<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 SEPTEMBER 30, 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 November
1, 1999 was 3,701,804
This report, including all exhibits and attachments, contains eleven pages.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISC, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 866,000 $ 828,000
Accounts Receivable 1,417,000 2,097,000
Inventories 1,630,000 1,512,000
Prepaids and deposits 133,000 103,000
------------ ------------
Total current assets 4,046,000 4,540,000
Property and equipment, net 411,000 430,000
------------ ------------
$ 4,457,000 $ 4,970,000
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 1,054,000 $ 772,000
Borrowings under credit line 905,000 1,632,000
Accrued expenses and other liabilities 391,000 525,000
------------ ------------
Total current liabilities 2,350,000 2,929,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock: no par value;
10,000,000 shares authorized; 4,920,300
and 4,799,212 shares issued and outstanding 16,272,000 14,647,000
Common Stock; no par value, 20,000,000
shares authorized; 3,801,804
and 3,695,434 shares issued and outstanding 12,358,000 12,353,000
Accumulated deficit (26,523,000) (24,959,000)
------------ ------------
Total shareholders' equity 2,107,000 2,041,000
------------ ------------
$ 4,457,000 $ 4,970,000
============ ============
</TABLE>
See the accompanying condensed notes to these financial statements.
<PAGE> 3
DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $2,206,000 $2,311,000 $ 7,241,000 $ 6,372,000
---------- ---------- ----------- -----------
Costs and expenses:
Cost of sales 1,814,000 1,716,000 5,400,000 4,973,000
Research and development 265,000 340,000 854,000 992,000
Marketing and sales 525,000 482,000 1,635,000 1,490,000
General and administrative 271,000 251,000 819,000 764,000
---------- ---------- ----------- -----------
Total Cost and Expenses 2,875,000 2,789,000 8,708,000 8,219,000
---------- ---------- ----------- -----------
Loss from operations (669,000) (478,000) (1,467,000) (1,847,000)
Interest income (expense), net (28,000) (31,000) (97,000) (92,000)
---------- ---------- ----------- -----------
Net loss $ (697,000) $ (509,000) $(1,564,000) $(1,939,000)
---------- ---------- ----------- -----------
Basic and diluted net loss per share $ (0.19) $ (0.15) $ (0.42) $ (0.58)
=========== =========== =========== ===========
Weighted average common shares
and equivalents for basic and diluted
net loss per share calculation 3,702,000 3,334,000 3,700,000 3,334,000
========== =========== =========== ===========
</TABLE>
See the accompanying condensed notes to these financial statements
3
<PAGE> 4
DISC, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months ended September 30,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,564,000) $(1,939,000)
Adjustments to reconcile net loss to cash
Depreciation expense 101,000 198,000
Changes in assets and liabilities:
Accounts receivable 680,000 (176,000)
Inventories (118,000) (344,000)
Prepaid and deposits (30,000) (27,000)
Accounts payable 282,000 (351,000)
Accrued expenses and other liabilities (134,000) 36,000
----------- -----------
Cash used in operating activities (783,000) (2,603,000)
----------- -----------
Cash flows used in investing activities for capital expenditures (82,000) (234,000)
----------- -----------
Cash flows from financing activities:
Borrowing (repayments) under bank line of credit (727,000) 173,000
Proceeds from issuance of Common Stock 5,000 0
Proceeds from issuance of Preferred Stock 1,625,000 2,895,000
----------- -----------
Cash provided by financing activities 903,000 3,068,000
----------- -----------
Net increase in cash 38,000 231,000
Cash at beginning of period 828,000 436,000
----------- -----------
Cash at end of period $ 866,000 $ 667,000
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 97,000 $ 92,000
----------- -----------
</TABLE>
See the accompanying condensed notes to these financial statements.
4
<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, 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>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Purchased component parts and subassemblies $1,070,000 $ 893,000
Work in process 524,000 530,000
Finished goods 36,000 89,000
---------- ----------
$1,630,000 $1,512,000
========== ==========
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
In March, June and September 1999, the Company issued $325,00, $600,000 and
$700,000, respectively, in principal amount of subordinated convertible
debentures to MK GVD Fund under its 1996 Convertible Debenture Purchase
Agreement, as amended. On March 31, June 30, and September 30, 1999, such
debentures were converted into 16,089 shares of Series T Preferred Stock, 38,961
shares of Series U Preferred Stock and 66,038 shares of Series V Preferred
Stock, respectively, and warrants to purchase 40,222 shares, 97,402 shares and
165,904 shares of Common Stock, respectively, at exercise prices of $2.53, $1.93
and $1.33, respectively. 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 thereunder, 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.
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 Exchange 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 statements relating to (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 and uncertainties that could cause actual results to differ materially
from those reflected 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. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflects management's
opinion only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the SEC, including the Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
5
<PAGE> 6
Results of Operations
For the three and nine months ended September 30, 1999, the Company had sales of
$2,206,000 and $7,241,000, respectively, compared to sales of $2,311,000 and
$6,372,000, for the three and nine month periods ended September 30, 1998. Sales
for the third quarter of 1999 were impacted by a decline in sales to banking
customers as a result of year 2000 concerns including decreased spending on new
information storage systems as customers complete their year 2000 testing
activities. The increase in sales for the nine month period ended September 30,
1999 as compared to the comparable period of 1998 is 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 82% and 75% for the three and nine
month periods ended September 30, 1999, as compared to 74% and 78% for the
comparable 1998 periods. Gross margin declined for the third quarter of 1999 as
compared to the third quarter of 1998, due to changes in the product mix and
pricing discounts for a high volume customer. 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.
For the three and nine month periods ended September 30, 1999, research and
development expenses were $265,000 and $854,000, respectively, compared to
$340,000 and $992,000 for the comparable periods in 1998. These decreases in
expenses are primarily due to a decrease in expenses related to the Orion
Project which was substantially complete by the end of the second quarter of
1998 and by a reduction in headcount. The Company believes that research and
development expenses will remain relatively constant during the remainder of
1999.
Marketing and sales expenses were $525,000 and $1,635,000 for the three and nine
month periods ended September 30, 1999 as compared to $482,000 and $1,490,000
for the comparable periods in 1998. The increase in expenses for the third
quarter of 1999 as compared to the third quarter of 1998 is primarily due to an
increase in the direct sales force. The increase for the nine months ended
September 30, 1999 as compared to the comparable period of 1998 is primarily due
to an increase in the direct sales force and an increase in trade show expenses.
The Company believes that marketing and sales expenses will increase moderately
during the remainder of 1999 primarily as a result of increased direct selling
expenses due to an expected increase in revenue.
General and administrative expenses remained relatively constant at $271,000 and
$819,000 for the three and nine month periods ended September 30, 1999,
respectively, as compared to $251,000 and $764,000 for the comparable periods in
1998 and are expected to remain relatively constant during the remainder of
1999.
Liquidity and Capital Resources
During the nine month period ended September 30, 1999, the Company used $783,000
of cash in operations, primarily to fund operating losses. During the first nine
months of 1999, the Company received $1,625,000 of equity financing from its
largest investor (see Note 3 Related Party Transactions in Condensed Notes to
Financial Statements). The Company believes that this cash together with
borrowing from its 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.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The information with respect to the issuance of convertible debentures to MK
GVD Fund and the conversion of those debentures into Series T Preferred Stock,
Series U Preferred Stock and Series V Preferred Stock contained in Note 3-
Related Party Transactions in the Condensed Notes to Financial Statements in
Item 1 of Part I of this Quarterly Report on Form 10-Q is incorporated into this
Item 2 by reference. The preferred stock issued upon conversion of the
convertible debentures have certain preferences with respect to dividend,
liquidation, voting and other rights over the Common Stock of the Company.
Item 4. Submission of matters to a vote of Security Holders
The Company held its Annual Meeting of Shareholders on August 5, 1999. Matters
voted upon at the meeting, and the number of shares cast for, against or
withheld were as follows:
1. Election of Board of Directors.
<TABLE>
<CAPTION>
ABSTENTIONS AND
FOR AGAINST SHARES NOT VOTED
---------- ------- ----------------
<S> <C> <C> <C>
J. Richard Ellis 12,595,672 8,017 407,408
Michael D. Kaufman 12,592,972 7,717 407,408
Frank Connors 12,592.972 7,717 407,408
F. Rigdon Currie 12,592,672 8,017 407,408
Arch J. McGill 12,592,672 8,017 407,408
Michael A. McManus, Jr. 12,592,672 8,017 407,408
</TABLE>
2. To increase the number of shares of common stock reserved for issuance
under the Company's 1990 Stock Plan to 1,350,000.
<TABLE>
<CAPTION>
ABSTENTIONS AND
FOR AGAINST SHARES NOT VOTED
---------- ------- ----------------
<S> <C> <C> <C>
11,338,615 31,719 1,637,763
</TABLE>
3. Approval of appointment of PricewaterhouseCoopers LLP as independent
auditors for fiscal 1999.
<TABLE>
ABSTENTIONS AND
FOR AGAINST SHARES NOT VOTED
---------- ------- ----------------
<S> <C> <C> <C>
12,593,213 2,500 412,384
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Tenth Amendment to Convertible Debenture Purchase Agreement dated
September 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 September 30, 1999.
6
<PAGE> 7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DISC, INC.
Dated November 15, 1999 By: /s/ J. RICHARD ELLIS
-------------------------------------------
J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
Dated November 15, 1999 By: /s/ HENRY MADRID
-------------------------------------------
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Accounting Officer)
7
<PAGE> 8
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1 Tenth Amendment to Convertible Debenture
Purchase Agreement dated September 30, 1999
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
TENTH AMENDMENT
TO
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS TENTH AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the
"Amendment") is entered into as of September 30, 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, September 25, 1998,
December 31, 1998, March 30, 1999, and June 30, 1999 to increase the aggregate
amount of Convertible Debenture to be purchased thereunder to $7,460,000.
B. The Company and Purchaser 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 Purchaser agrees to purchase, and the Company agrees to issue and sell, an
aggregate of $8,160,000 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-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 866,000
<SECURITIES> 0
<RECEIVABLES> 1,417,000
<ALLOWANCES> 147,000
<INVENTORY> 1,630,000
<CURRENT-ASSETS> 4,046,000
<PP&E> 411,000
<DEPRECIATION> 853,000
<TOTAL-ASSETS> 4,457,000
<CURRENT-LIABILITIES> 2,350,000
<BONDS> 0
0
16,272,000
<COMMON> 12,358,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,457,000
<SALES> 2,206,000
<TOTAL-REVENUES> 2,206,000
<CGS> 1,614,000
<TOTAL-COSTS> 2,675,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,000
<INCOME-PRETAX> (697,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (697,000)
<EPS-BASIC> (0.19)
<EPS-DILUTED> 0
</TABLE>
