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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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 Identification No.)
Incorporation or Organization)
372 Turquoise Street, Milpitas, CA 95035
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 934-7000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
<S> <C>
Common Stock, no par value None
Warrants, each to purchase one
share of Common Stock
</TABLE>
----------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sales price of the Common Stock as of
March 25, 1999 as quoted on the NASDAQ Small-Cap Market, was approximately
$4,760,000.
The number of outstanding shares of the registrant's Common Stock as of
March 25, 1999 was 3,695,434.
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DISC, INC.
FORM 10-K
INDEX
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PAGE
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PART I.......................................................................................3
ITEM 1. BUSINESS...........................................................................3
ITEM 2. PROPERTIES........................................................................7
ITEM 3. LEGAL PROCEEDINGS.................................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................7
PART II......................................................................................7
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............7
ITEM 6. SELECTED FINANCIAL DATA...........................................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE......................................................................11
PART III....................................................................................12
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................12
ITEM 11. EXECUTIVE COMPENSATION..........................................................13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................17
PART IV.....................................................................................19
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................19
</TABLE>
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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 the Company
intends that such forward-looking statements are subject to the safe harbors
created thereby. These forward-looking statements include (i) the existence and
development of the Company's technical and manufacturing capabilities, (ii)
anticipated competition, (iii) potential future growth in revenues and income,
(iv) potential future decreases in costs, and (v) the need for, and availability
of, additional financing. 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 thereof,
or comparable terminology are intended to identify forward-looking statements.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions, regarding the Company's
business, which involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in forward-looking statements will be realized. In
addition, the business and operations of the Company are subject to substantial
risks which increase the uncertainty inherent in such forward-looking statements
(see "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" on page 6 and
"ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS"). In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
ITEM 1. BUSINESS.
GENERAL
DISC, Inc. ("DISC" or the "Company") was incorporated under the laws of the
State of California in 1986. The Company operates in one business segment, the
computer mass storage system business. The Company designs, manufactures, and
markets a family of high-end computer mass storage systems which use 5.25 inch
rewritable, magneto optical disks (MO) and CD-ROM disks. The Company believes it
is the only supplier of information storage products currently offering a range
of storage capacities up to 5.2 terabytes in the 5.25 inch optical disk
libraries and up to 1,470 CD-ROM platters.
PRODUCTS
The Company's products consist of a family of optical disk storage libraries
based on the 5.25 inch Magneto optical or CD media. Their capabilities cover the
spectrum of high performance, transaction-oriented information systems such as
archival storage, imaging, COLD, network file servers and video/multimedia
servers.
DISC's modular automated library design houses a combination of optical
disks, disk drives and an advanced robotic picking mechanism. Each library
contains an array of cubes, each of which can hold either a group of disks or
one to two optical disk drives. The modular design of DISC's libraries allows
users to choose the configuration which best suits their needs. By adding more
cells of either optical disks or drives, users can easily expand the system as
storage requirements grow. The modular design of the system also caters to
various types of drives or media, allowing users the opportunity to easily
upgrade their systems as higher performance drives and media are introduced.
Software, developed by and proprietary to the Company, allows a user's computer
to communicate with the DISC library and command a high performance robotic
device to select a desired disk from the array and insert it into a drive. Once
in the drive, the information access time for optical disks is approaching that
of magnetic disks.
The Company is currently shipping four different sizes of frames for the arrays,
to allow for different sized applications in the
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user's operation. The 5.25 inch optical disk libraries range from 130 to over
1,050 Magneto optical disks stored and up to 32 optical drives. The CD-ROM
libraries range in capacity from 300 CDs to 1400 CDs and can handle up to 48
CD-ROM readers. List prices for the Company's products range from approximately
$40,000 to $140,000, not including the costs of media.
All of the Company's products have been designed to meet high duty cycles
while achieving high levels of reliability and ease of serviceability.
MARKETING AND SALES
Applications for the Company's products include federal and local government
and military applications and insurance, banking, legal, entertainment and
medical applications on a worldwide basis. Sales of the Company's initial
product line commenced in 1991 and have been primarily to distributors, value
added resellers (VARs), original equipment manufacturers (OEMs) and system
integrators (SIs), who combine DISC libraries with software and/or other
products and resell the combination to the end-user or other members of the
supply channel.
The Company's products are installed and serviced by an international
network of maintenance technicians from Tab Products Co. or Anacomp Inc.
Technical assistance and second level support is provided by the Company's
support staff located in Milpitas, California.
The Company's sales offices are located in Milpitas, California; Boston,
Massachusetts; Washington, District of Columbia and Dallas, Texas. The Company's
sales staff currently consists of five professional salespersons. In addition,
the Company has an independent sales representative located in Crowborough,
East Sussex, England.
The Company has not experienced, and does not expect, seasonality in the
sales of the Company's products in any material respect.
COMPETITION
The computer information storage industry is highly competitive and price
erosion is typical over the life of a product. The Company's products compete
directly with other data storage products, including optical media, magnetic
tape cartridges and magnetic disk subsystems. The Company's competitors include
Hewlett-Packard Co., Storage Technology Corporation, ATG/Cygnet and Plasmon.
Other companies, including computer manufacturers and other peripheral
manufacturers, could enter the market at any time. Such competitors may compete
with the Company's products with lower prices for similar products or by
introducing new products which provide greater storage capacity, faster access
time or other improved features, any of which could reduce demand for the
Company's products or require the Company to reduce its prices. Such competition
could have a materially adverse effect on the Company's results of operations.
Many of the Company's competitors have significantly greater financial,
technical, manufacturing and marketing resources than the Company, as well as
significant market shares and installed customer bases in certain market areas
addressed by the Company. As a result, the Company may not have the ability to
keep pace with rapid technological advances to the same extent as its
competitors.
However, the Company maintains an active program of research and development
in an effort to keep pace with potential competition.
The principal market requirements for the Company's products are large
storage capacity, high recording speeds, reliability, compact physical size and
low cost per megabyte of storage. While desired capabilities generally vary by
product family and end user application, the Company believes that, because of
its modular design, easy scalability, high performance and reliability, DISC
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 the Company's competitive position in the
marketplace may be found in "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING
RESULTS" under the heading "HIGHLY COMPETITIVE INDUSTRY".
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MANUFACTURING AND COMPONENTS
The Company's manufacturing operations consist of final system assembly and
product test activities. The majority of the parts and subassemblies in the DISC
libraries are standard, off-the-shelf components or are fabricated to DISC's
manufacturing documentation. These include power supplies, castings, motors,
bearings, timing belts and electronic components. The Company's proprietary
components, such as the frame, backplate, printed circuit assemblies and other
machined and fabricated parts are subcontracted out to independent vendors.
Certain components used by the Company are purchased from a single source of
supply. Where it relies on single sources of supply, the Company has been able
to obtain supplies of these components in a timely manner and maintains an
adequate inventory of components to meet its needs. The Company believes
alternative supplies for all such components are available on reasonable terms.
However, failure of sources of supply and the inability of the Company to
develop alternative sources of supply as required in the future could have a
material adverse effect on the Company's operations.
RESEARCH AND DEVELOPMENT
The Company has an active program of research and development consisting of
eight full-time employees in the areas of mechanical and electrical engineering
and software design. The Company's research and development activities include
robotics design and mass storage drive and technology design and development.
The Company expended $1,290,000, $1,439,000 and $1,297,000 on research and
development for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company has completed its major development efforts with respect to its 5.25
inch optical and CD products. The Company intends to continue to expand its
research and development activities in order to conduct on-going development of
existing products and to develop new products similar to its current products.
BACKLOG
The Company's backlog at December 31, 1998 was approximately $300,000 as
compared to a backlog of approximately $479,000 at December 31, 1997. The
Company includes in backlog only orders for products which are believed to be
firm and which are due to be shipped within 12 months. The Company includes in
backlog orders which may be canceled by customers upon payment of cancellation
charges which vary depending on the scheduled shipment date of the order.
Because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may not
be indicative of actual revenues for any specific future period. Although the
Company has never experienced material cancellation problems, no assurance can
be given that the Company will continue to avoid cancellation problems in the
future.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company has received U.S. patents covering various aspects of its
technology, including its overall system design. There can be no assurance that
any subsequent patent applications will be granted. The Company believes that
ownership of such patents is an important factor in its business and its success
does depend in part on the ownership thereof. However, the Company believes that
the improvement of its existing products, reliance upon trade secrets and
copyrights and on unpatented proprietary know-how and innovation in the
development of new products are generally as important as patent protection in
establishing and maintaining the Company's technological advantage. The Company
believes that the value of its products is partly dependent upon its proprietary
confidentiality and invention assignment agreements with its employees. While
the Company believes that copyright and trade secret laws should afford adequate
protection of its proprietary technology, there can be no assurance that the
Company's proprietary technology will remain a trade secret or that others will
not develop a similar technology and use such a technology to compete with the
Company. Such competition could have a material adverse effect on the Company.
In addition, policing unauthorized use of the Company's technology, particularly
in foreign countries, may be difficult. The Company has not received claims from
third parties alleging that the Company's products infringe the proprietary
rights of third parties, or seeking indemnification against such infringements
and knows of no basis for any such claims. However, there can be no assurance
that such claims will not be made in the future. Such claims, if asserted, may
involve costly and protracted litigation and there can be no assurance that the
Company would be able to obtain licenses from third parties on commercially
reasonable terms.
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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 the
Company's capital expenditures, earnings or competitive position. Although the
Company does not anticipate any material adverse effects in the future based on
the nature of its operations and the thrust of such 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 the Company.
EMPLOYEES
As of February 15, 1999, the Company employed 54 people on a full-time
basis, including 7 employees in administration and accounting, 8 employees in
marketing and sales, 8 employees in engineering, 22 employees in manufacturing,
2 employees in quality assurance and 7 employees in customer support. The
Company's future success is dependent, in part, on its continued ability to
attract, retain and motivate highly skilled personnel. The Company believes that
its relations with all employees are satisfactory. None of the employees are
covered by a collective bargaining agreement.
OTHER MATTERS
No single customer accounted for 10% or more of the Company's total revenue
in 1998, 1997 or 1996.
No material portion of the Company's business is subject to renegotiation of
profits or contract termination at the election of the United States government.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company's future operating results, and stock price, may be affected by
a number of factors that could cause actual results to differ materially from
those stated herein. These factors include the following:
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's quarterly
operating results fluctuate in part due to new product enhancements and to the
timing of product shipments, marketing and product development expenditures and
promotional programs. Accordingly, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indication of future performance. A significant
portion of the Company's operating expenses are relatively fixed, and planned
expenditures, such as the expansion of the Company's direct sales force, are
based primarily on sales forecasts. If revenues do not meet the Company's
expectations in any given quarter, operating results may be adversely affected.
There can be no assurance that the Company will be profitable in any quarter or
at all.
VOLATILITY OF STOCK PRICE; NASDAQ DELISTING; LOW STOCK PRICES. The
securities of computer and technology companies have experienced extreme price
and volume fluctuations, which have often been unrelated to the companies'
operating performance. Announcements of technological innovations for new
commercial products by the Company or its competitors, developments concerning
proprietary rights or general conditions in the software and computer industries
may have a significant effect on the Company's business and on the market price
of the Company's securities. Sales of a substantial number of shares of Common
Stock by existing security holders could also have an adverse effect on the
market price of the Company's securities. The trading of the Company's Common
Stock and Warrants on the NASDAQ System is conditioned upon the Company meeting
certain asset, revenues and stock price tests. If the Company fails any of these
tests, Common Stock and Warrants may be delisted from trading on the NASDAQ
System, which could materially adversely affect the trading market and prices
for such securities. In addition, low price stocks are subject to additional
risks including additional state regulatory requirements and the potential loss
of effective trading markets.
HIGHLY COMPETITIVE INDUSTRY. The Company's products compete with those
offered by larger companies which possess substantially greater financial,
technical and marketing resources than those of the Company. Competition from
computer companies and others diversifying into the field is expected to
increase as the market develops. The Company may face substantial competition
from new entrants in the industry and from established and emerging companies in
related industries. There is no assurance that the Company will not experience
increased competition in the future from these or other companies which would
adversely affect the Company's ability to successfully market its products.
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RAPID CHANGES IN TECHNOLOGY; MAINTENANCE OF TECHNOLOGICAL ADVANTAGE. The
technology underlying the Company's products and services is subject to rapid
change. The Company maintains an ongoing research and development program, and
its success will depend in part upon its continuing ability to respond quickly
and successfully to technological advances by developing and introducing new or
improved products. There can be no assurance that the Company will be able to
foresee and respond to such advances or that competitors will succeed in
developing technologies and products that are more effective than any of those
which have been or are being developed by the Company. In the past, the Company
has experienced delays in the introduction of some new products. There can be no
assurance that the Company will be able to introduce new products on schedule or
that such new products will achieve market acceptance.
HISTORY OF LOSSES AND EXPECTATIONS OF FUTURE LOSSES; NEED FOR ADDITIONAL
FINANCING. The Company has experienced significant operating losses since its
inception, and as of December 31, 1998 had an accumulated deficit of
$24,959,000. The Company expects to continue to incur net losses for the
foreseeable future, and the Company's ability to sustain its operations for a
significant period after December 31, 1999 will depend on the Company's ability
to significantly increase sales or raise significant additional debt or equity
financing. There can be no assurance that the Company will be able to increase
sales or that additional financing will be available on acceptable terms, or at
all.
ITEM 2. PROPERTIES.
The Company's executive offices and engineering/manufacturing operations are
located in approximately 17,000 square feet of space in Milpitas, California.
The Company leases the facility pursuant to a lease which will expire on October
31, 2000. The Company believes that this facility will be sufficient to support
operations for the foreseeable future. However, the Company believes that, if
necessary, additional space will be available in the area to house the Company's
operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's 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.
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1998 1997
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HIGH LOW HIGH LOW
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<S> <C> <C> <C> <C>
First quarter ended March 31 $1.75 $0.875 $5.25 $3.531
Second quarter ended June 30 1.063 0.313 4.203 1.938
Third quarter ended September 30 1.281 0.50 3.625 2.25
Fourth quarter ended December 31 1.063 0.25 3.00 0.875
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As of March 24, 1999, according to the records of the Company's transfer
agent, the Company had approximately 50 shareholders of record. Because many of
the Company's 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 July 6, 1998 (the record date for the 1998
annual meeting of the Company), the Company had over 500 shareholders, and the
Company believes that it presently has over 400 shareholders. The Company has
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.
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See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for a
description of equity securities sold by the Company 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 FINANCIAL DATA.
The following selected financial information has been derived from the
audited financial statements of the Company. 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 thereto 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.
(In thousands, except per share amounts)
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<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Net sales $ 9,145 $ 8,655 $ 7,761 $ 6,605 $ 4,326
Cost of sales 6,924 6,704 6,549 5,478 3,727
Research and development 1,290 1,439 1,297 1,336 1,414
Marketing and sales 2,011 1,960 2,155 1,295 1,146
General and administrative 1,030 924 984 1,195 962
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Loss from operations (2,110) (2,372) (3,224) (2,699) (2,923)
Interest and other expense, net (125) (117) (118) (127) (22)
------- ------- ------- ------- -------
Net loss $(2,235) $(2,489) $(3,342) (2,826) $(2,945)
------- ------- ------- ------- -------
Basic and diluted net loss per share $ (0.64) $ (0.75) $ (1.08) $ (0.94) $ (0.99)
Weighted average common shares for basic and
diluted net loss per share calculation 3,515 3,308 3,106 3,005 2,963
======= ======= ======= ======= =======
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AT DECEMBER 31, 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Working capital $1,611 $ 689 $ 691 $ 567 $ 264
Total assets 4,970 4,144 4,110 3,781 2,675
Long-term obligations, excluding current -- -- -- -- 43
portion
Mandatorily Redeemable Convertible Preferred -- -- -- -- 2,089
Stock
Shareholders' equity (deficit) $2,041 $1,071 $1,132 $1,004 $(1,501)
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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 the Company intends 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 the
Company's 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" in Item 1 above
and elsewhere in this Annual Report on Form 10-K. The following discussion
should be read in conjunction with the consolidated financial statements and
notes thereto included in Item 8 of this Form 10-K. All information is based on
the Company's fiscal calendar.
RESULTS OF OPERATIONS
NET SALES. The Company had net sales of $9,145,000 in 1998, $8,655,000 in
1997 and $7,761,000 in 1996. Management believes that the increase in sales is
due to an expanded customer base resulting from an increase in the Company's
direct sales personnel. Management believes, however, that the sales increase
was limited by the continued Asian Market softness. Although sales in the
Pacific Rim have historically been less than ten percent of total revenue, the
Company was expecting an increase in revenue from this geographic area. The
general sales cycles for distribution of the Company's products are similar to
those of most
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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
76% in 1998, 77% in 1997 and 84% in 1996. The Company's relatively low gross
margins reflect the Company's 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. The Company
expects that, as product sales continue to increase, costs of sales per unit of
product will decrease because fixed manufacturing costs will be distributed over
the larger sales volume, and material costs will decrease as the result of
volume purchases. The Company also expects that its recently introduced Orion
Series of products will increase the Company's overall margins.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1,290,000 in 1998, $1,439,000 in 1997 and $1,297,000 in 1996. The primary
reason for the decrease in expenses in 1998 as compared to 1997 were decreases
in expenses related to the Orion project, which was substantially complete by
the end of the second quarter of 1998. The primary reason for the increase in
1997 expenses as compared to 1996 was an increase in project material related to
the Orion product line. The Company believes that research and development
expenses will increase moderately in 1999 due to current projects under
development.
MARKETING AND SALES EXPENSES. Marketing and sales expenses were $2,011,000
in 1998, $1,960,000 in 1997 and $2,155,000 in 1996. The primary reason for the
increase from 1997 to 1998 was the expansion of the Company's direct sales
personnel. The decrease in 1997 as compared to 1996 was due to a reduction in
marketing management headcount. Although expenses were relatively flat over the
three year period ended December 31, 1998, the Company believes that in 1999
marketing and sales expenses will increase in connection with the Company's
continued efforts to broaden market acceptance of its products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1,030,000 in 1998, $924,000 in 1997 and $984,000 in 1996. The increase in
expenses in 1998 as compared to 1997 was primarily due to a return to the
employee headcount level of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, 1997 and 1996, the Company used $2,801,000, $2,530,000 and
$3,589,000, respectively, primarily to fund operating losses. In fiscal 1998,
the Company raised $3,205,000 through the issuance of convertible preferred
stocks. At December 31, 1998, the Company had a cash balance of approximately
$828,000. In addition, the Company has a commitment from its largest investor to
invest up to $1,000,000, if needed. The Company believes this committed future
investment, together with borrowing from a credit line with a financial
institution, which allows it to borrow the lesser of $2,000,000 or 80% of
eligible receivables (see Note 4 to the Notes to Financial Statements for a
further description of the credit line), and cash generated from operations,
will be sufficient to meet its operating requirements at least through the end
of 1999, 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, 1999, will depend on the Company's ability
to significantly increase sales or raise significant additional equity or debt
financing on terms acceptable to the Company. There is no assurance that any of
these conditions will be achieved. In particular, the Company expects to require
increasing amounts of cash to finance the Company's efforts to increase sales,
which the Company plans to achieve by increasing selling efforts to large system
integrators and OEMs by hiring additional sales and sales support staff and by
making evaluation units available. In addition, the Company intends to expand
its current network of resellers. The Company may require cash to finance
purchases of inventory to satisfy anticipated increased sales as the Company's
products achieve market acceptance.
Although the Company has not committed to make any material capital
expenditures as of December 31, 1998, the budget for capital equipment
expenditures for 1999 is approximately $300,000. The majority of these purchases
are expected to be in the areas of process and molding tooling to reduce cost
and improve producibility of the Company's products.
The terms of the Series C Preferred Stock and outstanding warrants may limit
the availability of financing for the Company, particularly equity financing.
Holders of Series C Preferred Stock are entitled to receive cumulative dividends
in the amount of approximately $112,000 per year. The Company has never paid
cash dividends and has no present plans to pay dividends.
9
<PAGE> 10
IMPACT OF YEAR 2000
The Company is taking steps to prepare its internal systems for the year
2000 date change. Certain of the Company's business operations software programs
were written using two digits rather than four to define the applicable year. As
a result, those software programs are time-sensitive and recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations, including but not
limited to, a temporary inability to sell or deliver products, process
transactions, send invoices or engage in similar normal business activities and
increased costs.
The Company has been informed by the vendor of the business operations
software used by the Company that upgrades that will bring such software into
year 2000 compliance are available and will be provided to the Company under its
existing software maintenance agreement. The Company expects to effect this
upgrade of its internal business operations software by the end of the second
quarter of 1999. The Company estimates that the cost of the conversion will be
approximately $75,000. Although the Company does not believe that it will incur
any material costs or experience material disruptions in its business associated
with preparing its internal systems for the year 2000, there can be no
assurance that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which are composed of third party
software, third party hardware that contains embedded software and the Company's
own software products.
The Company sells certain products that include various software
applications, and the Company intends to distribute software designed to
remediate potential year 2000 problems for certain of its older products.
However, the Company believes that the software components of its products,
which are self-contained software programs that run independently of external
chronology, will not be significantly affected by the year 2000 issues. There
can be no assurance, however, that the Company's current products and software
will be year 2000 ready in all environments or that any remedial software will
adequately address year 2000 problems. The Company is also in the process of
requesting assurance from its goods and services providers that they are, or
have programs in place to be, year 2000 compliant. The Company's costs to date
for its year 2000 compliance program, excluding the salaries of the employees,
has not been material. Although the Company has not completed its assessment, it
does not currently believe that the future costs associated with its year 2000
compliance program will be material.
The Company established a Year 2000 Steering Committee which reports
directly to the President and Chief Executive Officer. The committee members
include executive management and employees with expertise from various
disciplines including, but not limited to, information technology, engineering,
finance, customer service, sales, communications, facilities, procurement and
human resources. The Committee is responsible for addressing year 2000 issues
associated with the Company's (1) business application systems including, but
not limited to, the Company's customer service, operations and financial systems
and end-user applications, (2) embedded systems, including equipment that
operates such items as the Company's telecommunications and facilities, (3)
software applications embedded in certain of the Company's products, (4) vendor
and supplier relationships, and (5) contingency planning.
The Company currently believes that neither the software developed by it as
part of its products, nor the software licensed by it for its internal use, will
be materially affected by the year 2000 issues. However, there can be no
assurance that the Company's product software, its internal computer systems and
networks or those of its key vendors, developers and distributors will not be
affected by such year 2000 issues, which could have a material adverse effect on
the Company's business, operating results and financial condition.
The Company also has implemented a program to assess the possible effects on
its operations of the year 2000 readiness of key suppliers and vendors and is in
the process of receiving information concerning the suppliers' and vendors' year
2000 status. The Company's reliance on suppliers and vendors and, therefore, on
the proper functioning of their information systems and software, means that
their failure to address year 2000 issues could have a material effect on the
Company's operations and financial results. The Company anticipates completing
its assessment by the end of the third quarter of 1999. Based on the results of
the assessment, the Company may identify alternative suppliers and vendors.
The effect that the year 2000 will have on information technology spending
patterns is uncertain at this time. The potential adverse consequences resulting
from year 2000 concerns could include, among others, decreased spending on new
information storage systems during 1999 as customers complete their year 2000
testing activities and delays in customer purchase decisions once customers have
verified the year 2000 readiness of their information systems. The demand for
the Company's products could be
10
<PAGE> 11
adversely affected in the event these patterns were to materialize, which could
have an adverse effect on the Company's operating and financial results.
Some commentators have stated that a significant amount of litigation will
arise out of year 2000 compliance issues, and the Company is aware of a growing
number of lawsuits relating to year 2000 issues. Because of the unprecedented
nature of such litigation, it is uncertain whether or to what extent the Company
may be affected by it.
The Company is currently unable to determine its most reasonably likely
worst case year 2000 scenario, as it has not identified and assessed all of its
systems, particularly its non-IT systems. As the Company completes its
identification and assessment of internal and third-party systems, it expects to
develop contingency plans for various worst case scenarios. The Company expects
to have such contingency plans substantially in place by September 1999. A
failure to address year 2000 issues successfully could have a material adverse
effect on the Company's business, financial condition or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements required by this item are submitted as a
separate section of this Form 10-K. See Item 14.(a)1 for a listing of financial
statements provided in the section titled "Financial Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
11
<PAGE> 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
J. RICHARD ELLIS, 53, joined the Company as President and Chief Operating
Officer in July 1994 and became Chief Executive Officer in January 1995. Mr.
Ellis was appointed to the Board of Directors on July 13, 1994 and became
Chairman of the Board of Directors in August 1996. From November 1993 to June
1994, Mr. Ellis worked as an independent management consultant. From June 1991
to October 1993, Mr. Ellis was employed by Cygnet Systems Inc. ("Cygnet"), a
manufacturer of optical disk library units, as President and Chief Executive
Officer. From December 1988 to May 1991, Mr. Ellis was employed by Cygnet as
Vice President of Operations and then as Chief Operating Officer. In June 1993,
Cygnet filed a voluntary petition of bankruptcy under Chapter 11 of the federal
bankruptcy law. The plan of reorganization was approved and the bankruptcy
proceedings terminated in October 1993.
FRANK T. CONNORS, 65, has been Secretary of the Company since May 1990 and
was Chairman of the Board of Directors of the Company from June 1988 to August
1996 and Chief Executive Officer of the Company from May 1990 to December 1994.
From October 1994 until he retired in January 1999, Mr. Connors was Vice
Chairman of the Board of Directors and President of the Direc-to-Phone
subsidiary of STM Wireless, Inc., a publicly held manufacturer of satellite
communication networks.
MICHAEL D. KAUFMAN, 58, became a director of the Company in December 1988.
Since October 1987, he has been the Managing General Partner of each of MK
Global Ventures, MK Global Ventures II and MK GVD Fund, Palo Alto, California,
venture capital firms specializing in early-stage and start-up financing of high
technology companies. From August 1981 until October 1987, Mr. Kaufman was
General Partner and Special Limited Partner of Oak Investment Partners I, II,
and III, venture capital firms, which also focused on the formation of high
technology companies. Mr. Kaufman also serves on the Boards of Directors of
Davox Corp., a telecommunications company, Hypermedia Communications, Inc.,
which publishes Newmedia magazine, a periodical dedicated to interactive
multimedia technology, Syntellect Inc., a telecommunications company and Asante
Technologies Inc., a networking company.
F. RIGDON CURRIE, 68, became a director of the Company in December 1988.
Since February 1988, he has been Special Limited Partner of MK Global Ventures
II and MK GVD Fund. Mr. Currie serves on the Boards of Directors of QMS Inc., a
manufacturer of monochrome and color laser printers, and several private
companies.
ARCH J. MCGILL, 66, became a director of the Company in August 1993. Since
October 1985, he has been President of Chardonnay, Inc., a venture capital
investment and executive business advisory services company. From March 1983 to
October 1985, Mr. McGill was President and Chief Executive Officer of Rothchild
Ventures, Inc., a venture capital fund. From January 1981 to March 1983, Mr.
McGill was President of AIS/American Bell, a subsidiary of AT&T. Mr. McGill
serves on the Boards of Directors of Apertus Technologies, Inc., a data
networking company, and Employee Benefit Plans, Inc., a managed health-care
company.
MICHAEL A. MCMANUS, JR., 56, became a director of the Company in August
1993. He is presently the President and CEO 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. From July 1990 to October 1991, Mr. McManus was President and Chief
Executive Officer of Jancor Pharmaceuticals, Inc., a pharmaceutical company.
From July 1986 to July 1990, Mr. McManus was Vice President, Business Planning &
Development for the Consumer Division of Pfizer, Inc., a health-care company.
HENRY MADRID, 42, joined the Company as Vice President of Finance and Chief
Financial Officer in January 1990. From July 1987 to December 1989, Mr. Madrid
was employed by Zentec Corporation, a manufacturer of computer terminals, as
Controller and later Vice President, Finance. From August 1979 to May 1987, Mr.
Madrid was employed by Price Waterhouse, San Jose, California, in various
positions, the last of which was as a manager in the Audit Department. Mr.
Madrid is a Certified Public Accountant.
RONALD F. REYNOLDS, 61, joined the Company in February 1996, as Vice
President of Sales. From March 1995 to February 1996, Mr. Reynolds was an
independent consultant for start-up companies. From December 1992 to February
1995, Mr. Reynolds served as Vice President of Sales for the Lago Division of
Storage Tek, a manufacturer of storage products for the Unix marketplace. From
January 1988 to November 1992, Mr. Reynolds was Chief Executive Officer of
Century Financial, a leasing and consulting company for computer related
products.
12
<PAGE> 13
BRIAN IRVINE, 53, joined the Company in April 1990, and has held various
engineering positions in the Company including Director of Engineering, before
being promoted to Vice President of Engineering in December 1997.
ROBERT CELLUCCI, 56, joined the Company in February 1998 as the Vice
President of Operations. Prior to joining the Company, 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, and from September 1997 to
January 1998 served as Manufacturing and Materials consultant for Cyberdent, a
dental equipment start-up.
There are no family relationships between any director, executive officer or
person nominated or chosen by the Company to become a director or executive
officer.
Based upon its review of the copies of reporting forms furnished to the
Company, the Company believes that all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934, as amended, applicable to its directors,
officers, and any persons holding ten percent or more of the Company's Common
Stock with respect to the Company's fiscal year ended December 31, 1998, were
satisfied with the exception of those required due to the option repricing as
discussed on page 15.
ITEM 11. EXECUTIVE COMPENSATION.
The following Summary Compensation Table shows compensation paid by the
Company for services rendered during fiscal years 1998, 1997 and 1996 to the
person who was the Company's Chief Executive Officer and the other executive
officers of the Company who received salary and bonus compensation which
exceeded $100,000 in fiscal year 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) OPTIONS(1) COMPENSATION($)
--------------------------- ---- --------- ---------- ------------
<S> <C> <C> <C> <C>
J. Richard Ellis 1998 157,000 225,000+ 1,000(2)
President and Chief Executive Officer 1997 152,000 75,000 1,000(2)
1996 152,000 50,000 1,000(2)
------- ------- -------
Henry Madrid 1998 115,000 50,000+ 1,000(2)
Vice President, Finance and 1997 108,000 50,000 1,000(2)
Chief Financial Officer 1996 110,000 -- 1,000(2)
------- ------- -------
Ronald F. Reynolds 1998 143,000 145,000+ 1,000(2)
Sr. Vice President, Sales and Marketing(3) 1997 141,000 45,000 1,000(2)
1996 118,000 100,000 1,000(2)
------- ------- -------
Brian Irvine 1998 109,000 65,000+ 1,000(2)
Vice President, Engineering 1997 99,000 50,000 1,000(2)
1996 91,000 5,000 1,000(2)
------- ------- -------
</TABLE>
+ Option grants reflect repricing of options previously granted pursuant to
the Company's 1990 Stock Plan. See "COMPENSATION COMMITTEE REPORT ON OPTION
REPRICING" in Item 11 for a further description of the option repricing.
(1) Options are awarded pursuant to the Company's Stock Plan, which is
administered by the Board of Directors. The Board of Directors determines
the eligibility of employees and consultants, the number of shares to be
granted and the terms of such grants.
(2) The amounts shown represent life insurance premiums paid by the Company.
(3) Mr. Reynolds joined the Company in February 1996.
13
<PAGE> 14
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- -------------------------------------------------------------------------------------------------------- -----------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OF
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE 5%($) 10%($)
- ------------------------------- ------------- -------------- ------------ --------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Richard Ellis
President and Chief 225,000(1) 25% $0.75 May 2003 215,000 271,000
Executive Officer
Henry Madrid
Vice President, Finance 50,000(1) 5% $0.75 May 2003 48,000 60,000
and Chief Financial Officer
Ronald F. Reynolds
Sr. Vice President, Sales 145,000(1) 16% $0.75 May 2003 139,000 175,000
and Marketing
Brian Irvine
Vice President, 65,000(1) 7% $0.75 May 2003 62,000 79,000
Engineering
</TABLE>
- -------------
(1) Option grants reflect repricing of options previously granted pursuant to
the Company's 1990 Stock Plan. See "COMPENSATION COMMITTEE REPORT ON OPTION
REPRICING" in Item 11 for a further description of the option repricing.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table provides information on the value of options exercised
in fiscal 1998 and the value of unexercised in-the-money options held by the
named executive officers as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED ON VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
NAME EXERCISE (#) REALIZED($) AT DECEMBER 31, 1998 DECEMBER 31, 1998(1)
---- ----------- ---------- -------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Richard Ellis -- -- 32,812 192,188 $ -- $ --
Henry Madrid -- -- 7,292 42,708 -- --
Ronald F. Reynolds -- -- 21,146 123,854 -- --
Brian Irvine -- -- 9,479 55,521 -- --
</TABLE>
- -------------
(1) Market value of underlying securities at year-end minus the exercise price
of "in-the-money" options. The closing sale price for the Company's Common
Stock as of December 31, 1998 on the NASDAQ Small Cap Market System was
$0.375.
COMPENSATION OF DIRECTORS
Pursuant to the Company's 1995 Stock Option Plan for Non-Employee Directors,
each non-employee director receives an initial grant of options to purchase
25,000 shares of the Company's Common Stock upon commencement of service as a
director. In addition to such initial grant of 25,000 options, each non-employee
director is granted an option to purchase 5,000 shares of the Company's Common
Stock during each year of service as a director commencing with fiscal year
1995.
14
<PAGE> 15
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES MARKET PRICE OPTION TERM
UNDERLYING OF STOCK EXERCISE PRICE NEW REMAINING
OPTIONS AT TIME OF AT TIME OF EXERCISE AT DATE OF
NAME DATE REPRICED (#) REPRICING ($) REPRICING ($) PRICE($) REPRICING
- ----------------------------------- ------------ ------------ ------------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
J. Richard Ellis, President and CEO May 19, 1998 225,000 $0.75 1.578-6.25 $0.75 14-55 months
Henry Madrid, V.P. Finance and CFO May 19, 1998 50,000 $0.75 1.578 $0.75 55 months
Ronald F. Reynolds, Sr. V.P., Sales May 19, 1998 145,000 $0.75 1.578-5.38 $0.75 36-55 months
and Marketing May 20, 1996 50,000 $3.88 4.25 $3.88 45 months
Brian Irvine, V.P. Engineering May 19, 1998 65,000 $0.75 1.578-5.375 $0.75 27-55 months
May 20, 1996 5,000 $3.88 5.00 $3.88 24 months
</TABLE>
COMPENSATION COMMITTEE REPORT ON OPTION REPRICING
On May 19, 1998, the Compensation Committee approved the repricing of
786,250 options granted pursuant to the Company's 1990 Stock Plan and 1995 Stock
Option Plan for Non-Employee Directors, including an aggregate of 485,000
options granted to the named executive officers and an aggregate of 225,000
options granted to members of the Board of Directors. Such options had exercise
prices ranging from $1.58 to $6.25. Such repricing was effected by a replacement
grant of new options with an exercise price of $0.75 per share, and which, with
respect to employees, had a new four-year vesting period. The vesting period for
the new options for the non-employee directors remained unchanged.
The Compensation Committee approved the repricing because it believes that
equity interests are a significant factor in the Company's ability to attract
and retain directors, executive officers and employees, by providing an
incentive to all such personnel to devote their utmost effort and skill to the
advancement and betterment of the Company by permitting them to participate in
the success and increased value of the Company. The Compensation Committee
repriced the options because subsequent to the grant of options under the 1990
Stock Plan and the 1995 Stock Option Plan For Non-Employee Directors, the price
per share of the Company's Common Stock declined to approximately $1.00 as a
result of unforeseen market factors. The Compensation Committee believed that,
as a result of this sudden and large relative decline, the options so granted
would not have the desired motivational effect on the optionees. Accordingly,
the Compensation Committee approved the repricing as a means of ensuring that
such optionees have a meaningful equity interest in the Company.
Respectfully submitted,
Frank T. Connors
Michael A. McManus Jr.
F. Rigdon Currie
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 1998. Mr. Connors has been
Secretary of the Company since May 1990 and Chief Executive Officer of the
Company from May 1990 to December 1994. Neither Mr. McManus nor Mr. Currie was
during fiscal 1998 an officer or employee of the Company, and neither has been
an officer or employee of the Company. See "ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" for a discussion of certain relationships and transactions
between Mr. Currie and the Company. During fiscal year 1998, no executive
officer of the Company (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 the Company's 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 director of the Company.
15
<PAGE> 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of March 31, 1999, as to (a) all
directors, (b) the named executive officers identified in the Summary
Compensation Table located at page 13, (c) all directors and executive officers
as a group, and (d) each person known to the Company to be the beneficial owner
of more than 5% of any class of the Company's voting securities. Each share of
the Company's 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 the Company's Series F Preferred Stock is
convertible into two shares of Common Stock and is entitled to two votes per
share. Each share of Series G, Series H and Series P through Series T Preferred
Stock is convertible into ten shares of Common Stock and is entitled to ten
votes per share. Because the Company's outstanding Preferred Stock votes
together with and has the same rights to cumulative voting as the Common Stock,
the number of shares held by 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 the Company's Common and Preferred Stock, on an
as-if-converted basis, issued and outstanding as of March 31, 1999. Except as
otherwise indicated, the Company believes, based on information furnished by
such owners, that the beneficial owners of the Common Stock and Preferred Stock
have sole investment and voting power with respect to such shares, subject to
applicable community property laws.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
<S> <C> <C>
MK Global Ventures + 773,744(1) 6.0%
MK Global Ventures II + 913,982(2) 6.9%
MK GVD Fund + 11,711,211(3) 76.7%
Michael D. Kaufman + 13,443,937(4) 86.9%
Frank T. Connors ++ 127,558(5) 1.0%
J. Richard Ellis ++ 66,250(6) *
F. Rigdon Currie ++ 45,000(7) *
Arch J. McGill ++ 45,000(7) *
Michael A. McManus, Jr. ++ 57,500(7) *
Brian Irvine ++ 20,230(8) *
Ronald F. Reynolds ++ 49,250(9) *
Henry Madrid ++ 43,161(10) *
Directors and Executive 13,910,386(11) 88.0%
Officers as a group (ten (10) persons)
</TABLE>
- ----------------
* 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) According to a Schedule 13D filed with the Securities and Exchange
Commission on January 29, 1999 by Michael D. Kaufman, 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. Beneficial ownership also includes warrants for 4,186 shares of
Common Stock exercisable on March 31, 1999 or within 60 days thereafter.
(2) According to a Schedule 13D filed with the Securities and Exchange
Commission on January 29, 1999 by Michael D. Kaufman, 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 164,123 shares of Common Stock
exercisable on March 31, 1999 or within 60 days thereafter.
16
<PAGE> 17
(3) According to a Schedule 13D filed with the Securities and Exchange
Commission on January 29, 1999 by Michael D. Kaufman, MK GVD Fund
beneficially owns 595,049 shares of Common Stock; 333,333 shares, or
75%, of the Series D Preferred Stock; 375,000 shares, or 75%, of the
Series E Preferred Stock; 250,000 shares, or 100%, of the Series F
Preferred Stock; 97,500 shares, or 89%, of the Series G Preferred Stock;
26,109 shares, or 100%, of the Series H Preferred Stock; 84,999 shares,
or 54%, of the Series I Preferred Stock; 244,966 shares, or 100%, 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; 336,585 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; and 16,089 shares of the Series
T 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 2,257,564 shares of Common Stock exercisable on March 31,
1999 or within 60 days thereafter.
(4) Includes Common Stock and Preferred Stock 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. Beneficial ownership also
includes warrants for 2,425,873 shares of Common Stock exercisable on
March 31, 1999 or within 60 days thereafter.
(5) Includes 70,000 shares of Common Stock issuable upon exercise of stock
options exercisable on March 31, 1999 or within 60 days thereafter.
(6) Includes 77,083 shares of Common Stock issuable upon exercise of stock
options exercisable on March 31, 1999 or within 60 days thereafter.
(7) Includes 45,000 shares of Common Stock issuable upon exercise of stock
options exercisable on March 31, 1999 or within 60 days thereafter.
(8) Includes 16,250 shares of Common Stock issuable upon exercise of stock
options exercisable on March 31, 1999 or within 60 days thereafter.
(9) Includes 18,750 shares of Common Stock issuable upon exercise of stock
options exercisable on March 31, 1999 or within 60 days thereafter.
(10) Includes 12,500 shares of Common Stock issuable upon exercise of stock
options exercisable on March 31, 1999 or within 60 days thereafter.
(11) Includes 350,459 shares of Common Stock issuable upon exercise of stock
options and Warrants for 2,385,651 shares of Common Stock exercisable on
March 31, 1999 or within 60 days thereafter.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 29, 1996, the Company entered into a Series G Preferred Stock
Purchase Agreement with MK GVD Fund whereby MK GVD Fund agreed to purchase
47,500 shares of Series G Preferred Stock, each initially convertible into ten
(10) shares of Common Stock at a price of $20.00 per share and 118,750 warrants
to purchase additional shares of Common Stock at an exercise price of $2.50 per
share, at a price of $0.01 per warrant.
On March 29, 1996, the Company entered into a Convertible Debenture Purchase
Agreement with MK GVD Fund whereby MK
17
<PAGE> 18
GVD Fund agreed to purchase an aggregate of $1,400,000 in principal amount of
subordinated convertible debentures, each mandatorily convertible into shares of
Preferred Stock and Warrants to purchase Common Stock at a conversion price
based on the average closing price for the Common Stock for the five trading
days ended three days prior to the conversion date. In December 1996, the
agreement was amended to increase the amount to a total of $3,400,000 and the
Conversion Price was changed to the closing bid price of the Company's Common
Stock on the last day of the calendar quarter. In addition, MK GVD Fund assigned
a portion of its obligations under the agreement to MK Global Ventures II.
During the quarters ended June 30, September 30 and December 31, 1996, the
Company issued $1,000,000, $700,000 and $730,000, respectively, in principal
amount of such debentures. On June 30, September 30 and December 31, 1996 such
debentures were converted by MK GVD Fund into 26,109, 89,499 and 244,966 shares
of Series H, Series I and Series J Preferred Stock, respectively, and MK Global
Ventures II converted into 77,566 shares of Series I Preferred Stock at $38.30,
$4.19 and $2.98 for Series H, Series I and Series J Preferred Stock,
respectively. In addition, MK GVD Fund received for Series H, Series I and
Series J Preferred Stock warrants to purchase 65,272, 22,375 and 61,241 shares
of Common Stock, respectively, at exercise prices of $4.85, $5.24 and $3.73 per
share, respectively. MK Global Ventures II received with Series I Preferred
Stock a warrant to purchase 19,291 shares of Common Stock at an exercise price
of $5.24 per share.
In April 1997, the Convertible Debenture Purchase Agreement was amended to
increase to $4,430,000 the total principal amount of subordinated debentures
which MK GVD Fund has agreed to purchase. During the quarters ended March 31,
June 30, September 30 and December 31, 1997, the Company issued $750,000,
$550,000, $400,000 and $600,000, respectively, in principal amount of such
debentures to MK GVD Fund. On March 31, June 30, September 30 and December 31,
1997, such debentures were converted into 235,110, 199,275, 179,372 and 666,667
shares of Series K, Series L, Series M and Series N Preferred Stock, and
warrants to purchase 58,777, 49,819, 44,843 and 166,666 shares of Common Stock,
respectively, at exercise prices of $3.98, $3.45, $2.78 and $1.13, respectively.
In December 1997, the agreement was further amended to increase to $4,730,000
the total principal amount of subordinated convertible debentures which MK GVD
Fund has agreed to purchase.
In February 1998, the Company sold 1,320,755 shares of Series O Preferred
Stock and warrants to purchase 330,188 shares of Common Stock at an exercise
price of $1.33 per share to MK GVD Fund for a total purchase price of
$1,400,000.
During the quarters ended March 31, June 30, September 30 and December 31,
1998, the Company issued $300,000, $695,000, $500,000 and $310,000,
respectively, in principal amount of subordinated convertible debentures to MK
GVD Fund. On March 31, June 30, September 30 and December 31, 1998, such
debentures were converted into 36,585, 112,097, 86,207 and 96,875 shares of
Series P, Series Q, Series R and Series S Preferred Stock, respectively, and
warrants to purchase 91,462, 280,242, 215,517 and 242,187 shares of Common
Stock, respectively, at exercise prices of $0.82, $0.78, $0.73 and $0.40,
respectively. In December 1998, the Convertible Debenture Purchase Agreement was
further amended to increase to $6,535,000 the total principal amount of
subordinated convertible debentures which MK GVD Fund has agreed to purchase.
During the quarter ended March 31, 1999, the Company issued $325,000 in
principal amount of subordinated convertible debentures to MK GVD Fund. On March
31, 1999, such debentures were converted into 16,089 shares of the Series T
Preferred Stock, and warrants to purchase 40,222 shares of Common Stock at an
exercise price of $2.53.
The above transactions were unanimously approved by the Board of Directors
of the Company. Michael D. Kaufman, a director of the Company, is the managing
general partner of MK GVD Fund, MK Global Ventures and MK Global Ventures II. F.
Rigdon Currie, a director of the Company, was, and continues to be, special
limited partner of MK GVD Fund and MK Global Ventures II. However, the Company
believes that the terms and provisions of the above transactions were as fair to
the Company as they could have been if made with unaffiliated third parties.
18
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The Financial Statements of the Company as set forth under Item 8 of this
Annual Report on Form 10-K are presented herein at the pages noted.
<TABLE>
<CAPTION>
PAGE NUMBERS
------------
<S> <C>
Report of Independent Accountants 36
Balance Sheet - December 31, 1998 and 1997 24
Statement of Operations - For the Three Years Ended 25
December 31, 1998
Statement of Shareholders' Equity - For the Three 26
Years Ended December 31, 1998
Statement of Cash Flows - For the Three Years Ended 27
December 31, 1998
Notes to Financial Statements 28-34
</TABLE>
2. Financial Statement Schedules.
Financial Statement Schedules have been omitted because they are not
required or applicable, or the information required to be set forth therein is
included in the financial statements or notes thereto.
3. Exhibits.
The Exhibits set forth below, and listed on the accompanying index to
exhibits are filed as part of, or incorporated by reference into, this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation as filed with the
California Secretary of State on December 15, 1992, incorporated
herein by this reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 33-52144 (the "S-1
Registration Statement").
3.2 Certificate of Determination of Preferences of Series D
Preferred Stock, as filed with the California Secretary of State
on April 15, 1994, incorporated herein by this reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 (the "1994 Form 10-K").
3.3 Certificate of Determination of Preferences of Series E
Preferred Stock, as filed with the California Secretary of State
on March 30, 1995, incorporated herein by this reference to
Exhibit 3.3 to the Company's 1994 Form 10-K.
3.4 Certificate of Amendment to Amended and Restated Articles of
Incorporation, as filed with the California Secretary of State
on September 18, 1995, incorporated herein by this reference to
Exhibit 3.4 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 (the "1995 Form 10-K").
3.5 Certificate of Determination of Preferences of Series F
Preferred Stock, as filed with the California Secretary of State
on September 18, 1995, incorporated herein by this reference to
Exhibit 3.5 to the Company's 1995 Form 10-K.
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------
<S> <C>
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").
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 of 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.
3.19 Certificate of Determination of Preferences of Series R
Preferred Stock, as filed with the California Secretary of State
on January 12, 1999.
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------
<S> <C>
3.20 Certificate of Determination of Preferences of Series S
Preferred Stock, as filed with the California Secretary of State
on January 12, 1999.
3.21 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.
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------
<S> <C>
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.
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.
23 Consent of PricewaterhouseCoopers LLP.
25 Power of Attorney (included on Signature Page).
27 Financial Data Schedule.
</TABLE>
- ---------
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998.
22
<PAGE> 23
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 14th day of April 1999.
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.
<TABLE>
<S> <C> <C>
/s/ J. Richard Ellis President, Chief Executive Officer April 14, 1999
------------------------------ and Chairman of the Board of
(J. Richard Ellis) Directors (Principal Executive Officer)
/s/ Henry Madrid Vice President of Finance April 14, 1999
------------------------------ and Chief Financial Officer
(Henry Madrid) (Principal Financial and Accounting
Officer)
/s/ Frank T. Connors Director April 14, 1999
------------------------------
(Frank T. Connors)
/s/ F. Rigdon Currie Director April 14, 1999
------------------------------
(F. Rigdon Currie)
/s/ Michael D. Kaufman Director April 14, 1999
------------------------------
(Michael D. Kaufman)
/s/ Arch J. McGill Director April 14, 1999
------------------------------
(Arch J. McGill)
/s/ Michael A. McManus, Director April 14, 1999
------------------------------
(Michael A. McManus, Jr.)
</TABLE>
23
<PAGE> 24
FINANCIAL STATEMENTS
DISC, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Cash $ 828,000 $ 436,000
Accounts receivable, net 2,097,000 1,768,000
Inventories 1,512,000 1,465,000
Prepaids and deposits 103,000 73,000
------------ ------------
Total current assets 4,540,000 3,742,000
Property and equipment, net 430,000 402,000
------------ ------------
$ 4,970,000 $ 4,144,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 772,000 $ 1,332,000
Borrowings under credit line 1,632,000 1,338,000
Accrued expenses and other liabilities 525,000 403,000
------------ ------------
Total current liabilities 2,929,000 3,073,000
Shareholders' equity:
Convertible Preferred Stock; no par value, 10,000,000 shares
authorized; 4,799,212 and 3,395,304 shares issued and outstanding 14,647,000 12,742,000
Common Stock; no par value, 20,000,000 shares
authorized; 3,695,434 and 3,334,323 shares issued and outstanding 12,353,000 11,053,000
Accumulated deficit (24,959,000) (22,724,000)
------------ ------------
Total shareholders' equity 2,041,000 1,071,000
------------ ------------
$ 4,970,000 $ 4,144,000
============ ============
</TABLE>
See accompanying notes to financial statements.
24
<PAGE> 25
DISC, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 9,145,000 $ 8,655,000 $ 7,761,000
------------ ------------ ------------
Costs and expenses:
Cost of sales 6,924,000 6,704,000 6,549,000
Research and development 1,290,000 1,439,000 1,297,000
Marketing and sales 2,011,000 1,960,000 2,155,000
General and administrative 1,030,000 924,000 984,000
------------ ------------ ------------
Total costs and expenses 11,255,000 11,027,000 10,985,000
------------ ------------ ------------
Loss from operations (2,110,000) (2,372,000) (3,224,000)
Interest and other expense, net (125,000) (117,000) (118,000)
------------ ------------ ------------
Net loss $ (2,235,000) $ (2,489,000) $ (3,342,000)
------------ ------------ ------------
Basic and diluted net loss per share $ (0.64) $ (0.75) $ (1.08)
------------ ------------ ------------
Weighted average common shares for
basic and diluted net loss per share calculation 3,515,000 3,308,000 3,106,000
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
25
<PAGE> 26
DISC, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------- ---------------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,472,990 $ 7,062,000 3,034,545 $ 10,835,000 $(16,893,000) $ 1,004,000
Exercise of Common Stock Options -- -- 244,987 90,000 -- 90,000
Issuance of Series F Convertible
Preferred Stock and Warrants
for Common Stock, net 93,750 -- -- -- -- --
Issuance of Series G Convertible
Preferred Stock and Warrants
for Common Stock, net 110,000 950,000 -- -- -- 950,000
Issuance of Series H Convertible
Preferred Stock and Warrants
for Common Stock, net 26,109 1,000,000 -- -- -- 1,000,000
Issuance of Series I Convertible
Preferred Stock and Warrants
for Common Stock, net 167,065 700,000 -- -- -- 700,000
Issuance of Series J Convertible
Preferred Stock and Warrants
for Common Stock, net 244,966 730,000 -- -- -- 730,000
Net loss for the period -- -- -- -- (3,342,000) (3,342,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 2,114,880 10,442,000 3,279,532 10,925,000 (20,235,000) 1,132,000
Exercise of Common Stock Options -- -- 54,791 128,000 -- 128,000
Issuance of Series K Convertible
Preferred Stock and Warrants
for Common Stock, net 235,110 750,000 -- -- -- 750,000
Issuance of Series L Convertible
Preferred Stock and Warrants
for Common Stock, net 199,275 550,000 -- -- -- 550,000
Issuance of Series M Convertible
Preferred Stock and Warrants
for Common Stock, net 179,372 400,000 -- -- -- 400,000
Issuance of Series N Convertible
Preferred Stock and Warrants
for Common Stock, net 666,667 600,000 -- -- -- 600,000
Net loss for the period -- -- -- -- (2,489,000) (2,489,000)
------------ ------------ ------------ ------------ ------------ ------------
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 1,262,000 -- 138,000 -- 1,400,000
Issuance of Series P Convertible
Preferred Stock and Warrants
for Common Stock, net 36,585 272,000 -- 28,000 -- 300,000
Issuance of Series Q Convertible
Preferred Stock and Warrants
for Common Stock, net 112,097 632,000 -- 63,000 -- 695,000
Issuance of Series R Convertible
Preferred Stock and Warrants
for Common Stock, net 86,207 456,000 -- 44,000 -- 500,000
Issuance of Series S Convertible
Preferred Stock and Warrants
for Common Stock, net 96,875 283,000 -- 27,000 -- 310,000
Net loss for the period -- -- -- -- (2,235,000) (2,235,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 4,799,212 $ 14,647,000 3,695,434 $ 12,353,000 $(24,959,000) $ 2,041,000
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
26
<PAGE> 27
DISC, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,235,000) $(2,489,000) $(3,342,000)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation expense 263,000 121,000 226,000
Changes in assets and liabilities:
Accounts receivable (329,000) (338,000) (286,000)
Inventories (47,000) 397,000 (40,000)
Prepaids and deposits (30,000) (1,000) 8,000
Accounts payable (560,000) (253,000) 58,000
Accrued expenses and other liabilities 122,000 33,000 (213,000)
----------- ----------- -----------
Net cash used in operating activities (2,816,000) (2,530,000) (3,589,000)
----------- ----------- -----------
Cash used in investing activities for capital expenditures (291,000) (18,000) (230,000)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under line of credit, net 294,000 251,000 356,000
Proceeds from issuance of Common Stock -- 128,000 90,000
Proceeds from issuance of Preferred Stock
and Warrants for Common Stock 3,205,000 2,300,000 3,380,000
----------- ----------- -----------
Cash provided by financing activities 3,499,000 2,679,000 3,826,000
----------- ----------- -----------
Net increase in cash 392,000 131,000 7,000
Cash at beginning of the year 436,000 305,000 298,000
----------- ----------- -----------
Cash at end of the year $ 828,000 $ 436,000 $ 305,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 125,000 $ 114,000 $ 122,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE> 28
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. The Company operates in one
business segment.
Subsequent to year end, the Company received a commitment from its largest
investor for additional equity financing to the extent of $1,000,000,
$325,000 of which was received by March 31, 1999 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 1999, 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, 1999, 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.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of the product when
the Company has no significant obligations remaining and collection of the
resulting receivable is probable.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight line method over the shorter of the estimated useful lives of the
assets, which range from three to five years, or the lease term of the
respective assets, if applicable.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
STOCK COMPENSATION PLANS
The Company 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").
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting
28
<PAGE> 29
for Income Taxes" ("SFAS 109"). SFAS 109 accounts for income taxes under an
asset and liability approach, which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of timing
differences between the carrying amounts and the tax bases of assets and
liabilities.
COMPREHENSIVE INCOME (LOSS)
For the three years in the period ended December 31, 1998, there were no
elements of comprehensive income (loss), except for the net losses.
NOTE 3 - BALANCE SHEET DETAILS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Accounts Receivable:
Trade accounts receivable $ 2,231,000 $ 1,857,000
Less: Allowance for doubtful accounts (134,000) (89,000)
----------- -----------
$ 2,097,000 $ 1,768,000
=========== ===========
Inventories:
Raw materials $ 893,000 $ 1,052,000
Work-in-process 530,000 382,000
Finished goods 89,000 31,000
----------- -----------
$ 1,512,000 $ 1,465,000
=========== ===========
Property and Equipment:
Computer and other equipment $ 848,000 $ 752,000
Tooling 234,000 220,000
Evaluation units 628,000 586,000
Leasehold improvements 21,000 22,000
Furniture and fixtures 67,000 59,000
----------- -----------
1,798,000 1,639,000
Less: Accumulated depreciation and amortization (1,368,000) (1,237,000)
----------- -----------
$ 430,000 $ 402,000
=========== ===========
</TABLE>
NOTE 4 - DEBT:
The Company has had a line of credit agreement with a financial institution
since 1994 and the agreement was amended in December 1998 to extend the
expiration date to December 1999. This agreement requires the Company to comply
with certain financial convenants. Borrowings under this facility are limited to
the lesser of $2,000,000 or 80% of eligible receivables. At December 31, 1998
and 1997, $1,632,000 and $1,338,000, respectively, was outstanding under the
line. Borrowings under this facility bear interest at the bank's prime rate plus
2% (9.75% at December 31, 1998) with a minimum of 9% and are secured by
substantially all of the assets of the Company. In addition, the agreement
requires a minimum interest charge of $9,000 per month.
29
<PAGE> 30
NOTE 5 - CONVERTIBLE PREFERRED STOCK:
Information with regard to the Company's Preferred Stock as of December 31, 1998
is summarized in the following table:
<TABLE>
<CAPTION>
PROCEEDS
SHARES COMMON STOCK NET OF
SHARES ISSUED AND CONVERSION LIQUIDATION ISSUANCE
SERIES AUTHORIZED OUTSTANDING RATIO PREFERENCES COST
------ ---------- ----------- ----- ----------- ----
<S> <C> <C> <C> <C> <C>
C 372,296 372,296 1 to 1 $5.00 $1,861,000
D 600,000 333,333 1 to 1 5.00 1,471,000
E 500,000 375,000 1 to 1 4.00 1,480,000
F 250,000 250,000 1 to 2 8.00 1,250,000
G 110,000 97,500 1 to 10 20.00 950,000
H 26,109 26,109 1 to 10 38.30 1,000,000
I 167,065 167,065 1 to 1 4.19 700,000
J 244,966 244,966 1 to 1 2.98 730,000
K 235,110 235,110 1 to 1 3.19 750,000
L 199,275 199,275 1 to 1 2.76 550,000
M 179,372 179,372 1 to 1 2.23 400,000
N 666,667 666,667 1 to 1 0.90 600,000
O 1,320,755 1,320,755 1 to 1 1.06 1,262,000
P 36,585 36,585 1 to 10 8.20 272,000
Q 112,097 112,097 1 to 10 6.20 632,000
R 86,207 86,207 1 to 10 5.80 456,000
S 96,875 96,875 1 to 10 3.20 283,000
---------- --------- -----------
5,203,379 4,799,212 $14,647,000
Undesignated 4,796,621 --
---------- --------- -----------
Total 10,000,000 4,799,212 $14,647,000
========== ========= ===========
</TABLE>
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 S 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.
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 S 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.
The Warrants were valued at the estimated fair value at the date of issuance.
The proceeds received from the sales of Preferred Stock were allocated between
the Preferred Stock and the related Warrants. The value for the Warrants issued
in connection with the issuance of Series C to N Preferred Stock was immaterial.
30
<PAGE> 31
Holders of Preferred Stock received Warrants for the purchases of Common Stock
as follows:
<TABLE>
<CAPTION>
WARRANTS EXERCISE
ISSUED AND PRICE
SERIES OUTSTANDING PER SHARE DATE ISSUED
------ --------------- --------- -----------
<S> <C> <C> <C>
C 148,918 $ 5.50 Mar 95
D 260,000 5.50 Apr 94 - Mar 95
E 200,000 5.50 Mar - Sep 95
F 125,000 5.50 Sep - Dec 95
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
----------
2,500,651
==========
</TABLE>
All Warrants expire five years from the date of issuance.
NOTE 6 - COMMON STOCK:
In addition to the Common Stock Purchase Warrants issued in connection with the
sales of Preferred Stock described in Note 5, the Company has issued Warrants to
purchase its Common Stock at various times in conjunction with various
consulting service agreements. Information with regard to these Warrants
outstanding as of December 31, 1998 is summarized in the following table.
<TABLE>
<CAPTION>
DATE ISSUED NUMBER EXERCISE PRICE EXPIRATION
ISSUED IN CONNECTION WITH OF SHARES PER SHARE DATE
------ ------------------ --------- --------- ----
<S> <C> <C> <C> <C>
Feb 94 Consulting 11,666 5.50 Feb 99
Services
Aug 94 Consulting 10,000 5.25 Aug 99
Services
</TABLE>
The value of Warrants issued in connection with consulting services was
immaterial.
All Warrants outstanding as of December 31, 1998 are exercisable.
NOTE 7 - STOCK OPTION PLAN:
At December 31, 1998, the Company had two stock-based compensation plans, which
are described below:
THE 1990 PLAN
Under the 1990 Stock Option Plan, as amended in 1995 (the "1990 Plan"),
employees, consultants and non-employee directors (prior to 1995) may be granted
options for up to 1,150,000 shares of Common Stock which vest over a four year
period from the date of grant. The options vest equally on a monthly basis
unless it is the employee's or consultant's first stock grant, in which case
vesting commences six months from the date of grant.
At December 31, 1998, 152,000 shares were available for grant under the 1990
Plan.
31
<PAGE> 32
On May 20, 1996, the Company canceled options to purchase 72,600 shares of
Common Stock with exercise prices ranging from $4.25 to $6.25, previously
granted to employees and reissued all such options at an exercise price of
$3.88, the fair market value of the stock on that date. The reissued options
vest over a four year period from the date of reissuance.
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, each non-employee director of the Company will be granted a
non-statutory option to purchase 5,000 shares of the Company's Common Stock
during each year of service as a director of the Company commencing in 1995.
These options vest immediately upon grant and are immediately exercisable.
At December 31, 1998, 50,000 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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- -------------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------- ----------- ---------------- ------------- ---------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,011,500 $3.80 771,600 $5.22 811,661 $4.09
Granted 1,162,850 0.76 499,900 1.86 386,600 4.53
Exercised -- -- -- ----- (244,987) 0.37
Forfeited/Canceled (1,076,350) 3.62 (260,000) 3.90 (181,674) 5.25
---------- ---- --------- ----- -------- -----
Outstanding at end of year 1,098,000 $0.76 1,011,500 $3.90 771,600 $5.22
========== ===== ========= ===== ======== =====
Options exercisable at
year-end 242,018 452,200 383,130
Weighted-average fair
value of options
granted during the
year $0.59 $1.14 $2.90
</TABLE>
The following table summarizes the combined information about options
outstanding under the 1990 Plan and Non-Employee Option Plan at December 31,
1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.47 to $0.58 1,067,850 4.4 $ 0.74 228,957 $ 0.73
$1.00 to $2.88 27,500 4.5 $ 1.12 11,219 $ 1.12
$3.14 to $4.97 2,250 2.3 $ 3.96 1,484 $ 3.97
$5.13 to $6.38 400 1.4 $ 5.75 358 $ 5.75
</TABLE>
32
<PAGE> 33
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C> <C>
Net loss As Reported $(2,235,000) $(2,489,000) $(3,342,000)
Pro Forma $(2,649,000) $(2,678,000) $(3,456,000)
Basic and diluted net
loss per share As Reported $ (0.64) $ (0.75) $ (1.08)
Pro Forma $ (0.75) $ (0.81) $ (1.11)
</TABLE>
The compensation cost calculated under SFAS 123 is based on options granted from
1995 through 1998, 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 1998, 1997, 1996 and 1995: expected volatility of
112.9% for 1998 and 76.7% for 1997, 1996 and 1995; 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 8 - INCOME TAXES:
No provisions for federal or state income taxes were recorded for the years
ended December 31, 1998, 1997 and 1996 as the Company incurred net operating
losses during these three years.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards 8,240,000 $ 7,718,000
Credit carryforwards 941,000 817,000
Capitalized research and
development expenses 246,000 183,000
Reserves and other 237,000 156,000
----------- -----------
Deferred tax assets 9,700,000 8,874,000
Valuation allowance (9,700,000) (8,874,000)
----------- -----------
$ -- $ --
----------- -----------
</TABLE>
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, 1998, the Company had approximately $23,137,000 of federal and
$6,410,625 of state net operating loss carryforwards available to offset future
taxable income which expire in varying amounts beginning in 1999. 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.
33
<PAGE> 34
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:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Tax benefit at statutory rate $(760,000) $(846,000)
State income taxes, net of federal benefit -- (145,000)
Non-recognition of tax benefit and other 760,000 991,000
--------- ---------
$ -- $ --
--------- ---------
</TABLE>
NOTE 9 - COMMITMENTS
The Company occupies its facility under a non-cancelable operating lease
agreement which expires on October 31, 2000. The lease requires the Company to
pay property taxes and insurance.
The total minimum lease payments at December 31, 1998, excluding insurance,
normal maintenance and certain property taxes, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING LEASE
----------- ---------------
<S> <C>
1999 $158,000
2000 134,000
--------
Total minimum lease payments $292,000
========
</TABLE>
Total rental expense under operating leases, including month-to-month
rentals, was $181,000, $183,000 and $164,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
NOTE 10 - GEOGRAPHIC SALES AND MAJOR CUSTOMERS:
The Company sells its products predominately in the United States. No other
geographic region accounted for more than 10% of net sales in fiscal 1998, 1997,
or 1996.
No customer accounted for 10% of net sales in fiscal 1998, 1997 or 1996.
At December 31, 1998, two customers represented 17% and 16%, respectively, of
the accounts receivable balance. At December 31, 1997, one customer represented
22% of the accounts receivable balance. At December 31, 1996, one customer
represented 10% of the accounts receivable balance.
NOTE 11 - NET LOSS PER SHARE
Options and Warrants to purchase shares, and Convertible Preferred Stock
outstanding 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.
34
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF DISC, INC.
In our opinion, the accompanying balance sheet and the related statements of
operations, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of DISC, Inc. at December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California January 19, 1999,
except as to Note 1, which is as of March 31, 1999
35
<PAGE> 36
DISC, INC.
FORM 10-K
EXHIBIT INDEX
<TABLE>
<S> <C>
3.18 Certificate of Determination of Preferences of Series Q
Preferred Stock, as filed with the California
Secretary of State on October 9, 1998.
3.19 Certificate of Determination of Preferences of Series R
Preferred Stock, as filed with the California
Secretary of State on January 12, 1999.
3.20 Certificate of Determination of Preferences of Series S
Preferred Stock, as filed with the California
Secretary of State on January 12, 1999.
10.23 Seventh Amendment to Convertible Debenture Purchase
Agreement, dated December 30, 1998.
23 Consent of PricewaterhouseCoopers LLP.
25 Power of Attorney (included on Signature Page).
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
Exhibit 3.18
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF
SERIES Q PREFERRED STOCK
OF
DISC, INC.
We, J. Richard Ellis and Henry Madrid, hereby certify that we are the
President and the Chief Financial Officer, respectively, of DISC, INC., a
corporation organized and existing under the General Corporation Law of the
State of California, and further, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Articles of Incorporation of the said Corporation, the said Board of Directors
on June 30, 1998 adopted the following resolution creating a series of 112,097
shares of Preferred Stock designated as Series Q Preferred Stock, none of which
shares have been issued:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation by the Articles of Incorporation, the Board of
Directors does hereby provide for the issuance of a series of Preferred Stock,
no par value, of the Corporation, to be designated "Series Q Preferred Stock,"
initially consisting of 112,097 shares and to the extent that the designations,
powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series Q Preferred Stock are
not stated and expressed in the Articles of Incorporation, does hereby fix and
herein state and express such designations, powers, preferences and relative and
other special rights and the qualifications, limitations and restrictions
thereof, as follows (all terms used herein which are defined in the Articles of
Incorporation shall be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series Q Preferred Stock," no par value, and the number of shares
constituting such series shall be 112,097.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of
any shares of Series C Preferred Stock ranking prior and superior to the shares
of Series Q Preferred Stock with respect to dividends, and pari passu with the
rights of the holders of shares of Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred
Stock, Series I Preferred Stock, Series J Preferred Stock, Series K Preferred
Stock, Series L Preferred Stock, Series M Preferred Stock, Series N Preferred
Stock, Series O Preferred Stock, and Series P Preferred Stock with respect to
dividends, subject to the rights of any series of Preferred Stock which may
hereafter come into existence, the holders of shares of Series Q Preferred Stock
shall be entitled to receive when, as and if declared by the Board of Directors
out of funds legally available for the purpose, dividends in the same amount per
share as declared on the Common Stock, treating such number of shares of Series
Q Preferred Stock for this purpose as equal to the
<PAGE> 2
number of shares of Common Stock into which it is then convertible. In the event
any dividends are declared or paid on the outstanding shares of Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock, Series H Preferred Stock, Series I Preferred Stock, Series J
Preferred Stock, Series K Preferred Stock, Series L Preferred Stock, Series M
Preferred Stock, Series N Preferred Stock, Series O Preferred Stock, or Series P
Preferred Stock dividends shall simultaneously be declared and paid on the
outstanding shares of Series Q Preferred Stock, pari passu with the shares of
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock, Series H Preferred Stock, Series I Preferred Stock,
Series J Preferred Stock, Series K Preferred Stock, Series L Preferred Stock,
Series M Preferred Stock, Series N Preferred Stock, Series O Preferred Stock or
Series P Preferred Stock, based upon the number of shares of Common Stock into
which shares of Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock, Series H Preferred Stock, Series I
Preferred Stock, Series J Preferred Stock, Series K Preferred Stock, Series L
Preferred Stock, Series M Preferred Stock, Series N Preferred Stock, Series O
Preferred Stock, Series P Preferred Stock, and Series Q Preferred Stock are then
convertible. In the event the Corporation shall at any time after the date of
the filing of this Certificate of Determination of Preferences (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case, the amount of Common Stock or other consideration to which holders of
shares of Series Q Preferred Stock were entitled immediately prior to such event
under the preceding sentence shall be adjusted as set forth in Section 4(C)
hereof.
(B) The Corporation shall declare a dividend or distribution on
the Series Q Preferred Stock as provided in paragraph (A) above prior to
declaring a dividend payable on shares of Common Stock.
Section 3. Voting Rights. The holders of shares of Series Q Preferred
Stock shall have the following voting rights:
(A) Each holder of Series Q Preferred Stock is entitled to a
number of votes equal to the number of shares of Common Stock into which the
holder's Series Q Preferred Stock is then convertible. Except as provided by
law, the Common Stock and Series Q Preferred Stock (and any series of Preferred
Stock which may be subsequently authorized which is convertible into shares of
Common Stock and which has voting rights equal to the number of shares of Common
Stock into which such series of Preferred Stock is then convertible) shall vote
together as a single class on all matters to come before the shareholders for
approval. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series Q Preferred
Stock were entitled immediately prior to such event shall be adjusted as set
forth in Section 4(C) hereof.
(B) Except as otherwise provided herein or by law, the holders
of shares of Series Q Preferred Stock and the holders of shares of Common Stock
(and any series of
2
<PAGE> 3
Preferred Stock which may be subsequently authorized which is convertible into
shares of Common Stock and which has voting rights equal to the number of shares
of Common Stock into which such series of Preferred Stock is then convertible)
shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(C) Except as required by law or under Section 8 hereof, holders
of Series Q Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Conversion Rights.
(A) Each holder of Series Q Preferred Stock may, at any time, in
such holder's sole discretion, convert all or any part of such holder's shares
of Series Q Preferred Stock into fully paid and nonassessable shares of Common
Stock at the rate of ten (10) shares of Common Stock for each share of Series Q
Preferred Stock surrendered for conversion.
(B) Such conversion may be effected by surrender of such
holder's certificate or certificates for the shares of Series Q Preferred Stock
to be converted, duly endorsed, at the principal office of the Corporation, with
a written notice stating (i) that such holder elects to convert all or a
specified number of shares of Series Q Preferred Stock into shares of Common
Stock, and (ii) the name in which such holder desires a certificate for the
shares of Common Stock to be issued. Promptly thereafter, the Company shall
issue and deliver to such holder a certificate for the number of shares of
Common Stock to which such holder shall be entitled. Such conversion shall be
deemed to have been made at the close of business on the date of such surrender,
and such holder shall be treated for all purposes as the record holder of such
shares of Common Stock on that date.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then, in
each case, the number of shares of Common Stock issuable upon the conversion of
each share of Series Q Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that are outstanding immediately prior to
such event.
(D) In the event the Corporation shall at any time or from time
to time after the Rights Declaration Date make or issue, or fix a record date
for the determination of holders of Common Stock entitled to receive, a dividend
or other distribution payable in securities of the Corporation or any of its
subsidiaries, or of any other corporation or third party, other than in shares
of Common Stock, then, in each such event, provisions shall be made so that the
holders of Series Q Preferred Stock shall receive, upon the conversion thereof,
securities of the Corporation or any of its subsidiaries or of any other
corporation
3
<PAGE> 4
or third party which they would have received had their stock been converted
into Common Stock on the date of such event.
Section 5. Reacquired Shares. Any shares of Series Q Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution
or winding up of the Corporation, following the first priority liquidation
preference of the Series C Preferred Stock in the amount of $5.00 per share plus
any declared but unpaid dividends, and pari passu with the liquidation
preference of the Series D Preferred Stock in the amount of $5.00 per share plus
any declared but unpaid dividends ("Series D Liquidation Preference"), the
liquidation preference of the Series E Preferred Stock in the amount of $4.00
per share plus any declared but unpaid dividends ("Series E Liquidation
Preference"), the liquidation preference of the Series F Preferred Stock in the
amount of $8.00 per share plus any declared but unpaid dividends ("Series F
Liquidation Preference"), the liquidation preference of the Series G Preferred
Stock in the amount of $20.00 per share plus any declared but unpaid dividends
("Series G Liquidation Preference"), the liquidation preference of the Series H
Preferred Stock in the amount of $38.30 per share plus any declared but unpaid
dividends ("Series H Liquidation Preference"), the liquidation preference of the
Series I Preferred Stock in the amount of $4.19 per share plus any declared but
unpaid dividends ("Series I Liquidation Preference"), the liquidation preference
of the Series J Preferred Stock in the amount of $2.98 per share plus any
declared but unpaid dividends ("Series J Liquidation Preference"), the
liquidation preference of the Series K Preferred Stock in the amount of $3.19
per share plus any declared but unpaid dividends ("Series K Liquidation
Preference"), the liquidation preference of the Series L Preferred Stock in the
amount of $2.76 per share plus any declared but unpaid dividends ("Series L
Liquidation Preference"), the liquidation preference of the Series M Preferred
Stock in the amount of $2.23 per share plus any declared but unpaid dividends
("Series M Liquidation Preference"), the liquidation preference of the Series N
Preferred Stock in the amount of $.90 per share plus any declared but unpaid
dividends ("Series N Liquidation Preference"), the liquidation preference of the
Series O Preferred Stock in the amount of $1.06 per share of Series O Preferred
Stock plus any declared but unpaid dividends (the "Series O Liquidation
Preference"), the liquidation preference of the Series P Preferred Stock in the
amount of $.82 per share of Series P Preferred Stock plus any declared but
unpaid dividends (the "Series P Liquidation Preference") no distribution shall
be made to the holders of shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series Q Preferred Stock
unless, prior thereto, the holders of shares of Series Q Preferred Stock shall
have received an amount equal to $.62 per share of Series Q Preferred Stock plus
any declared but unpaid dividends ("Series Q Liquidation Preference").
4
<PAGE> 5
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series D Liquidation Preference, the
Series E Liquidation Preference, the Series F Liquidation Preference, the Series
G Liquidation Preference, the Series H Liquidation Preference, the Series I
Liquidation Preference, the Series J Liquidation Preference, the Series K
Liquidation Preference, the Series L Liquidation Preference, the Series M
Liquidation Preference, the Series N Liquidation Preference, the Series O
Liquidation Preference, the Series P Liquidation Preference, the Series Q
Liquidation Preference and the liquidation preferences of all other series of
Preferred Stock, if any, which rank on a parity with the Series Q Preferred
Stock, then such remaining assets shall be distributed ratably to the holders of
such parity shares in proportion to their respective liquidation preferences.
Section 7. No Redemption. The shares of Series Q Preferred Stock shall
not be redeemable.
Section 8. Amendment. The Articles of Incorporation of the Corporation
shall not be further amended in any manner which would (a) alter or change the
powers, preferences or special rights or privileges of the Series Q Preferred
Stock so as to affect them adversely or (b) grant to any other class of shares
any rights superior to those of the Series Q Preferred Stock without the
affirmative vote of the holders of a majority or more of the outstanding shares
of Series Q Preferred Stock, voting separately as a class.
Section 9. Fractional Shares. Series Q Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series Q Preferred Stock."
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing Certificate are true of their own knowledge.
Executed at Milpitas, California on October 1, 1998.
/s/ J. Richard Ellis
-------------------------------------
J. Richard Ellis
President and Chief Executive Officer
/s/ Henry Madrid
-------------------------------------
Henry Madrid
Chief Financial Officer
6
<PAGE> 1
Exhibit 3.19
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF
SERIES R PREFERRED STOCK
OF
DISC, INC.
We, J. Richard Ellis and Henry Madrid, hereby certify that we are the
President and the Chief Financial Officer, respectively, of DISC, INC., a
corporation organized and existing under the General Corporation Law of the
State of California, and further, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Articles of Incorporation of the said Corporation, the said Board of Directors
on June 30, 1998 adopted the following resolution creating a series of 86,207
shares of Preferred Stock designated as Series R Preferred Stock, none of which
shares have been issued:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation by the Articles of Incorporation, the Board of
Directors does hereby provide for the issuance of a series of Preferred Stock,
no par value, of the Corporation, to be designated "Series R Preferred Stock,"
initially consisting of 86,207 shares and to the extent that the designations,
powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series R Preferred Stock are
not stated and expressed in the Articles of Incorporation, does hereby fix and
herein state and express such designations, powers, preferences and relative and
other special rights and the qualifications, limitations and restrictions
thereof, as follows (all terms used herein which are defined in the Articles of
Incorporation shall be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series R Preferred Stock," no par value, and the number of shares
constituting such series shall be 86,207.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of
any shares of Series C Preferred Stock ranking prior and superior to the shares
of Series R Preferred Stock with respect to dividends, and pari passu with the
rights of the holders of shares of Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred
Stock, Series I Preferred Stock, Series J Preferred Stock, Series K Preferred
Stock, Series L Preferred Stock, Series M Preferred Stock, Series N Preferred
Stock, Series O Preferred Stock, Series P Preferred Stock, and Series Q
Preferred Stock with respect to dividends, subject to the rights of any series
of Preferred Stock which may hereafter come into existence, the holders of
shares of Series R Preferred Stock shall be entitled to receive when, as and if
declared by the Board of Directors out of
<PAGE> 2
funds legally available for the purpose, dividends in the same amount per share
as declared on the Common Stock, treating such number of shares of Series R
Preferred Stock for this purpose as equal to the number of shares of Common
Stock into which it is then convertible. In the event any dividends are declared
or paid on the outstanding shares of Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H
Preferred Stock, Series I Preferred Stock, Series J Preferred Stock, Series K
Preferred Stock, Series L Preferred Stock, Series M Preferred Stock, Series N
Preferred Stock, Series O Preferred Stock, Series P Preferred Stock, or Series Q
Preferred Stock dividends shall simultaneously be declared and paid on the
outstanding shares of Series R Preferred Stock, pari passu with the shares of
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock, Series H Preferred Stock, Series I Preferred Stock,
Series J Preferred Stock, Series K Preferred Stock, Series L Preferred Stock,
Series M Preferred Stock, Series N Preferred Stock, Series O Preferred Stock,
Series P Preferred Stock or Series Q Preferred Stock, based upon the number of
shares of Common Stock into which shares of Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H
Preferred Stock, Series I Preferred Stock, Series J Preferred Stock, Series K
Preferred Stock, Series L Preferred Stock, Series M Preferred Stock, Series N
Preferred Stock, Series O Preferred Stock, Series P Preferred Stock, Series Q
Preferred Stock, and Series R Preferred Stock are then convertible. In the event
the Corporation shall at any time after the date of the filing of this
Certificate of Determination of Preferences (the "Rights Declaration Date") (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case, the amount of
Common Stock or other consideration to which holders of shares of Series R
Preferred Stock were entitled immediately prior to such event under the
preceding sentence shall be adjusted as set forth in Section 4(C) hereof.
(B) The Corporation shall declare a dividend or distribution on
the Series R Preferred Stock as provided in paragraph (A) above prior to
declaring a dividend payable on shares of Common Stock.
Section 3. Voting Rights. The holders of shares of Series R Preferred
Stock shall have the following voting rights:
(A) Each holder of Series R Preferred Stock is entitled to a
number of votes equal to the number of shares of Common Stock into which the
holder's Series R Preferred Stock is then convertible. Except as provided by
law, the Common Stock and Series R Preferred Stock (and any series of Preferred
Stock which may be subsequently authorized which is convertible into shares of
Common Stock and which has voting rights equal to the number of shares of Common
Stock into which such series of Preferred Stock is then convertible) shall vote
together as a single class on all matters to come before the shareholders for
approval. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide
2
<PAGE> 3
the outstanding Common Stock, or (iii) combine the outstanding Common Stock into
a smaller number of shares, then in each such case the number of votes per share
to which holders of shares of Series R Preferred Stock were entitled immediately
prior to such event shall be adjusted as set forth in Section 4(C) hereof.
(B) Except as otherwise provided herein or by law, the holders
of shares of Series R Preferred Stock and the holders of shares of Common Stock
(and any series of Preferred Stock which may be subsequently authorized which is
convertible into shares of Common Stock and which has voting rights equal to the
number of shares of Common Stock into which such series of Preferred Stock is
then convertible) shall vote together as one class on all matters submitted to a
vote of shareholders of the Corporation.
(C) Except as required by law or under Section 8 hereof, holders
of Series R Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Conversion Rights.
(A) Each holder of Series R Preferred Stock may, at any time, in
such holder's sole discretion, convert all or any part of such holder's shares
of Series R Preferred Stock into fully paid and nonassessable shares of Common
Stock at the rate of ten (10) shares of Common Stock for each share of Series R
Preferred Stock surrendered for conversion.
(B) Such conversion may be effected by surrender of such
holder's certificate or certificates for the shares of Series R Preferred Stock
to be converted, duly endorsed, at the principal office of the Corporation, with
a written notice stating (i) that such holder elects to convert all or a
specified number of shares of Series R Preferred Stock into shares of Common
Stock, and (ii) the name in which such holder desires a certificate for the
shares of Common Stock to be issued. Promptly thereafter, the Company shall
issue and deliver to such holder a certificate for the number of shares of
Common Stock to which such holder shall be entitled. Such conversion shall be
deemed to have been made at the close of business on the date of such surrender,
and such holder shall be treated for all purposes as the record holder of such
shares of Common Stock on that date.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then, in
each case, the number of shares of Common Stock issuable upon the conversion of
each share of Series R Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that are outstanding immediately prior to
such event.
3
<PAGE> 4
(D) In the event the Corporation shall at any time or from time
to time after the Rights Declaration Date make or issue, or fix a record date
for the determination of holders of Common Stock entitled to receive, a dividend
or other distribution payable in securities of the Corporation or any of its
subsidiaries, or of any other corporation or third party, other than in shares
of Common Stock, then, in each such event, provisions shall be made so that the
holders of Series R Preferred Stock shall receive, upon the conversion thereof,
securities of the Corporation or any of its subsidiaries or of any other
corporation or third party which they would have received had their stock been
converted into Common Stock on the date of such event.
Section 5. Reacquired Shares. Any shares of Series R Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution
or winding up of the Corporation, following the first priority liquidation
preference of the Series C Preferred Stock in the amount of $5.00 per share plus
any declared but unpaid dividends, and pari passu with the liquidation
preference of the Series D Preferred Stock in the amount of $5.00 per share plus
any declared but unpaid dividends ("Series D Liquidation Preference"), the
liquidation preference of the Series E Preferred Stock in the amount of $4.00
per share plus any declared but unpaid dividends ("Series E Liquidation
Preference"), the liquidation preference of the Series F Preferred Stock in the
amount of $8.00 per share plus any declared but unpaid dividends ("Series F
Liquidation Preference"), the liquidation preference of the Series G Preferred
Stock in the amount of $20.00 per share plus any declared but unpaid dividends
("Series G Liquidation Preference"), the liquidation preference of the Series H
Preferred Stock in the amount of $38.30 per share plus any declared but unpaid
dividends ("Series H Liquidation Preference"), the liquidation preference of the
Series I Preferred Stock in the amount of $4.19 per share plus any declared but
unpaid dividends ("Series I Liquidation Preference"), the liquidation preference
of the Series J Preferred Stock in the amount of $2.98 per share plus any
declared but unpaid dividends ("Series J Liquidation Preference"), the
liquidation preference of the Series K Preferred Stock in the amount of $3.19
per share plus any declared but unpaid dividends ("Series K Liquidation
Preference"), the liquidation preference of the Series L Preferred Stock in the
amount of $2.76 per share plus any declared but unpaid dividends ("Series L
Liquidation Preference"), the liquidation preference of the Series M Preferred
Stock in the amount of $2.23 per share plus any declared but unpaid dividends
("Series M Liquidation Preference"), the liquidation preference of the Series N
Preferred Stock in the amount of $.90 per share plus any declared but unpaid
dividends ("Series N Liquidation Preference"), the liquidation
4
<PAGE> 5
preference of the Series O Preferred Stock in the amount of $1.06 per share of
Series O Preferred Stock plus any declared but unpaid dividends (the "Series O
Liquidation Preference"), the liquidation preference of the Series P Preferred
Stock in the amount of $.82 per share of Series P Preferred Stock plus any
declared but unpaid dividends (the "Series P Liquidation Preference"), the
liquidation preference of the Series Q Preferred Stock in the amount of $.62 per
share of Series Q Preferred Stock plus any declared but unpaid dividends (the
"Series Q Liquidation Preference") no distribution shall be made to the holders
of shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series R Preferred Stock unless, prior
thereto, the holders of shares of Series R Preferred Stock shall have received
an amount equal to $.58 per share of Series R Preferred Stock plus any declared
but unpaid dividends ("Series R Liquidation Preference").
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series D Liquidation Preference, the
Series E Liquidation Preference, the Series F Liquidation Preference, the Series
G Liquidation Preference, the Series H Liquidation Preference, the Series I
Liquidation Preference, the Series J Liquidation Preference, the Series K
Liquidation Preference, the Series L Liquidation Preference, the Series M
Liquidation Preference, the Series N Liquidation Preference, the Series O
Liquidation Preference, the Series P Liquidation Preference, the Series Q
Liquidation Preference, the Series R Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any, which rank on a
parity with the Series R Preferred Stock, then such remaining assets shall be
distributed ratably to the holders of such parity shares in proportion to their
respective liquidation preferences.
Section 7. No Redemption. The shares of Series R Preferred Stock shall
not be redeemable.
Section 8. Amendment. The Articles of Incorporation of the Corporation
shall not be further amended in any manner which would (a) alter or change the
powers, preferences or special rights or privileges of the Series R Preferred
Stock so as to affect them adversely or (b) grant to any other class of shares
any rights superior to those of the Series R Preferred Stock without the
affirmative vote of the holders of a majority or more of the outstanding shares
of Series R Preferred Stock, voting separately as a class.
Section 9. Fractional Shares. Series R Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series R Preferred Stock."
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing Certificate are true of their own knowledge.
5
<PAGE> 6
Executed at Milpitas, California on September 30, 1998.
/s/ J. Richard Ellis
-------------------------------------
J. Richard Ellis
President and Chief Executive Officer
/s/ Henry Madrid
-------------------------------------
Henry Madrid
Chief Financial Officer
6
<PAGE> 1
Exhibit 3.20
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF
SERIES S PREFERRED STOCK
OF
DISC, INC.
We, J. Richard Ellis and Henry Madrid, hereby certify that we are the
President and the Chief Financial Officer, respectively, of DISC, INC., a
corporation organized and existing under the General Corporation Law of the
State of California, and further, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Articles of Incorporation of the said Corporation, the said Board of Directors
on June 30, 1998 adopted the following resolution creating a series of 96,875
shares of Preferred Stock designated as Series S Preferred Stock, none of which
shares have been issued:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation by the Articles of Incorporation, the Board of
Directors does hereby provide for the issuance of a series of Preferred Stock,
no par value, of the Corporation, to be designated "Series S Preferred Stock,"
initially consisting of 96,875 shares and to the extent that the designations,
powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series S Preferred Stock are
not stated and expressed in the Articles of Incorporation, does hereby fix and
herein state and express such designations, powers, preferences and relative and
other special rights and the qualifications, limitations and restrictions
thereof, as follows (all terms used herein which are defined in the Articles of
Incorporation shall be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series S Preferred Stock," no par value, and the number of shares
constituting such series shall be 96,875.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of
any shares of Series C Preferred Stock ranking prior and superior to the shares
of Series S Preferred Stock with respect to dividends, and pari passu with the
rights of the holders of shares of Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred
Stock, Series I Preferred Stock, Series J Preferred Stock, Series K Preferred
Stock, Series L Preferred Stock, Series M Preferred Stock, Series N Preferred
Stock, Series O Preferred Stock, Series P Preferred Stock, Series Q Preferred
Stock and Series R Preferred Stock with respect to dividends, subject to the
rights of any series of Preferred Stock which may hereafter come into existence,
the holders of shares of Series S Preferred Stock shall be entitled to receive
when, as and if declared by the
<PAGE> 2
Board of Directors out of funds legally available for the purpose, dividends in
the same amount per share as declared on the Common Stock, treating such number
of shares of Series S Preferred Stock for this purpose as equal to the number of
shares of Common Stock into which it is then convertible. In the event any
dividends are declared or paid on the outstanding shares of Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock, Series H Preferred Stock, Series I Preferred Stock, Series J Preferred
Stock, Series K Preferred Stock, Series L Preferred Stock, Series M Preferred
Stock, Series N Preferred Stock, Series O Preferred Stock, Series P Preferred
Stock, Series Q Preferred Stock, or Series R Preferred Stock dividends shall
simultaneously be declared and paid on the outstanding shares of Series S
Preferred Stock, pari passu with the shares of Series D Preferred Stock, Series
E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H
Preferred Stock, Series I Preferred Stock, Series J Preferred Stock, Series K
Preferred Stock, Series L Preferred Stock, Series M Preferred Stock, Series N
Preferred Stock, Series O Preferred Stock, Series P Preferred Stock, Series Q
Preferred Stock or Series R Preferred Stock, based upon the number of shares of
Common Stock into which shares of Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred
Stock, Series I Preferred Stock, Series J Preferred Stock, Series K Preferred
Stock, Series L Preferred Stock, Series M Preferred Stock, Series N Preferred
Stock, Series O Preferred Stock, Series P Preferred Stock, Series Q Preferred
Stock, Series R Preferred Stock, and Series S Preferred Stock are then
convertible. In the event the Corporation shall at any time after the date of
the filing of this Certificate of Determination of Preferences (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case, the amount of Common Stock or other consideration to which holders of
shares of Series S Preferred Stock were entitled immediately prior to such event
under the preceding sentence shall be adjusted as set forth in Section 4(C)
hereof.
(B) The Corporation shall declare a dividend or distribution on
the Series S Preferred Stock as provided in paragraph (A) above prior to
declaring a dividend payable on shares of Common Stock.
Section 3. Voting Rights. The holders of shares of Series S Preferred
Stock shall have the following voting rights:
(A) Each holder of Series S Preferred Stock is entitled to a
number of votes equal to the number of shares of Common Stock into which the
holder's Series S Preferred Stock is then convertible. Except as provided by
law, the Common Stock and Series S Preferred Stock (and any series of Preferred
Stock which may be subsequently authorized which is convertible into shares of
Common Stock and which has voting rights equal to the number of shares of Common
Stock into which such series of Preferred Stock is then convertible) shall vote
together as a single class on all matters to come before the shareholders for
approval. In the
2
<PAGE> 3
event the Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the number of
votes per share to which holders of shares of Series S Preferred Stock were
entitled immediately prior to such event shall be adjusted as set forth in
Section 4(C) hereof.
(B) Except as otherwise provided herein or by law, the holders
of shares of Series S Preferred Stock and the holders of shares of Common Stock
(and any series of Preferred Stock which may be subsequently authorized which is
convertible into shares of Common Stock and which has voting rights equal to the
number of shares of Common Stock into which such series of Preferred Stock is
then convertible) shall vote together as one class on all matters submitted to a
vote of shareholders of the Corporation.
(C) Except as required by law or under Section 8 hereof, holders
of Series S Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Conversion Rights.
(A) Each holder of Series S Preferred Stock may, at any time, in
such holder's sole discretion, convert all or any part of such holder's shares
of Series S Preferred Stock into fully paid and nonassessable shares of Common
Stock at the rate of ten (10) shares of Common Stock for each share of Series S
Preferred Stock surrendered for conversion.
(B) Such conversion may be effected by surrender of such
holder's certificate or certificates for the shares of Series S Preferred Stock
to be converted, duly endorsed, at the principal office of the Corporation, with
a written notice stating (i) that such holder elects to convert all or a
specified number of shares of Series S Preferred Stock into shares of Common
Stock, and (ii) the name in which such holder desires a certificate for the
shares of Common Stock to be issued. Promptly thereafter, the Company shall
issue and deliver to such holder a certificate for the number of shares of
Common Stock to which such holder shall be entitled. Such conversion shall be
deemed to have been made at the close of business on the date of such surrender,
and such holder shall be treated for all purposes as the record holder of such
shares of Common Stock on that date.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then, in
each case, the number of shares of Common Stock issuable upon the conversion of
each share of Series S Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding
3
<PAGE> 4
immediately after such event and the denominator of which is the number of
shares of Common Stock that are outstanding immediately prior to such event.
(D) In the event the Corporation shall at any time or from time
to time after the Rights Declaration Date make or issue, or fix a record date
for the determination of holders of Common Stock entitled to receive, a dividend
or other distribution payable in securities of the Corporation or any of its
subsidiaries, or of any other corporation or third party, other than in shares
of Common Stock, then, in each such event, provisions shall be made so that the
holders of Series S Preferred Stock shall receive, upon the conversion thereof,
securities of the Corporation or any of its subsidiaries or of any other
corporation or third party which they would have received had their stock been
converted into Common Stock on the date of such event.
Section 5. Reacquired Shares. Any shares of Series S Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution
or winding up of the Corporation, following the first priority liquidation
preference of the Series C Preferred Stock in the amount of $5.00 per share plus
any declared but unpaid dividends, and pari passu with the liquidation
preference of the Series D Preferred Stock in the amount of $5.00 per share plus
any declared but unpaid dividends ("Series D Liquidation Preference"), the
liquidation preference of the Series E Preferred Stock in the amount of $4.00
per share plus any declared but unpaid dividends ("Series E Liquidation
Preference"), the liquidation preference of the Series F Preferred Stock in the
amount of $8.00 per share plus any declared but unpaid dividends ("Series F
Liquidation Preference"), the liquidation preference of the Series G Preferred
Stock in the amount of $20.00 per share plus any declared but unpaid dividends
("Series G Liquidation Preference"), the liquidation preference of the Series H
Preferred Stock in the amount of $38.30 per share plus any declared but unpaid
dividends ("Series H Liquidation Preference"), the liquidation preference of the
Series I Preferred Stock in the amount of $4.19 per share plus any declared but
unpaid dividends ("Series I Liquidation Preference"), the liquidation preference
of the Series J Preferred Stock in the amount of $2.98 per share plus any
declared but unpaid dividends ("Series J Liquidation Preference"), the
liquidation preference of the Series K Preferred Stock in the amount of $3.19
per share plus any declared but unpaid dividends ("Series K Liquidation
Preference"), the liquidation preference of the Series L Preferred Stock in the
amount of $2.76 per share plus any declared but unpaid dividends ("Series L
Liquidation Preference"), the liquidation preference of the Series M Preferred
Stock in the amount of $2.23 per share plus any declared
4
<PAGE> 5
but unpaid dividends ("Series M Liquidation Preference"), the liquidation
preference of the Series N Preferred Stock in the amount of $.90 per share plus
any declared but unpaid dividends ("Series N Liquidation Preference"), the
liquidation preference of the Series O Preferred Stock in the amount of $1.06
per share of Series O Preferred Stock plus any declared but unpaid dividends
(the "Series O Liquidation Preference"), the liquidation preference of the
Series P Preferred Stock in the amount of $.82 per share of Series P Preferred
Stock plus any declared but unpaid dividends (the "Series P Liquidation
Preference"), the liquidation preference of the Series Q Preferred Stock in the
amount of $.62 per share of Series Q Preferred Stock plus any declared but
unpaid dividends (the "Series Q Liquidation Preference"), the liquidation
preference of the Series R Preferred Stock in the amount of $.58 per share of
Series R Preferred Stock plus any declared but unpaid dividends (the "Series R
Liquidation Preference") no distribution shall be made to the holders of shares
of stock ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Series S Preferred Stock unless, prior thereto, the
holders of shares of Series S Preferred Stock shall have received an amount
equal to $.32 per share of Series S Preferred Stock plus any declared but unpaid
dividends ("Series S Liquidation Preference").
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series D Liquidation Preference, the
Series E Liquidation Preference, the Series F Liquidation Preference, the Series
G Liquidation Preference, the Series H Liquidation Preference, the Series I
Liquidation Preference, the Series J Liquidation Preference, the Series K
Liquidation Preference, the Series L Liquidation Preference, the Series M
Liquidation Preference, the Series N Liquidation Preference, the Series O
Liquidation Preference, the Series P Liquidation Preference, the Series Q
Liquidation Preference, the Series R Liquidation Preference, the Series S
Liquidation Preference and the liquidation preferences of all other series of
Preferred Stock, if any, which rank on a parity with the Series S Preferred
Stock, then such remaining assets shall be distributed ratably to the holders of
such parity shares in proportion to their respective liquidation preferences.
Section 7. No Redemption. The shares of Series S Preferred Stock shall
not be redeemable.
Section 8. Amendment. The Articles of Incorporation of the Corporation
shall not be further amended in any manner which would (a) alter or change the
powers, preferences or special rights or privileges of the Series S Preferred
Stock so as to affect them adversely or (b) grant to any other class of shares
any rights superior to those of the Series S Preferred Stock without the
affirmative vote of the holders of a majority or more of the outstanding shares
of Series S Preferred Stock, voting separately as a class.
5
<PAGE> 6
Section 9. Fractional Shares. Series S Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series S Preferred Stock."
6
<PAGE> 7
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing Certificate are true of their own knowledge.
Executed at Milpitas, California on December 31, 1998.
/s/ J. Richard Ellis
-------------------------------------
J. Richard Ellis
President and Chief Executive Officer
/s/ Henry Madrid
-------------------------------------
Henry Madrid
Chief Financial Officer
7
<PAGE> 1
EXHIBIT 10.23
SEVENTH AMENDMENT
TO
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS SEVENTH AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the
"Amendment") is entered into as of December 30, 1998, by and between DISC, Inc.,
a California corporation (the "Company"), and MK GVD Fund (the "Purchaser").
R E C I T A L S :
A. WHEREAS on March 29, 1996 the Company and Purchaser entered into a
Convertible Debenture Purchase Agreement pursuant to which the Company agreed to
sell, and Purchaser agreed to purchase, an aggregate of $1,400,000 in principal
amount of Convertible Debentures, each convertible into shares of the Company's
Preferred Stock, which Agreement was amended as of December 31, 1996, April 11,
1997, December 31, 1997, March 27, 1998, June 30, 1998 and September 25, 1998 to
increase the aggregate amount of Convertible Debenture to be purchased
thereunder to $6,225,000.
B. The Company and Optionee now seek to amend the Agreement to increase
the total amount of Convertible Debentures which Purchaser agrees to purchase
thereunder.
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, and in consideration of the mutual covenants set forth
herein, the parties hereto agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, capitalized terms used
in the Amendment shall have the same meanings ascribed to them in the
Convertible Debenture Purchase Agreement.
2. AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE AGREEMENT. Section 1.1(a)
of the Convertible Debenture Purchase Agreement is hereby amended to provide
that Purchase agrees to purchase, and the Company agrees to issue and sell, an
aggregate of $6,535,000 in principal amount of Convertible Debentures.
3. ENTIRE AGREEMENT; AMENDMENT. The Convertible Debenture Purchase
Agreement, as amended by this Amendment, constitutes the full and complete
agreement and understanding between the parties hereto regarding the subject
matter of the Convertible Debenture Purchase Agreement and shall supersede all
prior communications, representations, understandings or agreements, if any,
whether oral or written, concerning the subject matter contained in the
Convertible Debenture Purchase Agreement, as so amended, and that no provision
of the Convertible Debenture Purchase Agreement, as so amended, may be modified,
amended, waived or discharged, in whole or in part, except in accordance with
its terms.
4. FORCE AND EFFECT. Except as modified by this Amendment, the terms and
provisions of the Convertible Debenture Purchase Agreement are hereby ratified
and confirmed and are and shall remain in full force and effect. Should any
inconsistency arise between this Amendment and the Convertible Debenture
Purchase Agreement as to the specific matters which are the subject of this
Amendment, the terms and conditions of this Amendment shall control. This
Amendment shall be construed to be part of the Convertible Debenture Purchase
Agreement and shall be deemed incorporated into the Convertible Debenture
Purchase Agreement by this reference.
5. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
<PAGE> 2
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed
in duplicate on its behalf by its duly authorized officer and Optionee has also
executed this Amendment in duplicate, all as of the day and year indicated
above.
DISC, INC.
a California corporation
By: /s/ J. Richard Ellis
-------------------------------------
J. Richard Ellis,
President and Chief Executive Officer
PURCHASER:
MK GVD Fund
By: /s/ Michael D. Kaufman
-------------------------------------
Michael D. Kaufman, General Partner
<PAGE> 1
EXHIBIT 23
CONSENT OF PRICEWATERHOUSECOOPERS LLP
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-91794 and 333-30503) of DISC, Inc. of our report
dated January 19, 1999, except as to Note 1, which is as of March 31, 1999,
appearing on page 35 of this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 828,000
<SECURITIES> 0
<RECEIVABLES> 2,231,000
<ALLOWANCES> 134,000
<INVENTORY> 1,512,000
<CURRENT-ASSETS> 4,540,000
<PP&E> 430,000
<DEPRECIATION> 1,368,000
<TOTAL-ASSETS> 4,970,000
<CURRENT-LIABILITIES> 2,929,000
<BONDS> 0
0
14,647,000
<COMMON> 12,353,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,970,000
<SALES> 9,145,000
<TOTAL-REVENUES> 9,145,000
<CGS> 6,924,000
<TOTAL-COSTS> 11,255,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,000
<INCOME-PRETAX> (2,235,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,235,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,235,000)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
