UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
1-11578
(Commission file number)
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DISC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 77-0129625
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
372 Turquoise Street
Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 934-7000
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 [ ] The number of shares
outstanding of the registrant's common stock as of July 15, 2001 was 3,846,033.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DISC INC.
BALANCE SHEET
June 30, 2001 December 31, 2000
------------- -----------------
(Unaudited)
(Restated) (Restated)
ASSETS
Current assets:
Cash $ 636,000 $ 128,000
Accounts receivable 2,108,000 1,784,000
Inventories 1,342,000 1,465,000
Prepaids and deposits 202,000 76,000
------------ ------------
Total current assets 4,288,000 3,453,000
Property and equipment, net 409,000 432,000
------------ ------------
$ 4,697,000 $ 3,885,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,020,000 $ 1,159,000
Borrowings under credit line 732,000 --
Accrued expenses and other liabilities 821,000 630,000
------------ ------------
Total current liabilities 2,573,000 1,789,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock; no par value:
10,000,000 shares authorized; 5,283,599
and 5,141,573 shares issued and outstanding 21,344,000 19,277,000
Common Stock and Warrants;
no par value: 40,000,000
Shares authorized; 3,846,033
and 3,841,053 shares issued and outstanding 14,164,000 13,775,000
Accumulated deficit (33,384,000) (30,956,000)
------------ ------------
Total shareholders' equity 2,124,000 2,096,000
------------ ------------
$ 4,697,000 $ 3,885,000
============ ============
See the accompanying condensed notes to these financial statements.
2
DISC INC.
STATEMENT OF OPERATIONS
Three Months ended June 30 Six Months ended June 30
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Restated) (Restated) (Restated) (Restated)
Net sales $ 2,513,000 $ 1,457,000 $ 4,075,000 $ 3,072,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 2,087,000 1,324,000 3,491,000 2,698,000
Research and development 416,000 278,000 788,000 558,000
Marketing and sales 829,000 700,000 1,581,000 1,193,000
General and administrative 312,000 250,000 590,000 522,000
----------- ----------- ----------- -----------
3,644,000 2,552,000 6,450,000 4,971,000
Loss from operations (1,131,000) (1,095,000) (2,375,000) (1,899,000)
Interest income (expense), net (30,000) (28,000) (53,000) (55,000)
----------- ----------- ----------- -----------
Net loss $(1,161,000) $(1,123,000) $(2,428,000) $(1,954,000)
Deemed preferred dividend (348,000) (340,000) (814,000) (1,004,000)
----------- ----------- ----------- -----------
Net loss attributable to
common shareholders $(1,509,000) $(1,463,000) $(3,242,000) $(2,958,000)
=========== =========== =========== ===========
Net loss per share -- basic and diluted $ (0.39) $ (0.38) $ (0.84) $ (0.78)
Weighted average common shares
and equivalents 3,846,000 3,808,000 3,845,000 3,788,000
See the accompanying condensed notes to these financial statements.
3
DISC INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
------------------------- ------------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- ------------ --------- ----------- ------------ -----------
Balance at December 31, 2000 (restated) .. 5,141,573 $ 19,277,000 3,841,053 $13,775,000 $(30,956,000) $ 2,096,000
Issuance of Series BB Convertible
Preferred Stock and Warrants for
Common Stock, net...................... 71,038 1,066,000 234,000 -- 1,300,000
Exercise of Common Stock
Options ................................ 4,980 6,000 -- 6,000
Net loss for the period .................. (1,267,000) (1,267,000)
Allocation of discount on
Preferred Stock ........................ (466,000) -- 466,000 --
Deemed preferred stock dividend .......... 466,000 -- -- (466,000) --
--------- ------------ --------- ----------- ------------ -----------
Balance at March 31, 2001 (unaudited) .... 5,212,611 20,343,000 3,846,033 14,015,000 (32,223,000) 2,135,000
Issuance of Series CC Convertible
Preferred Stock and Warrants .......... 70,988 1,001,000 149,000 -- 1,150,000
Net loss for the period .................. (1,161,000) (1,161,000)
Allocation of discount on
Preferred Stock ....................... 348,000 -- (348,000) --
Deemed preferred stock dividend .......... (348,000) -- -- 348,000 --
--------- ------------ --------- ----------- ------------ -----------
Balance at June 30, 2001 (unaudited) ..... 5,283,599 $ 21,344,000 3,846,033 $14,164,000 (33,384,000) $ 2,124,000
========= ============ ========= =========== ============ ===========
See the accompanying condensed notes to these financial statements.
4
DISC INC.
STATEMENT OF CASH FLOWS
Six Months ended June 30,
-----------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $(2,428,000) $(1,954,000)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation expense 146,000 128,000
Changes in assets and liabilities:
Accounts receivable (324,000) 607,000
Inventories 123,000 (414,000)
Prepaid and deposits (126,000) 48,000
Accounts payable (139,000) (157,000)
Accrued expenses and other liabilities 191,000 47,000
----------- -----------
Cash used in operating activities (2,557,000) (1,695,000)
----------- -----------
Cash flows used in investing activities for
capital expenditures (123,000) (137,000)
----------- -----------
Cash flows from financing activities:
Borrowings (repayments) under line of
credit 732,000 (410,000)
Proceeds from issuance of Common Stock 6,000 75,000
Proceeds from issuance of Preferred Stock 2,450,000 1,920,000
----------- -----------
Cash provided by financing activities 3,188,000 1,585,000
----------- -----------
Net increase (decrease) in cash 508,000 (247,000)
Cash at beginning of period 128,000 1,126,000
----------- -----------
Cash at end of period $ 636,000 $ 879,000
=========== ===========
See the accompanying condensed notes to these financial statements.
5
DISC, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
We have prepared the unaudited interim financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission. We have
condensed or omitted certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles pursuant to these rules and regulations. In our opinion,
the financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the financial position,
operating results and cash flows for the periods presented. These financial
statements should be read in conjunction with the financial statements and
accompanying notes for the years ended December 31, 2000 and 1999 included in
our Annual Report on Form 10-K. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
the fiscal year, which ends December 31, 2001, or for any other period.
During the first six months of 2001, we received $2,450,000 of equity financing
from our largest investor. Our investor also agreed to provide up to an
additional $2,500,000 of equity financing to us, if needed. We believe that this
committed investment, together with current cash reserves, cash to be generated
from operations and borrowings from our factoring agreement with a financial
institution, which allows us to sell the lesser of $1,500,000 or 85% of eligible
accounts receivable, will be sufficient to meet our operating requirements at
least through the end of 2001, although we anticipate that we will continue to
incur net losses for the foreseeable future. The ability to sustain our
operations for a significant period after December 31, 2001 will depend on our
ability to significantly increase sales or raise significant additional equity
or debt financing.
NOTE 2 -- INVENTORIES
The components of inventory were as follows:
June 30, December 31,
2001 2000
---------- ------------
Purchased component parts and subassemblies $ 661,000 $ 812,000
Work-in-process 560,000 574,000
Finished goods 121,000 79,000
---------- ----------
$1,342,000 $1,465,000
========== ==========
NOTE 3 -- RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2001, the Company sold and MK GVD Fund, the
principal shareholder, purchased 71,038 and 70,988 shares of convertible
preferred stock, Series BB and CC, respectively, and warrants under a formula
set out in a March 1996 agreement for aggregate proceeds of $1,300,000 and
$1,150,000, respectively. The warrants allow the holder to purchase 177,595 and
117,469 shares of common stock for an exercise price of $2.29 and $2.03 per
share, respectively. Under the agreement the number of shares of preferred stock
was determined based on 85% of the average closing price of the Company's Common
Stock for the five trading days ended three days prior to the issuance date, but
not to exceed $2.50 per share as converted into common stock. Under the terms of
the agreement, MK GVD Fund also agreed to provide up to an additional $2,500,000
of funding, if needed.
The fair value of the warrants was determined using a Black Scholes option
pricing model with the following assumptions: volatility of 142%; risk free
interest rate of 5.08%; expected life: 5 years and no dividend yield. The fair
value of the warrants is recorded in shareholders equity.
NOTE 4 -- COMPREHENSIVE INCOME (LOSS)
For the periods presented, there were no elements of comprehensive income
(loss), except for the net losses.
NOTE 5 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes
6
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the balance sheet and
measurement of those instruments at fair value. We adopted SFAS 133 as of
January 1, 2001 and it did not have a material effect on our financial condition
or results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." This standard eliminates the pooling-of-interests method of
accounting for business combinations, except for qualifying business
combinations that were initiated prior to July 1, 2001, and applies to all
business combinations accounted for under the purchase method that are completed
after June 30, 2001. The implementation of this standard is not expected to have
a significant impact on the Company's financial condition or results of
operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets." This standard eliminates the amortization of goodwill, and
requires goodwill to be reviewed at least annually for impairment, the useful
lives of previously recognized intangible assets to be reassessed and the
remaining amortization periods to be adjusted accordingly. This standard is
effective for fiscal years beginning after December 15, 2001. The implementation
of this standard is not expected to have a significant impact on the Company's
financial condition or results of operations.
NOTE 6 -- SUBSEQUENT EVENT
On July 30, 2001, we completed the acquisition of all of the shares outstanding
of NSM Storage GmbH, Germany (NSM). As consideration for the acquired business,
we paid $10,000 in cash and issued 965,210 shares of our common stock. This
transaction will be accounted for under the purchase method of accounting
pursuant to the recently issued Financial Accounting Standard ("FAS") No. 141
and No. 142, respectively. The allocation of the purchase price has not yet been
determined. Our future results beginning July 31, 2001, with include the
operations of NSM.
NOTE 7 -- RESTATEMENT
Under EITF Nos. 98-5 and 00-27 and related standards, if a company issues
convertible preferred stock with a beneficial conversion feature, then the value
of the beneficial conversion feature is accounted for as a deemed dividend. A
beneficial conversion feature is computed as the intrinsic value of the spread
between the quoted market price of common stock and the conversion price
multiplied by the number of common shares into which the preferred stock
converts. As described in Note 3, the Company has funded its operations through
the sales, in private placements, of preferred stock and warrants to its
principal investor. Management believes that these equity transactions were made
in the best interests of the Company. In determining whether there was a
beneficial conversion feature, management utilized an estimated fair value of
common stock which was lower than its quoted market price. Management believed
that the negotiated price of the stock was representative of the market price of
the stock in a private placement of that size. Management concluded that there
was no beneficial conversion feature associated with the issuance of convertible
preferred stock and warrants, and the Company did not record a deemed dividend.
Recently, the Company became aware that the SEC has insisted that the quoted
market price be used in calculating a beneficial conversion feature. As the
result of the SEC's position, the Company has restated its financial statements
to reflect a deemed dividend as a charge to accumulated deficit and earnings per
share. The restatement did not affect the Company's assets, liabilities,
revenues or expenses as originally reported. In the restatement, the deemed
dividend is added to net loss to determine net loss attributable to common
shareholders.
In addition to the restatement to use the quoted market price to measure the
beneficial conversion feature, the Company restated to report a cumulative
effect of accounting change of as of October 1, 2000, representing the effect of
the change in accounting method from use of the stated conversion price to use
of the accounting conversion price in applying the intrinsic value method for
determining the beneficial conversion feature for all convertible preferred
stock issuances as required by EITF 00-27. The EITF required that the effect of
adopting the accounting conversion price be recorded in the fourth quarter of
2000. The loss per share for each period is revised to reflect the net loss
attributable to common shareholders, as presented below:
7
Six Months
Quarter ended June 30, ended June 30,
----------------------- ------------------------
2001 2000 2001 2000
-------- -------- -------- ---------
(in thousands, except per share data)
Net loss, as originally reported $ (1,161) $ (1,123) $ (2,428) $ (1,954)
Deemed dividend, including cumulative effect
adjustment $ (348) (340) (814) (1,004)
Net loss attributable to common shareholders,
as restated $ (1,509) $ (1,463) $ (3,242) $ (2,958)
Net loss per share, as originally reported $ (0.30) $ (0.29) $ (0.63) $ (0.52)
Net loss attributable to common shareholders per
share, as restated $ (0.39) $ (0.38) $ (0.84) $ (0.93)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2001, the company had sales of
$2,513,00 and $4,075,000, respectively, compared to sales of $1,475,000 and
$3,072,000 for the three and six months ended June 30, 2000. The increase is
related to an increase in unit sales and an increase in the sale of media. In
the first quarter of the year the supply of 9.1 GB MO media was severely
limited, however, the availability problem was resolved during the second
quarter and we were able to ship our backlog of 9.1 GB MO media. The general
sales cycles for distribution of our products are similar to those of most
businesses selling products designed for use as part of large systems, and range
from three to six months for value added resellers and small system integrators
and from one to two years for original equipment manufacturers, product
integrators and large system integrators. Because our products are part of large
systems, the sales cycles for our products vary significantly and are difficult
to predict for any particular transaction. The long and often unpredictable
sales cycles for our products complicate forecasting for operational planning
and may cause net sales and operating results to vary significantly from quarter
to quarter.
Cost of sales, as a percentage of sales, decreased to 83% and 86%for the three
and six months ended June 30, 2001, as compared to 91% and 88% for the
comparable 2000 periods, primarily due to the increase in net sales. Our
relatively low gross margins reflect our low levels of net sales, which have
resulted in unabsorbed manufacturing costs and high costs of materials due to
the inability to achieve purchasing economies of scale. We expect that, if
product sales increase significantly, 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. However, even with product sales increases, cost of sales per unit of
product may not decrease significantly or at all because the magnitude of the
sales increase was not sufficient or because manufacturing, material and other
costs may independently increase.
For the three and six months ended June 30, 2001, research and development
expenses were $416,000 and $788,000, respectively, compared to $278,000 and
$558,000 for the comparable period of 2000. The increase was primarily due to an
increase in headcount in connection with our network attach storage program. We
believe that research and development expenses will continue to increase
moderately during the remainder of 2001 due to new projects currently under
development.
8
Marketing and sales expenses were $829,000 and $1,581,000 for the three and six
months ended June 30, 2001 compared to $700,000 and $1,193,000 for the
comparable periods in 2000. The increase is primarily due to an increase in our
sales and marketing headcount. We believe that marketing and sales expenses will
increase during the remainder of 2001 as we have added significant resources in
marketing and business development to allow us to address new markets and expand
our customer base.
General and administrative expenses were $312,000 and $590,000 for the three and
six months ended June 30, 2001, compared to $250,000 and $522,000 for the
comparable periods in 2000. The increase was primarily due to an increase in
headcount and an increase in professional fees. General and administrative
expenses are expected to remain relatively constant during the remainder of
2001.
Restated Net Loss Available to Common Shareholders and Earnings Per Share. Under
EITF Nos. 98-5 and 00-27 and related standards, if a company issues convertible
preferred stock with a beneficial conversion feature, then the value of the
beneficial conversion feature is accounted for as a deemed dividend. A
beneficial conversion feature is computed as the intrinsic value of the spread
between the quoted market price of common stock and the conversion price
multiplied by the number of common shares into which the preferred stock
converts. As described in Note 5, the Company has funded its operations through
the sales, in private placements, of preferred stock and warrants to its
principal investor. Management believes that these equity transactions were made
in the best interests of the Company. In determining whether there was a
beneficial conversion feature, management utilized an estimated fair value of
common stock which was lower than its quoted market price. Management believed
that the negotiated price of the stock was representative of the market price of
the stock in a private placement of that size. Management concluded that there
was no beneficial conversion feature associated with the issuance of convertible
preferred stock and warrants, and the Company did not record a deemed dividend.
Recently, the Company became aware that the SEC has insisted that the quoted
market price be used in calculating a beneficial conversion feature. As the
result of the SEC's position, the Company has restated its financial statements
to reflect a deemed dividend as a charge to accumulated deficit and earnings per
share. The restatement did not affect the Company's assets, liabilities,
revenues or expenses as originally reported. In the restatement, the deemed
dividend is added to net loss to determine net loss attributable to common
shareholders.
In addition to the restatement to use the quoted market price to measure the
beneficial conversion feature, the Company restated to report a cumulative
effect of accounting change of as of October 1, 2000, representing the effect of
the change in accounting method from use of the stated conversion price to use
of the accounting conversion price in applying the intrinsic value method for
determining the beneficial conversion feature for all convertible preferred
stock issuances as required by EITF 00-27. The EITF required that the effect of
adopting the accounting conversion price be recorded in the fourth quarter of
2000. The loss per share for each period is revised to reflect the net loss
attributable to common shareholders, as presented below:
Quarter ended June 30, Six Months ended June 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands, except per share data)
Net loss, as originally reported $ (1,161) $ (1,123) $ (2,428) $ (1,954)
Deemed dividend, including cumulative effect
adjustment (348) (340) (814) (1,004)
Net loss attributable to shareholders, as restated $ (1,509) $ (1,463) $ (3,242) $ (2,958)
Net loss per share, as originally reported $ (0.30) $ (0.29) $ (0.63) $ (0.52)
Net loss attributable to common shareholders per
share, as restated $ (0.39) $ (0.38) $ (0.84) $ (0.93)
9
Notwithstanding the foregoing, we may incur significant, unexpected expenses as
a result of attempts to respond to technological advances, increased
competition, new product announcements and releases by our competitors, changes
in the data storage market, market opportunities and other factors discussed
below in "Factors That May Affect Future Operating Results and the Market Price
of Our Stock."
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended June 30, 2001, we used $2,557,000 of cash in
operations, primarily to fund operating losses. During the first six months of
2001, we received $2,450,000 of equity financing from our largest investor (see
Note 3 Related Party Transactions in Condensed Notes to Financial Statements).
Our largest investor also agreed to provide up to an additional $2,500,000 of
equity financing to us, if needed. We believe that this committed investment
together with borrowing from our factoring agreement with a financial
institution, which allows us to sell the lesser of $1,500,000 or 85% of eligible
accounts receivable, current cash reserves and cash to be generated from
operations will be sufficient to meet our operating requirements at least
through the end of 2001, although we anticipate that we will continue to incur
net losses for the foreseeable future. We expect to require increasing amounts
of cash to finance our efforts to increase sales, which we plan to achieve by
increasing selling efforts to large system integrators and OEMs by hiring
additional sales and sales support staff and by making evaluation units
available. In addition, we plan to expand our current network of resellers. We
also expect that it will require cash to finance purchases of inventory in
anticipation of possible increases in sales. In addition, we expect that the
integration of our recent acquisition of NSM storage GmbH and the support of its
operations will require cash as well. If we incur greater expenditures than we
currently anticipate in connection with these or other matters, and if we cannot
raise funds on acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements.
The ability to sustain our operations for a significant period after December
31, 2001 will depend on our ability to significantly increase sales or raise
significant additional equity or debt financing. We may not be able to increase
sales or raise significant additional equity or debt financing, from our largest
investor or otherwise, on a timely basis or at all. In particular, while we have
relied upon regular investments by our largest investor to sustain our
operations, our largest investor has no commitment to continue its investments,
other than with respect to the additional $2,500,000 of equity financing
mentioned above.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the balance sheet and measurement of
those instruments at fair value. We adopted SFAS 133 as of January 1, 2001 and
it did not have a material effect on our financial condition or results of
operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." This standard eliminates the pooling-of-interests method of
accounting for business combinations, except for qualifying business
combinations that were initiated prior to July 1, 2001, and applies to all
business combinations accounted for under the purchase method that are completed
after June 30, 2001. The implementation of this standard is not expected to have
a significant impact on the Company's financial condition or results of
operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets." This standard eliminates the amortization of goodwill, and
requires goodwill to be reviewed at least annually for impairment, the useful
lives of previously recognized intangible assets to be reassessed and the
remaining amortization periods to be adjusted accordingly.
10
This standard is effective for fiscal years beginning after December 15, 2001.
The implementation of this standard is not expected to have a significant impact
on the Company's financial condition or results of operations.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This quarterly report on Form 10-Q contains certain forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and we intend
that these forward-looking statements are subject to the safe harbours created
by those provisions. These forward-looking statements include statements
relating to:
- - future research and development projects;
- - increasing our sales efforts and possible increases in sales;
- - potential future decreases in costs of sales per unit;
- - expected research and development, marketing and sales and general and
administrative expenditures;
- - expanding our sales channels;
- - expected sales cycles;
- - the need for, and availability of, additional financing; and
- - actual and potential acquisitions and their effects on our financial position
The forward-looking statements included in this quarterly report on Form 10-Q
are based on current expectations that involve a number of risks and
uncertainties. These forward-looking statements are based on assumptions
regarding our business, which involve judgments with respect to, among other
things, future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, our business and operations of are subject to substantial risks which
increase the uncertainty inherent in such forward-looking statements (see
"Additional Factors that May Affect Future Operating Results and the Market
Price of our Stock" starting on page 5 of our annual report on Form 10-K for the
year ended December 31, 2000 and Factors that May Affect Future Operating
Results and the Market Price of our Stock" below). In light of the significant
uncertainties inherent in the forward-looking information included in this
quarterly report on Form 10-Q, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives or
plans will be achieved.
These statements do not reflect the potential impact of business combinations
that had not closed as of the end of the second quarter of 2001.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE MARKET PRICE OF OUR
STOCK
Our future operating results, and stock price, may be affected by a number of
factors, many of which are beyond our control. These factors include the
following:
OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE FOR A NUMBER OF
REASONS, WHICH MAY CAUSE OUR STOCK PRICE TO FLUCTUATE.
Our quarterly operating results have varied in the past and are likely to vary
significantly in the future due to several factors, including:
11
- - the size and timing of significant customer orders;
- - shifts in product or distribution channel mix;
- - increased competition and pricing pressure;
- - timing of new product announcements and releases by us or our competitors;
- - new product developments by storage device manufacturers;
- - the rate of growth in the data storage market;
- - market acceptance of new and enhanced versions of our products;
- - timing and levels of our sales and operating expenses;
- - gain or loss of significant customers or distributors;
- - changes in economic conditions;
- - personnel changes; and
- - our ability to effectively integrate the products and operations of NSM GmbH
with ours.
Our quarterly revenue and operating results have been affected by seasonal
trends. These trends often result in lower revenue in the first quarter of each
fiscal year compared to the fourth quarter of the previous fiscal year due to
customer purchasing and budgetary practices.
The general sales cycles for distribution of our products are similar to those
of most businesses selling products designed for use as part of large systems,
and range from three to six months for value added resellers and small system
integrators and from one to two years for original equipment manufacturers,
product integrators and large system integrators. Our variable and extended
sales cycle makes it difficult to predict if or when revenue will be earned.
Since our operating expenses are based on anticipated revenue levels and because
a high percentage of these expenses are relatively fixed, a delay in a sale or
revenue recognition for a sale could cause significant variations in our
operating results from quarter to quarter and could cause unexpected results.
Operating results in any period should not be considered indicative of the
results investors can expect for any future period. Due to the forgoing and
other factors related to our industry, past results are a much less reliable
predicator of future results than is the case in many older, more stable and
less dynamic industries. We cannot assure you that we will be able to increase
or even sustain our recent levels of quarterly revenue and net sales, as
normalized for unusual or one-time items, or that we will attain or maintain
profitability in any future period. Any unfavourable change in the factors
described above or any other factors could adversely affect our operating
results for a particular quarter. In addition, it is likely that in some future
quarters our operating results will be below the expectations of public market
analysts and investors. In any of these events, the price of our common stock
would likely decline.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
The market price of our common stock has experienced fluctuations and is likely
to fluctuate significantly in the future. Our stock price can fluctuate for a
number of reasons, including:
- - announcements about us or our competitors;
- - quarterly variations in operating results;
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- - the introduction of new technologies or products;
- - changes in product pricing policies by us or our competitors;
- - comments regarding us and the data storage market made on Internet bulletin
boards; and
- - changes in earnings estimates by analysts or changes in accounting policies.
In addition, stock markets have experienced extreme price and volume volatility
in recent years. This volatility has had a substantial effect on the market
prices of securities of many smaller public companies for reasons frequently
unrelated or disproportionate to the operating performance of the specific
companies. In addition, the securities of many high technology companies,
including DISC, have historically been subject to extensive price and volume
fluctuations that may affect the market price of their common stock. These broad
market fluctuations may adversely affect the market price of our common stock.
IF OUR SECURITIES ARE DELISTED FROM NASDAQ, THE TRADING MARKET AND PRICES OF OUR
SECURITIES WOULD BE HARMED.
The trading of our common stock on the NASDAQ System is conditioned upon our
meeting certain asset, revenues and stock price tests. If we fail any of these
tests, our common stock may be delisted from trading on the NASDAQ System, which
could materially adversely affect the trading market and prices for those
securities. In addition, low price stocks are subject to additional risks
including additional state regulatory requirements and the potential loss of
effective trading markets.
COMPETITION IN THE COMPUTER INFORMATION STORAGE MARKET MAY LEAD TO REDUCED
MARKET SHARE, DECLINING PRICES AND REDUCED PROFITS.
The markets for data storage solutions are intensely competitive, fragmented and
characterized by rapidly changing technology and evolving standards. These
conditions could render our products less competitive or obsolete and could harm
our business, financial condition and ability to market our products. Some of
our competitors have significantly more financial, technical, manufacturing,
marketing and other resources than we have. As a result, our competitors may be
able to respond more quickly than we can to new or changing opportunities,
technologies, standards or customer requirements. Competitors may develop
products and technologies that are less expensive or technologically superior to
our products. In addition, our competitors may manufacture and market their
products more successfully than we do our products. Competition from computer
companies and others diversifying into the field is expected to increase as the
market develops. We may face substantial competition from new entrants in the
industry and from established and emerging companies in related industries.
There is significant price competition in the markets in which we compete, and
we believe that pricing pressures are likely to continue. Certain competitors
may reduce prices in order to preserve or gain market share. This pricing
pressure could result in significant price erosion, reduced gross profit margins
and loss of market share, any of which could negatively affect our business,
financial condition and operating results.
THE STORAGE DEVICE MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL EVOLUTION, AND
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW PRODUCTS.
The market for our products is characterized by rapidly changing technology and
evolving industry standards and is highly competitive with respect to timely
innovation. At this time, the data storage market is particularly subject to
change with the emergence of Fibre Channel protocol and new storage solutions
such as storage area networks, or SANs, and network attached storage, or NAS,
devices. The introduction of new products embodying new or alternative
technology or the emergence of new industry standards could render our existing
products obsolete or unmarketable. Our future success will depend in part on our
ability to anticipate changes in technology, to gain
13
access to such technology for incorporation into our products and to develop new
and enhanced products on a timely and cost-effective basis. Risks inherent in
the development and introduction of new products include:
- - the difficulty in forecasting customer demand accurately;
- - the possibility that sales of new products may cannibalise sales of our
current products;
- - delays in our initial shipments of new products;
- - competitors' responses to our introduction of new products; and
- - the desire by customers to evaluate new products for longer periods of time
before making a purchase decision.
In addition, we must be able to maintain the compatibility of our products with
significant future device technologies, and we must rely on producers of new
device technologies to achieve and sustain market acceptance of those
technologies. Development schedules for high-technology products are subject to
uncertainty, and we may not meet our product development schedules.
We have in the past experienced delays in the introduction of some new products.
If we are unable, for technological or other reasons, to develop products in a
timely manner or if the products or product enhancements that we develop do not
achieve market acceptance, our business will be harmed.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO INCUR FUTURE LOSSES.
We have experienced significant operating losses since our inception, and as of
June 30, 2001 had an accumulated deficit of $33,384,000. We expect to continue
to incur net losses for the foreseeable future, and our ability to sustain our
operations for a significant period after December 31, 2001 will depend on our
ability to significantly increase or even maintain sales or raise significant
additional debt or equity financing. There can be no assurance we will be able
to increase sales or that additional financing will be available on acceptable
terms, or at all. Even if we are able to increase sales, we may incur net losses
for the foreseeable future due to anticipated spending increases primarily on
sales, marketing and research and development efforts. Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis.
ANY INABILITY TO MEET OUR FUTURE CAPITAL REQUIREMENTS WOULD LIMIT OUR ABILITY TO
GROW.
We will likely need to seek additional funding in the future. In the event we
need to raise additional funds, we may not be able to do so on favourable terms,
if at all. We have a commitment from our largest investor to invest up to
$2,500,000 during the remainder of 2001, if needed, to help fund our capital
requirements. However there can be no assurance that this investor, or any of
our other investors, will be willing to make similar commitments in the future.
Further, if we issue equity securities, shareholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of our existing securities. If we cannot raise funds on
acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL SHAREHOLDERS MAY PREVENT OTHER INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.
As of July 31, 2001, our executive officers, directors and principal
shareholders beneficially owned, in the aggregate, approximately 87% of our
outstanding common stock, preferred stock and warrants, on an as-if-converted
basis. In particular, our largest investor beneficially owns approximately 85%
of our outstanding common stock, preferred stock and warrants, on an as
converted basis. As a result, these shareholders, if acting together, will be
able to exercise control over all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership could disadvantage other
shareholders with interests different from those of our officers, directors and
principal shareholders. For example,
14
our officers, directors and principal shareholders could delay or prevent an
acquisition or merger even if the transaction would benefit other shareholders.
THERE ARE SUBSTANTIAL RISKS ASSOCIATED WITH THE ACQUISITION OF NSM GMBH
We recently acquired NSM GmbH. If we are not successful in integrating their
products, services, technology and operations with ours, including coordinating
our research development and sales and marketing efforts, our net sales and
operating results could decline. During the integration of NSM GmbH, our
financial performance will be subject to risks commonly associated with an
acquisition, including the financial impact of expenses necessary to realize
benefits from the acquisition and the potential for disruption of operations,
including the diversion of management's attention. We will face difficulties
integrating personnel with disparate backgrounds and combining corporate
cultures, and we may lose key employees. We may also lose customers and
potential customers of NSM GmbH in connection with the transition of ownership
or otherwise
We may not be able to accurately predict the impairment of the goodwill
resulting form the acquisition. Further, we may not be able to accurately
forecast the effect on future operating results from amortization of
identifiable intangible assets.
BECAUSE WE OPERATE WITH LITTLE BACKLOG, OUR OPERATING RESULTS COULD BE ADVERSELY
AFFECTED IF WE DO NOT ACCURATELY ANTICIPATE FUTURE SALES LEVELS.
Historically, we have operated with little order backlog and, due to the nature
of our business, do not anticipate that we will have significant backlog in the
future. Consequently, a large portion of our revenue in each quarter results
from orders placed during that quarter. Because of the relatively large dollar
size of orders from our distributors and original equipment manufacturers, or
OEMs, delay in the placing of a small number of orders by a small number of
purchasers could negatively affect our operating results for a particular
period. In addition, our operating expense levels are, in the short term,
largely fixed and are based, in part, on expectations regarding future revenue.
Thus, our operating results could be disproportionately affected if we do not
receive the expected number of orders in a given quarter and our net sales falls
below our expectations.
WE DEPEND ON CERTAIN KEY SUPPLIERS.
We do not possess proprietary optical disk, high-density disk or other storage
technologies and, consequently, we depend on a limited number of third-party
manufacturers to supply us with the devices that we incorporate into our
products. In some cases, these manufacturers are sole-source providers of the
device technology. Our suppliers have in the past been, and may in the future
be, unable to meet our supply needs, including our needs for timely delivery,
adequate quantity and high quality. We do not have long-term contracts with any
of our significant suppliers. If these suppliers were to decide to pursue the
disc library market directly, they may cease supplying us with disc drives and
media, in which case we may be unable to obtain adequate supplies of disc drives
and media at acceptable prices, if at all. The partial or complete loss of any
of our suppliers could result in significant lost sales, added costs and
production delays or may otherwise harm our business, financial condition,
operating results and customer relationships.
WE HAVE A CONCENTRATED CUSTOMER BASE, AND THEREFORE THE LOSS OF A SINGLE
CUSTOMER COULD NEGATIVELY AFFECT OUR OPERATING RESULTS.
The majority of our end users purchase our products from distributors,
value-added resellers, or VARs, original equipment manufacturers, or OEMs, and
systems integrators, or SIs. We have no long-term orders with any of our
significant customers or distributors. Generally we sell products pursuant to
purchase orders. In addition, our distributors carry competing product lines
which they may promote over our products. A distributor may not continue to
purchase our products or market them effectively. Moreover, certain of our
contracts with our distributors contain "most favoured nation" pricing
provisions which mandate that we offer our products to these customers at the
lowest price offered to other similarly situated customers. Our operating
results could be adversely affected if any of the following factors were to
occur relating to one or more of our significant resellers:
- - the reduction, delay or cancellation of orders or the return of a significant
amount of products;
15
- - the loss of one or more of such resellers; or
- - any financial difficulties of those resellers that result in their inability
to pay amounts owed to us.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our operations
and increase our expenses. In the event of an acute power shortage, that is,
when power reserves for the state of California fall below certain critical
levels, California has on some occasions implemented, and may in the future
continue to implement, rolling blackouts throughout California. We currently do
not have backup generators or alternate sources of power in the event of a
blackout, and our current insurance does not provide coverage for any damages we
or our customers may suffer as a result of any interruption in our power supply.
If blackouts interrupt our power supply, we would be temporarily unable to
continue operations at our California facilities. Any such interruption in our
ability to continue operations at our facilities could damage our reputation,
harm our ability to retain existing customers and to obtain new customers, and
could result in lost revenue, any of which could substantially harm our business
and results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996 by the
California government has caused power prices to increase. Under deregulation,
utilities were encouraged to sell their plants, which traditionally had produced
most of California's power, to independent energy companies that were expected
to compete aggressively on price. Instead, due in part to a shortage of supply,
wholesale prices have skyrocketed over the past year. If wholesale prices
continue to increase, the operating expenses associated with our facilities are
located in California will likely increase which would harm our results of
operations.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN OUR DATA STORAGE PRODUCTS.
We face potential liability for performance problems of our products because our
end users employ our storage technologies for the storage and backup of
important data. Although we maintain general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. Any imposition of liability that is
not covered by insurance or is in excess of our insurance coverage could harm
our business.
A NUMBER OF KEY PERSONNEL ARE CRITICAL TO THE SUCCESS OF OUR BUSINESS.
Our future success depends in large part on our ability to retain certain key
executives and other personnel, some of whom have been instrumental in
establishing and maintaining strategic relationships with key suppliers and
customers. We do not have any employment agreements with our employees. Our
future growth and success will depend in large part on our ability to hire,
motivate and retain highly qualified management, technical, operations and sales
and marketing personnel. Competition for such personnel is intense in the
high-technology industry, particularly in the San Francisco Bay area. We may not
be able to retain our existing personnel or attract additional qualified
personnel in the future. In addition, companies in our industry whose employees
accept positions with competitors frequently claim that their competitors have
engaged in unfair hiring practices. We may receive such claims in the future as
we seek to hire qualified personnel, and such claims could result in litigation.
Regardless of the merits of these claims, we could incur substantial costs in
defending ourselves against these claims.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY THE RECENT SLOWDOWN IN
INFORMATION TECHNOLOGY SPENDING.
Some customers have delayed their purchase decisions and are revaluating their
information technology spending budgets because of the recent slowdown in the
U.S. economy. A prolonged economic downturn would also increase our exposure to
credit risk on trade receivables.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not exposed to significant market risk related to fluctuations in
interest rates, as we are not expected to have a significant amount of interest
income in fiscal 2001. In addition, we do not use derivative financial
instruments of any kind and all of our transactions are in U.S. currency.
As a result of our recent acquisition of NSM Storage GmbH, we will experience an
increased exposure to the change in foreign exchange rates. We plan to assess
the need to enter into foreign exchange forward contracts to offset the impact
of currency fluctuations on certain nonfunctional currency assets and
liabilities, primarily denominated in German Marks. We also plan to assess the
need to periodically hedge anticipated transactions with currency options.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As more fully discussed in Note 3 to the Condensed Notes to Financial
Statements, we have issued 71,038 shares of our Series BB preferred stock and
70,988 shares of our Series CC preferred stock. The preferred stock have certain
rights, privileges and preferences (including liquidation preferences) over our
common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Seventeenth Amendment to Convertible Debenture Purchase Agreement dated
June 29, 2001
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter ending June 30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated November 13, 2001 By: /s/ J. Richard Ellis
------------------------------------
J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
Dated November 13, 2001 By: /s/ Henry Madrid
-------------------------------------
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Seventeenth Amendment to Convertible Debenture Purchase Agreement
dated June 29, 2001
19