<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, 1999 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, 1999 was 3,699,637
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISC, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,021,000 $ 828,000
Accounts receivable 2,230,000 2,097,000
Inventories 1,433,000 1,512,000
Prepaids and deposits 148,000 103,000
------------ ------------
Total current assets 4,832,000 4,540,000
Property and equipment, net 459,000 430,000
------------ ------------
$ 5,291,000 $ 4,970,000
============ ============
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 933,000 $ 772,000
Borrowings under credit line 1,771,000 1,632,000
Accrued expenses and other liabilities 518,000 525,000
------------ ------------
Total current liabilities 3,222,000 2,929,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock; no par
value, 10,000,000 shares authorized,
4,815,301 and 4,799,212 shares issued and
outstanding 14,972,000 14,647,000
Common Stock; no par value, 20,000,000 shares
authorized; 3,698,721 and 3,695,434 issued
and outstanding 12,355,000 12,353,000
Accumulated deficit (25,258,000) (24,959,000)
------------ ------------
Total shareholders' equity 2,069,000 2,041,000
------------ ------------
$ 5,291,000 $ 4,970,000
============ ============
</TABLE>
See the accompanying condensed notes to these financial statements.
2
<PAGE> 3
DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 2,704,000 $ 1,827,000
----------- -----------
Costs and expenses:
Cost of sales 1,903,000 1,536,000
Research and development 286,000 295,000
Marketing and sales 508,000 462,000
General and administrative 270,000 250,000
----------- -----------
Total cost and expenses 2,967,000 2,543,000
----------- -----------
Loss from operations (263,000) (716,000)
Interest and other expense, net (36,000) (33,000)
----------- -----------
Net loss (299,000) (749,000)
----------- -----------
Basic and diluted net loss per share $ (0.08) $ (0.22)
=========== ===========
Weighted and average common shares
for basic and diluted net loss per
share calculations 3,698,000 3,334,000
=========== ===========
</TABLE>
See the accompanying condensed notes to these financial statements.
3
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DISC, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (299,000) $ (749,000)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation expense 50,000 56,000
Changes in assets and liabilities:
Accounts receivable (133,000) 302,000
Inventories 79,000 (311,000)
Prepaid and deposits (45,000) (44,000)
Accounts payable 161,000 (193,000)
Accrued expenses and other liabilities (7,000) (60,000)
----------- -----------
Cash used in operating activities (194,000) (999,000)
----------- -----------
Cash flows used in investing activities for
capital expenditures (79,000) (7,000)
----------- -----------
Cash flows from financing activities:
Borrowings (repayments) under bank line of credit 139,000 (205,000)
Proceeds from issuance of Common Stock 2,000 --
Proceeds from issuance of Preferred Stock and
Warrants for Common Stock 325,000 1,700,000
----------- -----------
Cash provided by financing activities 466,000 1,495,000
----------- -----------
Net increase in cash 193,000 489,000
Cash at beginning of period 828,000 436,000
----------- -----------
Cash at end of period $ 1,021,000 $ 925,000
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 36,000 $ 31,000
----------- -----------
</TABLE>
See the accompanying condensed notes to these financial statements.
4
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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, 1998 and 1997, 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, 1999.
NOTE 2 - INVENTORIES
The components of inventory were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Purchased component parts and
subassemblies $ 903,000 $ 893,000
Work in process 469,000 530,000
Finished goods 61,000 89,000
---------- ----------
$1,433,000 $1,512,000
========== ==========
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 1999, the Company issued $325,000 in
principal amount of subordinated convertible debentures to MK GVD Fund under its
1996 agreement, as amended. On March 31, 1999, such debentures were converted
into 16,089 shares of Series T Preferred Stock, and warrants to purchase 40,222
shares of Common Stock at an exercise price of $2.53. The sales of convertible
debentures and preferred stock were deemed to be exempt from registration under
Securities Act in reliance on Section 4 (2) of the Securities Act or regulation
D promulgated there under, as transactions by an issuer not involving a public
offering. 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. MK GVD
Fund also agreed to provide up to an additional $675,000 under the Agreement to
the Company, if needed.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
For the periods presented, there were no elements of comprehensive income
(loss), except for the net losses.
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
5
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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 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1998). 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
For the three months ended March 31, 1999, the Company had sales of $2,704,000
compared to sales of $1,827,000 for the three month period ended March 31, 1998.
This increase was primarily due to an increase in unit sales to an expanded
customer base that has been developed over the last two to three years. 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 70% for the three month period
ended March 31, 1999, as compared to 84% for the comparable 1998 period. The
Company's relatively low gross margins reflect the Company's low levels of net
sales, which have resulted in unabsorbed manufacturing costs and high costs of
materials due to the inability to achieve purchasing economies of scale. 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 the recently
introduced Orion Series of products will increase the company's overall margins.
For the three month period ended March 31, 1999, research and development
expenses were relatively constant at $286,000 compared to $295,000 for the
comparable period of 1998. The Company believes that research and development
expenses will increase moderately in 1999 due to new projects currently under
consideration.
Marketing and sales expenses were $508,000 for the three month period ended
March 31, 1999 as compared to $462,000 for the comparable period in 1998. The
increase is primarily due to an increase in direct selling expenses related to
the increase in sales. The Company believes that marketing and sales expenses
will increase moderately during the remainder of 1999 primarily related to
increased direct selling expenses due to an expected increase in revenue.
General and administrative expenses were $270,000 for the three month period
ended March 31, 1999, compared to $250,000 for the comparable period in 1998 and
are expected to remain relatively constant during the remainder of 1999.
Liquidity and Capital Resources
During the three month period ended March 31, 1999, the Company used $194,000 of
cash in operations, primarily to fund operating losses. During the first quarter
of 1999, the Company received $325,000 of equity financing from its largest
investor. The largest investor also agreed to provide up to an additional
$675,000 of equity financing to the Company, if needed. 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 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. 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 expects that it will require cash
to finance purchases of inventory to satisfy anticipated increased sales as the
Company's products achieve market acceptance.
6
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Eighth Amendment to Convertible Debenture Purchase Agreement dated
March 30, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ending March 31, 1999.
7
<PAGE> 8
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.
DISC, INC.
Dated May 15, 1999 By: /s/ J. Richard Ellis
------------------------------------
J. Richard Ellis
President Chief Executive Officer
(Principal Executive Officer)
Dated May 15, 1999 By: /s/ Henry Madrid
------------------------------------
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Accounting Officer)
8
<PAGE> 9
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Eighth Amendment to Convertible Debenture
Purchase Agreement dated March 30, 1999
27.1 Financial Data Schedule
</TABLE>
9
<PAGE> 1
EXHIBIT 10.1
EIGHTH AMENDMENT
TO
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS SEVENTH AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the
"Amendment") is entered into as of March 31, 1999, 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,
and December 31, 1998 to increase the aggregate amount of Convertible Debenture
to be purchased thereunder to $6,535,000.
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 $6,860,000 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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,021,000
<SECURITIES> 0
<RECEIVABLES> 2,230,000
<ALLOWANCES> 148,000
<INVENTORY> 1,433,000
<CURRENT-ASSETS> 4,832,000
<PP&E> 459,000
<DEPRECIATION> 1,418,000
<TOTAL-ASSETS> 5,291,000
<CURRENT-LIABILITIES> 3,222,000
<BONDS> 0
0
14,972,000
<COMMON> 12,355,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,291,000
<SALES> 2,704,000
<TOTAL-REVENUES> 2,704,000
<CGS> 1,903,000
<TOTAL-COSTS> 2,967,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,000
<INCOME-PRETAX> (299,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (299,000)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
