma $(4,444,000) $(2,483,000) $(2,649,000)
Basic and diluted net loss per share As Reported $ (1.04) $ (0.56) $ (0.64)
Pro Forma $ (1.17) $ (0.67) $ (0.75)
The compensation cost calculated under SFAS 123 is based on options
granted from 1996 through 2000, 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 2000, 1999, and 1998: expected volatility of
157.7% for 2000, 144.5% for 1999, and 112.9% for 1998; dividend yield of 0% 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.
NOTE 7 - INCOME TAXES:
No provisions for federal or state income taxes were recorded for the
years ended December 31, 2000, 1999, and 1998 as the Company incurred net
operating losses during these years.
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37
Significant components of the Company's deferred tax assets are as
follows:
DECEMBER 31,
-------------------------------------------
2000 1999 1998
----------- ------------ -----------
Net operating loss carryforwards .......... $ 9,513,000 $ 8,910,000 8,240,000
Credit carryforwards ...................... 970,000 967,000 941,000
Capitalized research and
development expenses ................... 311,000 246,000
303,000
Reserves and other ........................ 329,000 254,000 237,000
----------- ------------ -----------
Deferred tax assets ....................... 11,115,000 10,442,000 9,664,000
Valuation allowance ....................... (11,115,000) (10,442,000) (9,664,000)
----------- ------------ -----------
$ -- $ -- $ --
=========== ============ ===========
Management believes that it is more likely than not that the deferred
tax assets will not be utilized. Accordingly, a full valuation allowance has
been recorded.
At December 31, 2000, the Company had approximately $26,817,000 of
federal and $8,810,000 of state net operating loss carryforwards available to
offset future taxable income which expire in varying amounts beginning in 2000.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. Events
which cause limitations in the amount of net operating losses that the Company
may utilize in any one year include, but are not limited to, a cumulative
ownership change of more than 50% as defined, over a three year period.
The benefit for income taxes differed from the amount determined by
applying U.S. statutory income tax rates to income before income taxes. A
reconciliation is summarized below:
DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- --------- ---------
Tax benefit at statutory rate ................... $(1,339,000) $(701,000) $(760,000)
Non-recognition of tax benefit and other ........ 1,339,000 701,000 760,000
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
NOTE 8 - NET LOSS PER SHARE
Options and Warrants to purchase shares, and Convertible Preferred
Stock outstanding totaling 16,764,661 were not included in the computation of
diluted net loss per share, as their effect was antidilutive for the periods
presented. Therefore, both the basic and diluted net loss per share computations
resulted in the same number and there were no reconciling items.
NOTE 9 - OPERATING SEGMENTS
The Company sells its products predominately in the United States. No
other geographic region accounted for more than 10% of net sales in fiscal 2000,
1999, or 1998.
The Company has no long-lived assets outside the United States in any
of the years presented.
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The following table presents external net sales of similar products and
services:
2000 1999 1998
---------- ---------- ----------
Storage devices and services ......... $6,086,000 8,622,000 $8,779,000
Media ................................ 735,000 1,124,000 366,000
---------- ---------- ----------
$6,821,000 $9,746,000 $9,145,000
========== ========== ==========
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company occupies its facility under a non-cancelable operating
lease agreement which expires on October 31, 2005. The lease requires the
Company to pay property taxes and insurance.
The total minimum rental commitments at December 31, 2000, excluding
insurance, normal maintenance and certain property taxes, are payable as
follows:
FISCAL YEAR OPERATING LEASE
----------- ---------------
2001 $456,000
2002 474,000
2003 493,000
2004 513,000
2005 441,000
Total rental expense under operating leases, including month-to-month rentals,
was $218,779, $159,000, and $181,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
From time to time the Company is involved in litigation in the normal
course of business. Management believes that the outcome of matters to date will
not have a material effect on the Company's financial position, results of
operations or cash flows.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of DISC, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) on page 23 present fairly, in all material respects, the financial
position of DISC, Inc. at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, CA
February 9, 2001, except as to Note 1, which is as of March 26, 2001
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INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-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, File 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, File No. 33-52144 (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, File No. 33-52144 (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
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, incorporated herein by this reference to
Exhibit 3.8 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 (the "1996 Form 10-K").
3.9 Certificate of Determination of Preferences of Series I Preferred
Stock, as filed with the California Secretary of State on
November 18, 1996, incorporated herein by this reference to
Exhibit 3.9 to the Company's 1996 Form 10-K.
3.10 Certificate of Amendment to Amended and Restated Articles of
Incorporation, as filed with the California Secretary of State on
April 14, 1997, incorporated herein by this reference to Exhibit
3.10 to the Company's 1996 Form 10-K.
3.11 Certificate of Determination of Preferences of Series J Preferred
Stock, as filed with the California Secretary of State on April
14, 1997, incorporated herein by this reference to Exhibit 3.11
to the Company's 1996 Form 10-K.
3.12 Certificate of Determination of Preferences of Series K Preferred
Stock, as filed with the California Secretary of State on August
15, 1997, incorporated herein by this reference to Exhibit 3.12
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (the "1997 Form 10-K").
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EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.13 Certificate of Determination of Preferences of Series L Preferred
Stock, as filed with the California Secretary of State on August
15, 1997, incorporated herein by this reference to Exhibit 3.13
to the Company's 1997 Form 10-K.
3.14 Certificate of Determination of Preferences of Series M Preferred
Stock, as filed with the California Secretary of State on January
6, 1998, incorporated herein by this reference to Exhibit 3.14 to
the Company's 1997 Form 10-K.
3.15 Certificate of Determination of Preferences of Series N Preferred
Stock, as filed with the California Secretary of State on January
7, 1998, incorporated herein by this reference to Exhibit 3.15 to
the Company's 1997 Form 10-K.
3.16 Certificate of Determination of Preferences of Series O Preferred
Stock, as filed with the California Secretary of State on March
31, 1998, incorporated herein by this reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998 (the "1998 Third Quarter Form
10-Q").
3.17 Certificate of Determination of Preferences of Series P Preferred
Stock, as filed with the California Secretary State on October 9,
1998, incorporated herein by this reference to Exhibit 3.2 to the
Company's 1998 Third Quarter Form 10-Q.
3.18 Certificate of Determination of Preferences of Series Q Preferred
Stock, as filed with the California Secretary of State on October
9, 1998, incorporated herein by this reference to Exhibit 3.18 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 Form 10-K").
3.19 Certificate of Determination of Preferences of Series R Preferred
Stock, as filed with the California Secretary of State on January
12, 1999, incorporated herein by this reference to Exhibit 3.19
to the Company's 1998 Form 10-K.
3.20 Certificate of Determination of Preferences of Series S Preferred
Stock, as filed with the California Secretary of State on January
12, 1999, incorporated herein by this reference to Exhibit 3.20
to the Company's 1998 Form 10-K.
3.21 Certificate of Determination of Preferences of Series T Preferred
Stock, as filed with the California Secretary of State on
December 31, 1999, incorporated herein by this reference to
Exhibit 3.21 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 (the "1999 Form 10-K).
3.22 Certificate of Determination of Preferences of Series U Preferred
Stock, as filed with the California Secretary of State on
December 31, 1999, incorporated herein by this reference to
Exhibit 3.22 to the Company's 1999 Form 10-K.
3.23 Certificate of Determination of Preferences of Series V Preferred
Stock, as filed with the California Secretary of State on
December 31, 1999, incorporated herein by this reference to
Exhibit 3.23 to the Company's 1999 Form 10-K.
3.24 Certificate of Determination of Preferences of Series W Preferred
Stock, as filed with the California Secretary of State on January
26, 2000, incorporated herein by this reference to Exhibit 3.24
to the Company's 1999 Form 10-K.
3.25* Certificate of Determination of Preferences of Series X Preferred
Stock, as filed with the California Secretary of State on
December 28, 2000.
3.26* Certificate of Determination of Preferences of Series Y Preferred
Stock, as filed with the California Secretary of State on
December 28, 2000.
3.27* Certificate of Determination of Preferences of Series Z Preferred
Stock, as filed with the California Secretary of State on
December 28, 2000.
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42
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.28* Certificate of Determination of Preferences of Series AA
Preferred Stock, as filed with the California Secretary of State
on January 9, 2001.
3.29 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 this
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.
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, incorporated herein by this reference to
Exhibit 10.15 to the Company's 1996 Form 10-K.
10.16 Second Amendment to Convertible Debenture Purchase Agreement,
dated April 11, 1997, incorporated herein by this reference to
Exhibit 10.16 to the Company's 1996 Form 10-K.
10.17 Third Amendment to Convertible Debenture Purchase Agreement,
dated December 31, 1997, incorporated herein by this reference to
Exhibit 10.17 to the Company's 1997 Form 10-K.
10.18 Amendment No. 2 to Loan Documents, dated January 13, 1998,
incorporated herein by this reference to Exhibit 10.18 to the
Company's 1997 Form 10-K.
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43
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.19 Series O Preferred Stock Purchase Agreement dated February 20,
1998, incorporated herein by this reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998 (the "1998 First Quarter Form 10-Q").
10.20 Fourth Amendment to Convertible Debenture Purchase Agreement,
dated March 27, 1998, incorporated herein by this reference to
Exhibit 10.2 to the Company's 1998 First Quarter Form 10-Q.
10.21 Fifth Amendment to Convertible Debenture Purchase Agreement,
dated June 30, 1998, incorporated herein by this reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998.
10.22 Sixth Amendment to Convertible Debenture Purchase Agreement,
dated September 25, 1998, incorporated herein by this reference
to Exhibit 10.2 to the Company's 1988 Third Quarter Form 10-Q.
10.23 Seventh Amendment to Convertible Debenture Purchase Agreement,
dated December 30, 1998, incorporated herein by this reference to
Exhibit 10.23 to the Company's 1998 Form 10-K.
10.24 Eighth Amendment to Convertible Debenture Purchase Agreement,
dated March 31, 1999, incorporated herein by this reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1999.
10.25 Ninth Amendment to Convertible Debenture Purchase Agreement,
dated June 30, 1999, incorporated herein by this reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999.
10.26 Tenth Amendment to Convertible Debenture Purchase Agreement,
dated September 30, 1999, incorporated herein by this reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999.
10.27* Factoring Agreement dated December 27, 2000 between the Company
and SUMMIT Financial Resources, L.P.
10.28* First Amendment, dated June 29, 2000, to Lease Agreement between
the Company and Stanley R. Deck and Ellen Deck.
23.1* Consent of PricewaterhouseCoopers LLP.
25 Power of Attorney (included on Signature Page).
- ----------
+ Indicates management contract or compensatory plan or arrangement.
* Filed with this Annual Report on Form 10-K for the year ended December 31,
2000.
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44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, this 30th day of March 2001.
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 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, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. RICHARD ELLIS President, Chief Executive Officer and March 30, 2001
- ------------------------------------------- Chairman of the Board of Directors
(J. Richard Ellis) (Principal Executive Officer)
/s/ HENRY MADRID Vice President of Finance and March 30, 2001
- ------------------------------------------- Chief Financial Officer
(Henry Madrid) (Principal Financial and Accounting Officer
/s/ FRANK T. CONNORS Director March 30, 2001
- -------------------------------------------
(Frank T. Connors)
/s/ F. RIGDON CURRIE Director March 30, 2001
- -------------------------------------------
(F. Rigdon Currie)
/s/ MICHAEL D. KAUFMAN Director March 30, 2001
- -------------------------------------------
(Michael D. Kaufman)
/s/ ARCH J. MCGILL Director March 30, 2001
- -------------------------------------------
(Arch J. McGill)
/s/ MICHAEL A. MCMANUS, JR. Director March 30, 2001
- -------------------------------------------
(Michael A. McManus, Jr.)
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