<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 JUNE 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 July 31,
1999 was 3,699,637
This report, including all exhibits and attachments, contains 12 pages.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISC, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 864,000 $ 828,000
Accounts Receivable 1,916,000 2,097,000
Inventories 1,564,000 1,512,000
Prepaids and deposits 129,000 103,000
------------ ------------
Total current assets 4,473,000 4,540,000
Property and equipment, net 437,000 430,000
------------ ------------
$ 4,910,000 $ 4,970,000
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 1,107,000 $ 772,000
Borrowings under credit line 1,240,000 1,632,000
Accrued expenses and other liabilities 461,000 525,000
------------ ------------
Total current liabilities 2,808,000 2,929,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock: no par value;
10,000,000 shares authorized;
and 4,854,262 shares issued and
outstanding 15,572,000 14,647,000
Common Stock; no par value, 20,000,000
shares auth; 3,699,637 shares issued
and outstanding 12,356,000 12,353,000
Accumulated deficit (25,826,000) (24,959,000)
------------ ------------
Total shareholders' equity 2,102,000 2,041,000
------------ ------------
$ 4,910,000 $ 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 June 30, Six Months ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 2,331,000 $ 2,234,000 $ 5,035,000 $ 4,061,000
=============================== ===============================
Costs and expenses:
Cost of sales 1,683,000 1,721,000 3,586,000 3,257,000
Research and development 303,000 357,000 589,000 652,000
Marketing and sales 602,000 546,000 1,110,000 1,008,000
General and administrative 278,000 262,000 548,000 512,000
----------- ----------- ----------- -----------
2,866,000 2,886,000 5,833,000 5,429,000
Loss from operations (535,000) (652,000) (798,000) (1,368,000)
Interest income (expense), net (33,000) (28,000) (69,000) (61,000)
------------------------------- -------------------------------
Net loss (568,000) (680,000) (867,000) (1,429,000)
=============================== ===============================
Net loss per share $ (0.15) $ (0.20) $ (0.23) $ (0.43)
Weighted avg common shares
and equivalents 3,699,637 3,334,000 3,699,637 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>
Six Months ended June 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (867,000) $(1,429,000)
Adjustments to reconcile net loss to cash
Depreciation expense 148,000 131,000
Changes in assets and liabilities:
Accounts receivable 181,000 65,000
Inventories (52,000) (416,000)
Prepaid and deposits (26,000) 7,000
Accounts payable 335,000 (354,000)
Accrued expenses and other liabilities (64,000) 9,000
----------- -----------
Cash used in operating activities (345,000) (1,987,000)
----------- -----------
Cash flows used in investing activities for capital expenditures (155,000) (87,000)
----------- -----------
Cash flows from financing activities:
Borrowing under bank line of credit (392,000) (97,000)
Proceeds from issuance of Common Stock 3,000 0
Proceeds from issuance of Preferred Stock 925,000 2,395,000
----------- -----------
Cash provided by (used in) financing activities 536,000 2,298,000
----------- -----------
Net increase (decrease) in cash 36,000 224,000
Cash at beginning of period 828,000 436,000
----------- -----------
Cash at end of period $ 864,000 $ 660,000
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 69,000 $ 61,000
----------- -----------
</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>
JUNE 30, DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Purchased component parts and subassemblies $ 959,000 $ 893,000
Work in process 538,000 530,000
Finished goods 67,000 89,000
---------- ----------
$1,564,000 $1,512,000
========== ==========
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
In March and June 1999, the Company issued $325,000 and $600,000, respectively,
in principal amount of subordinated convertible debentures to MK GVD Fund under
its 1996 agreement, as amended. On March 31, and June 30, 1999, such debentures
were converted into 16,089 shares of Series T Preferred Stock and 38,961 shares
of Series U Preferred Stock, respectively, and warrants to purchase 40,222 and
97,402 shares of Common Stock, respectively, at exercise prices of $2.53 and
$1.93, 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. MK GVD Fund also agreed to provide
up to an additional $75,000 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, as amended, and Section 21E of the
Securities 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
5
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business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in forward-looking
statements will be realized. In addition, the business and operations of the
Company are subject to substantial risks which increase the uncertainty inherent
in such forward-looking statements (see "Additional Factors that May Affect
Future Operating Results" on page 6 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 and six months ended June 30, 1999, the Company had sales of
$2,331,000 and $5,035,000, respectively, compared to sales of $2,234,000 and
$4,061,000, for the three and six month periods ended June 30, 1998. Although
sales for the second quarter of 1999 were impacted by the delay of several
shipments to the third quarter, the increase in sales from 1999 as compared to
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 72% and 71% for the three and six
month periods ended June 30, 1999, as compared to 77% and 80% for the comparable
1998 periods. 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 six month periods ended June 30, 1999, research and
development expenses were $303,000 and $589,000, respectively, compared to
$357,000 and $652,000 for the comparable period of 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. The Company believes that research and development expenses will remain
relatively constant during the remainder of 1999.
Marketing and sales expenses were $602,000 and $1,110,000 for the three and six
month periods ended June 30, 1999 as compared to $546,000 and $1,008,000 for the
comparable periods in 1998. These increases are primarily due to an increase in
direct selling expenses related to the increase in sales and an increase in
trade show expenses. 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 $278,000 and $548,000 for the three and
six month periods ended June 30, 1999, as compared to $262,000 and $512,000 for
the comparable periods in 1998 and are expected to remain relatively constant
during the remainder of 1999.
Liquidity and Capital Resources
During the six month period ended June 30, 1999, the Company used $345,000 of
cash in operations, primarily to fund operating losses. During the first six
months of 1999, the Company received $925,000 of equity financing from its
largest investor. This largest investor also agreed to provide up to an
additional $75,000 of equity financing to the Company, if needed. 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.
6
<PAGE> 7
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Ninth Amendment to Convertible Debenture Purchase Agreement
dated June 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 June 30, 1999.
7
<PAGE> 8
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 August 12, 1999 By: /s/ J. Richard Ellis
------------------------------------
J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
Dated August 12, 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 Ninth Amendment to Convertible Debenture
Purchase Agreement dated June 30, 1999
27.1 Financial Data Schedule
</TABLE>
9
<PAGE> 1
Exhibit 10.1
NINTH AMENDMENT
TO
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS NINTH AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the
"Amendment") is entered into as of June 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 and March 30, 1999, to increase the aggregate amount of
Convertible Debenture to be purchased thereunder to $6,860,000.
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 $7,460,000 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
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 864,000
<SECURITIES> 0
<RECEIVABLES> 1,916,000
<ALLOWANCES> 140,000
<INVENTORY> 1,564,000
<CURRENT-ASSETS> 4,473,000
<PP&E> 437,000
<DEPRECIATION> 1,516,000
<TOTAL-ASSETS> 4,910,000
<CURRENT-LIABILITIES> 2,808,000
<BONDS> 0
0
15,572,000
<COMMON> 12,356,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,910,000
<SALES> 2,331,000
<TOTAL-REVENUES> 2,331,000
<CGS> 1,683,000
<TOTAL-COSTS> 2,866,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,000
<INCOME-PRETAX> (568,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (568,000)
<EPS-BASIC> (0.15)
<EPS-DILUTED> 0
</TABLE>
