<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number: 1-11578
DISC, INC.
(Exact name of registrant as specified in its charter)
California 77-0129625
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
372 Turquoise Street 95035
Milpitas, California (Zip Code)
(Address of principal executive offices)
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 April
30, 1997, was 3,288,162.
This report, including all exhibits and attachments, contains 9 pages.
See the accompanying condensed notes to these Financial Statements.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISC, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 285,000 $ 305,000
Accounts receivable, net of allowance for doubtful
accounts of $116,000 and $115,000 1,262,000 1,430,000
Inventories 1,750,000 1,862,000
Prepaids and deposits 171,000 72,000
------------ ------------
Total current assets 3,468,000 3,669,000
Property and equipment, net 413,000 441,000
------------ ------------
$ 3,881,000 $ 4,110,000
============ ============
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,431,000 $ 1,585,000
Borrowings under credit line 993,000 1,087,000
Other accrued liabilities 227,000 211,000
Accrued warranty 98,000 95,000
Current portion of capitalized lease obligations 1,000 --
------------ ------------
Total current liabilities 2,750,000 2,978,000
Shareholders' equity:
Series C Convertible Preferred Stock; no par value,
372,296 shares authorized, issued and outstanding 1,861,000 1,861,000
Series D Convertible Preferred Stock; no par value,
600,000 shares authorized, 444,444 shares issued and
outstanding 1,971,000 1,971,000
Series E Convertible Preferred Stock; no par value,
500,000 shares authorized, issued and outstanding 1,980,000 1,980,000
Series F Convertible Preferred Stock; no par value,
250,000 shares authorized, issued and outstanding 1,250,000 1,250,000
Series G Convertible Preferred Stock, no par value,
110,000 shares authorized, issued and outstanding 950,000 950,000
Series H Convertible Preferred Stock, no par value,
26,109 shares authorized, issued and outstanding 1,000,000 1,000,000
Series I Convertible Preferred Stock, no par value,
167,065 shares authorized, issued and outstanding 700,000 700,000
Series J Convertible Preferred Stock, no par value, shares
authorized, 244,966 issued and outstanding 730,000 730,000
Series K Convertible Preferred Stock, no par value,
235,110 shares authorized, issued, and outstanding 750,000
Common Stock; no par value, 20,000,000 shares
authorized; 3,288,162 and 3,279,532 shares
issued and outstanding 10,925,000 10,925,000
Accumulated deficit (20,986,000) (20,235,000)
------------ ------------
Total shareholders' equity 1,131,000 1,132,000
------------ ------------
$ 3,881,000 $ 4,110,000
============ ============
</TABLE>
See the accompanying condensed notes to these Financial Statements.
<PAGE> 3
DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 1,701,000 $1,402,000
----------- -----------
Costs and expenses:
Cost of sales 1,405,000 1,342,000
Research and development 320,000 283,000
Marketing and sales 460,000 444,000
General and administrative 240,000 252,000
----------- -----------
2,425,000 2,321,000
----------- -----------
Loss from operations (724,000) (919,000)
Interest income (expense), net (27,000) (33,000)
----------- -----------
Net loss $ (751,000) $ (952,000)
=========== ===========
Net loss per share $ (0.23) $ (0.31)
=========== ===========
Weighted average common
shares and equivalents 3,282,000 3,044,000
=========== ===========
</TABLE>
See the accompanying condensed notes to these Financial Statements.
<PAGE> 4
DISC, INC.
STATEMENT OF CASH FLOWS
(DECREASE) INCREASE IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(751,000) $(952,000)
Adjustments to reconcile net loss to cash used in operating
expenses
Depreciation expense 37,000 74,000
Changes in assets and liabilities:
Accounts receivable 168,000 161,000
Inventories 112,000 (8,000)
Prepaid and deposits (99,000) (20,000)
Accounts payable (154,000) (63,000)
Other accrued liabilities 16,000 (147,000)
Accrued warranty 3,000 (18,000)
--------- ---------
Cash used in operating activities (668,000) (973,000)
--------- ---------
Cash flows used in investing activities for capital expenditures (9,000) (160,000)
--------- ---------
Cash flows from financing activities:
Borrowing under bank line of credit (94,000) (58,000)
Proceeds from issuance of Common Stock -- 2,000
Proceeds from issuance of Preferred Stock 750,000 950,000
Repayment of capitalized lease obligations 1,000 (12,000)
--------- ---------
Cash provided by financing activities 657,000 882,000
--------- ---------
Net decrease in cash (20,000) (251,000)
Cash at beginning of period 305,000 298,000
--------- ---------
Cash at end of period $ 285,000 $ 47,000
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 28,000 $ 33,000
========= =========
</TABLE>
See the accompanying condensed notes to these Financial Statements.
<PAGE> 5
DISC, Inc.
CONDENSED NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The unaudited Financial Statements have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, 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 those periods presented. These
Financial Statements should be read in conjunction with the Financial Statements
and notes thereto for the years ended December 31, 1996 and 1995, included in
the Company's Form 10-K. The results of operations for the interim periods are
not necessarily indicative of the results that may be expected for any other
period or for the fiscal year which ends December 31, 1997.
NOTE 2 - INVENTORIES
The components of inventory were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ----------
<S> <C> <C>
Purchased component parts and subassemblies $1,225,000 $1,286,000
Work-in-process 500,000 545,000
Finished goods 25,000 31,000
---------- ----------
$1,750,000 $1,862,000
========== ==========
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
In April, 1997, the Company amended the March 1996 agreement, with one of its
shareholders to increase the total amount to be received upon issuance of
subordinated convertible debentures to $4,430,000. Through March 31, 1997, the
Company has received $3,180,000 pursuant to such agreement. The Company will
receive the remaining $1,250,000 in installments during 1997 in exchange for
subordinated convertible debentures. The debentures will convert to preferred
stock at June 30, September 30, and December 31, 1997 in amounts to be
determined at a price per share based on the closing bid price of the Company's
Common Stock on the last day of the calendar quarter.
<PAGE> 6
PART II
OTHER INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act
of 1934 and the Company intends that such forward-looking statements are subject
to the safe harbors created thereby. These forward-looking statements include
(i) the existence and development of the Company's technical and manufacturing
capabilities, (ii) anticipated increased sales, (iii) potential future decreases
in manufacturing costs, and (iv) the need for, and availability of, additional
financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business, which
involve judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, the business and operations of the Company are subject to substantial
risks which increase the uncertainty inherent in such forward-looking statements
(see "Additional Factors that May Affect Future Operating Results" on page 5 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
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.
Results of Operations
The Company had sales of $1,701,000 for the quarter ended March 31, 1997, as
compared to $1,402,000 in the first quarter of 1996. This increase was primarily
due to sales to an expanded customer base as a result of an increase in the
Company's direct sales personnel. The general sales cycles for distribution of
the Company's products are similar to those of most businesses selling products
designed for use as part of large systems, and range from three to six months
for Value Added Resellers and small System Integrators and from one to two years
for Original Equipment Manufacturers, Product Integrators and large System
Integrators.
Cost of sales, as a percentage of sales, was 83% in the first quarter of 1997,
as compared to 96% in the first quarter of 1996. The Company's relatively low
gross margins reflected the Company's low levels of net sales, which have
resulted in unabsorbed manufacturing costs and high costs of materials due to
the inability to achieve purchasing economies of scale due to low sales volume.
The Company expects that, as product sales continue to increase, costs of sales
per unit of product will decrease because fixed manufacturing costs will be
distributed over the larger sales volume, and material costs will decrease as
the result of volume purchases.
Research and development expenses were $320,000 in the first quarter of 1997 as
compared to $283,000 in the first quarter of 1996. The primary reason for the
increase in the first quarter of 1997 as compared to the first quarter of 1996
was an increase in engineering personnel. The Company has restructured its
research and development group and is focused on building core competencies
internally. The Company believes that research and development expenses will
continue to increase moderately in 1997 due to current projects under
consideration.
Marketing and sales expenses were $460,000 in the first quarter of 1997 as
compared to $444,000 in the first quarter of 1996. The primary reason for the
increase was due to participation in more trade shows targeted to vertical
markets. The Company believes that marketing and sales expenses will moderately
increase in connection with the Company's continued efforts to broaden the
market acceptance of its products.
<PAGE> 7
General and administrative expenses were $240,000 in the first quarter of 1997
as compared to $252,000 in the first quarter of 1996. The primary reason for the
decrease in expenses was due to a reduction in headcount.
Liquidity and Capital Resources
In the first quarter of 1997, the Company used $668,000 of cash in
operations, primarily to fund operating losses. Also in the first quarter of
1997, the Company raised $750,000 through the issuance of subordinated
convertible debentures. In addition, in April 1997, the Company amended its
agreement to raise funds through the issuance of subordinated convertible
debentures. The Company will receive $1,250,000 in installments during the
remainder of 1997. The Company believes that this cash together with borrowing
from the credit line, which allows it to borrow the lesser of $1,500,000 or 80%
of eligible receivables, and cash generated from operations will be sufficient
to meet its operating requirements at least through the end of 1997, although
the Company anticipates that it will continue to incur net losses for the
foreseeable future. The ability to sustain its operations for a significant
period after December 31, 1997, will depend on the Company's ability to
significantly increase sales or raise significant additional equity or debt
financing. There is no assurance that any of these conditions will be achieved.
In particular, the Company expects to require increasing amounts of cash to
finance the Company's efforts to increase sales, which the Company plans to
achieve by increasing selling efforts to large system integrators and OEMs.
The company plans to hire additional sales and sales support staff, increase
its participation at industry trade shows and make evaluation units available
to VARs and software developers. In addition, the Company intends to expand its
current network of resellers. The Company expects that it will require cash to
finance purchases of inventory to satisfy anticipated increased sales as the
Company's products achieve market acceptance.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the fiscal quarter ended March 31, 1997, the Registrant
did not file any reports on Form 8-K.
<PAGE> 8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DOCUMENT IMAGING SYSTEMS CORPORATION
Dated May 9, 1997 By: /s/ J. Richard Ellis
-------------------------------------
J. Richard Ellis
President
Chief Executive Officer
(Principal Executive Officer and
Duly Authorized Officer)
Dated May 9, 1996 By: /s/ Henry Madrid
-------------------------------------
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
<PAGE> 9
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 285,000
<SECURITIES> 0
<RECEIVABLES> 1,262,000
<ALLOWANCES> 116,000
<INVENTORY> 1,750,000
<CURRENT-ASSETS> 3,468,000
<PP&E> 413,000
<DEPRECIATION> 1,153,000
<TOTAL-ASSETS> 3,881,000
<CURRENT-LIABILITIES> 2,750,000
<BONDS> 0
10,925,000
0
<COMMON> 11,192,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,881,000
<SALES> 1,701,000
<TOTAL-REVENUES> 1,701,000
<CGS> 1,405,000
<TOTAL-COSTS> 2,425,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,000
<INCOME-PRETAX> (751,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (751,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (751,000)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> 0
</TABLE>
