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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2000 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,
2000 was 3,807,339
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DISC, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash $ 879,000 $ 1,126,000
Accounts receivable 1,070,000 1,677,000
Inventories 1,861,000 1,447,000
Prepaids and deposits 81,000 129,000
------------ ------------
Total current assets 3,891,000 4,379,000
Property and equipment, net 478,000 469,000
------------ ------------
$ 4,369,000 $ 4,848,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 869,000 $ 1,026,000
Borrowings under credit line 755,000 1,165,000
Accrued expenses and other liabilities 635,000 588,000
------------ ------------
Total current liabilities 2,259,000 2,779,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock; no par value:
10,000,000 shares authorized; 5,030,609
and 4,950,501 shares issued and outstanding 18,942,000 17,022,000
Common Stock; no par value: 20,000,000
shares authorized; 3,809,839
and 3,711,592 shares issued and outstanding 12,140,000 12,065,000
Accumulated deficit (28,972,000) (27,018,000)
------------ ------------
Total shareholders' equity 2,110,000 2,069,000
------------ ------------
$ 4,369,000 $ 4,848,000
============ ============
</TABLE>
See the accompanying condensed notes to these financial statements.
2
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DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended June 30 Six Months ended June 30
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,457,000 $ 2,331,000 $ 3,072,000 $ 5,035,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 1,324,000 1,683,000 2,698,000 3,586,000
Research and development 278,000 303,000 558,000 589,000
Marketing and sales 700,000 602,000 1,193,000 1,110,000
General and administrative 250,000 278,000 522,000 548,000
----------- ----------- ----------- -----------
2,552,000 2,866,000 4,971,000 5,833,000
Loss from operations (1,095,000) (535,000) (1,899,000) (798,000)
Interest income (expense), net (28,000) (33,000) (55,000) (69,000)
----------- ----------- ----------- -----------
Net loss (1,123,000) (568,000) (1,954,000) (867,000)
=========== =========== =========== ===========
Net loss per share $ (0.29) $ (0.15) $ (0.52) $ (0.23)
Weighted average common shares
and equivalents 3,808,000 3,699,000 3,788,000 3,699,000
</TABLE>
See the accompanying condensed notes to these financial statements.
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DISC, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended June 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,954,000) $ (867,000)
Adjustments to reconcile net loss to cash
Depreciation expense 128,000 148,000
Changes in assets and liabilities:
Accounts receivable 607,000 181,000
Inventories (414,000) (52,000)
Prepaid and deposits 48,000 (26,000)
Accounts payable (157,000) 335,000
Accrued expenses and other liabilities 47,000 (64,000)
----------- -----------
Cash used in operating activities (1,695,000) (345,000)
----------- -----------
Cash flows used in investing activities for capital expenditures (137,000) (155,000)
----------- -----------
Cash flows from financing activities:
Borrowing under bank line of credit (410,000) (392,000)
Proceeds from issuance of Common Stock 75,000 3,000
Proceeds from issuance of Preferred Stock 1,920,000 925,000
----------- -----------
Cash provided by (used in) financing activities 1,585,000 536,000
----------- -----------
Net increase (decrease) in cash (247,000) 36,000
Cash at beginning of period 1,126,000 828,000
----------- -----------
Cash at end of period $ 879,000 $ 864,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 55,000 $ 69,000
=========== ===========
</TABLE>
See the accompanying condensed notes to these financial statements.
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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, 1999 and 1998, included in
the Company's 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, 2000, or for any other
period.
NOTE 2 - INVENTORIES
The components of inventory were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Purchased component parts and subassemblies $ 959,000 $ 824,000
Work in process 627,000 546,000
Finished goods 275,000 77,000
---------- ----------
$1,861,000 $1,447,000
========== ==========
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
In March and June 2000, the Company issued $820,000 and $1,100,000,
respectively, in principal amount of subordinated convertible debentures to MK
GVD Fund under its 1996 Convertible Debenture Purchase Agreement with MK GVD
Fund, as amended. On March 31, and June 30, 2000, such debentures were converted
into 32,800 shares of Series X Preferred Stock and 47,308 shares of Series Y
Preferred Stock, respectively, and warrants to purchase 82,000 and 118,269
shares of Common Stock, respectively, at exercise prices of $3.13 and $2.91 per
share. The sales of the convertible debentures and preferred stock were deemed
to be exempt from registration under the Securities Act of 1933, as amended, 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, but not to exceed $2.50
per share as converted into common stock. MK GVD Fund also agreed to provide up
to an additional $80,000 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
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2000, the Company had sales of
$1,457,000 and $3,072,000, respectively, compared to sales of $2,331,000 and
$5,035,000 for the three and six month periods ended June 30, 1999. We believe
that this decrease was primarily due to a decrease in unit sales as Company
sales have been affected by a change in strategy by its largest customer. This
customer has focused their sales efforts on a new product that is sold as
software only. This customer therefore addresses a different portion of the
market than they had previously addressed with a total solution product that
included our product. This has resulted in a significant decrease in sales to
that customer. In addition, the Company has continued to be impacted by the
lingering effects of Y2K in certain sectors of our business, primarily the
banking sector. We believe that many information technology capital expenditures
were put on hold and no new technologies were considered until after the new
year due to concerns surrounding Y2K. Furthermore, our
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customers have informed us that they were unable to restart their sales cycles
until mid-January. 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, increased to 91% and 88% for the three
and six month periods ended June 30, 2000, as compared to 72% and 71% for the
comparable 1999 periods, primarily due to the decrease in revenue. 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 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, 2000, research and
development expenses were relatively constant at $278,000 and $558,000,
respectively, compared to $303,000 and $589,000 for the comparable periods of
1999. The Company believes that research and development expenses will increase
moderately during the remainder of 2000 due to new projects currently under
consideration.
Marketing and sales expenses were $700,000 and $1,193,000 for the three and six
month periods ended June 30, 2000, compared to $602,000 and $1,110,000 for the
comparable period in 1999. The increase is primarily due to an increase in
headcount. The Company believes that marketing and sales expenses will increase
during the remainder of 2000 as the Company has recently 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 $250,000 and $525,000 for the three and
six month periods ended June 30, 2000, compared to $278,000 and $548,000 for the
comparable periods in 1999. This decrease is primarily due to a temporary
decrease in headcount. The Company believes that general and administrative
expenses will return to 1999 levels during the remainder of 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended June 30, 2000, the Company used $1,695,000 of
cash in operations, primarily to fund operating losses. During the first six
months of 2000, the Company received $1,920,000 of equity financing from its
largest investor (see Note 3 Related Party Transactions in Condensed Notes to
Financial Statements). The Company has a credit line under which it can borrow
the lesser of $1,500,000 or 80% of eligible receivables. The Company has been
informed by its bank that the bank will not renew the credit line at the end of
December 2000. The Company has started searching for a different bank to secure
new line of credit. The Company believes that it will require additional equity
financing to meet its operating requirements at least through the end of 2000,
because 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, 2000 will depend on the Company's ability to
significantly increase sales or raise significant additional equity or debt
financing, and in particular, obtain a new line of credit. There is no assurance
that the Company will be able to increase sales or raise significant additional
equity or debt financing on a timely basis or at all. 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. In addition, the Company recently
increased sales and marketing expenses by hiring additional sales and sales and
marketing staff. The Company expects that it will require cash to finance
purchases of inventory in anticipation of possible increases in sales upon
increased market acceptance of the Company's products.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
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 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) expected
sales cycles, (ii) future research and development projects and expenses, (iii)
anticipated increased sales, (iv) potential future decreases in manufacturing
and materials costs and cost per unit, (v) the continuing impact of Y2K on
information technology expenditures, (vi) changes in customers' businesses,
(vii) increased manufacturing, sales and business development resources, (viii)
future general and administrative expenses and (ix) 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
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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. These risks and uncertainties include or
relate to our history of losses, our ability to anticipate future sales levels,
the loss of customers or distributors, changes in the size and timing of
customer orders or in product or distribution channel mix, increased competition
and pricing pressure, market acceptance of our products, our ability to
anticipate and keep pace with technological innovation and competitive
developments, our ability to anticipate or respond to changes in the data
storage market, our ability to raise future capital, our ability to obtain a
replacement credit line on acceptable terms, our independence on key suppliers,
the loss of key personnel, a fall in the trading price of our common stock,
fluctuations in operation results and our ability to forecast the timing and
amount of our operating expenses. "Additional Factors that May Affect Future
Operating Results and the Market Price of our Stock" on page 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 for a further
description of risks that may affect future operating results. 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.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE MARKET PRICE OF OUR
STOCK
The Company's future operating results, and stock price, may be affected
by a number of factors, many of which are beyond the Company's 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:
- 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 operating expenses;
- gain or loss of significant customers or distributors; and
- personnel changes
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.
Operating results in any period should not be considered indicative of
the results investors can expect for any future period. 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
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will attain or maintain profitability in any future period. Any unfavorable
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;
- 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. 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.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO INCUR FUTURE LOSSES. The
Company has experienced significant operating losses since its inception, and as
of December 31, 1999 had an accumulated deficit of $27,018,000. The Company
expects to continue to incur net losses for the foreseeable future, and the
Company's ability to sustain its operations for a significant period after
December 31, 2000 will depend on the Company's ability to significantly increase
sales or raise significant additional debt or equity financing. There can be no
assurance that the Company will be able to increase sales or that additional
financing will be available on acceptable terms, or at all.
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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 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 favored 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;
- 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.
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, 2000, our executive officers, directors and
principal shareholders beneficially owned, in the aggregate, greater than 85% of
our outstanding common stock and preferred stock, on an as-if-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, our officers, directors and principal shareholders could delay or
prevent an acquisition or merger even if the transaction would benefit other
shareholders.
Due to the forgoing and other factors, past results are a much less reliable
predicator of future results than is the case in many older, more stable and
less dynamic industries. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to significant market risk related to fluctuations in
interest rates as we are not expected to have a significant investment portfolio
in fiscal 2000. In addition, the Company does not use derivative financial
instruments of any kind and currently all of the Company's transactions are in
U.S. currency.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Thirteenth Amendment to Convertible Debenture Purchase Agreement
dated June 30, 2000.
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, 2000.
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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.
DISC, INC.
Dated August 14, 2000 By: /s/ J. Richard Ellis
-------------------------------------
J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
Dated August 14, 2000 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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Thirteenth Amendment to Convertible Debenture Purchase
Agreement dated June 30, 2000
27.1 Financial Data Schedule
</TABLE>
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