<PAGE> 1
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 MARCH 31, 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 April
30, 2000 was 3,805,798
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DISC, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 916,000 $ 1,126,000
Accounts receivable 1,197,000 1,677,000
Inventories 1,724,000 1,447,000
Prepaids and deposits 165,000 129,000
------------ ------------
Total current assets 4,002,000 4,379,000
Property and equipment, net 442,000 469,000
------------ ------------
$ 4,444,000 $ 4,848,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 814,000 $ 1,026,000
Borrowings under credit line 879,000 1,165,000
Accrued expenses and other liabilities 621,000 588,000
------------ ------------
Total current liabilities 2,314,000 2,779,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock; no par value:
10,000,000 shares authorized; 4,983,301
and 4,950,501 shares issued and outstanding 17,842,000 17,022,000
Common Stock; no par value: 20,000,000
shares authorized; 3,805,798
and 3,711,592 shares issued and outstanding 12,137,000 12,065,000
Accumulated deficit (27,849,000) (27,018,000)
------------ ------------
Total shareholders' equity 2,130,000 2,069,000
------------ ------------
$ 4,444,000 $ 4,848,000
============ ============
</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,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 1,615,000 $ 2,704,000
----------- -----------
Costs and expenses:
Cost of sales 1,374,000 1,903,000
Research and development 280,000 286,000
Marketing and sales 493,000 508,000
General and administrative 272,000 270,000
----------- -----------
Total cost and expenses 2,419,000 2,967,000
----------- -----------
Loss from operations (804,000) (263,000)
Interest and other expense, net (27,000) (36,000)
----------- -----------
Net loss (831,000) (299,000)
----------- -----------
Basic and diluted net loss per share $ (0.22) $ (0.08)
=========== ===========
Weighted and average common shares
for basic and diluted net loss per
share calculations 3,772,000 3,698,000
=========== ===========
</TABLE>
See the accompanying condensed notes to these financial statements.
3
<PAGE> 4
DISC, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended March 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (831,000) $ (299,000)
Adjustments to reconcile net loss to cash
Depreciation expense 62,000 50,000
Changes in assets and liabilities:
Accounts receivable 480,000 (133,000)
Inventories (277,000) 79,000
Prepaid and deposits (36,000) (45,000)
Accounts payable (212,000) 161,000
Accrued expenses and other liabilities 33,000 (7,000)
----------- -----------
Cash used in operating activities (781,000) (194,000)
----------- -----------
Cash flows used in investing activities for
capital expenditures (35,000) (79,000)
----------- -----------
Cash flows from financing activities:
Borrowing under bank line of credit (286,000) 139,000
Proceeds from issuance of Common Stock 72,000 2,000
Proceeds from issuance of Preferred Stock 820,000 325,000
----------- -----------
Cash provided by (used in) financing activities 606,000 466,000
----------- -----------
Net increase (decrease) in cash (210,000) 193,000
Cash at beginning of period 1,126,000 828,000
----------- -----------
Cash at end of period $ 916,000 $ 1,021,000
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 27,000 $ 36,000
----------- -----------
</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, 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 any other period or for the fiscal year, which ends December 31,
2000.
NOTE 2 - INVENTORIES
The components of inventory were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Purchased component parts and
subassemblies $ 848,000 $ 824,000
Work in process 675,000 546,000
Finished goods 201,000 77,000
---------- ----------
$1,724,000 $1,447,000
========== ==========
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 2000, the Company issued $820,000 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, 2000, such debentures were converted into 32,800 shares of Series X
Preferred Stock, and warrants to purchase 82,000 shares of Common Stock at an
exercise price of $3.13 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 $1,180,000 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 months ended March 31, 2000, the Company had sales of $1,615,000
compared to sales of $2,704,000 for the three month period ended March 31, 1999.
We believe that this decrease was primarily due to a decrease in unit sales as
the Company continues to be impacted by the lingering effects of Y2K in certain
sectors of our business. 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 customers
have informed us that they were unable to restart their sales cycles until
mid-January and that they are just beginning to see movement in their business.
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.
5
<PAGE> 6
Cost of sales, as a percentage of sales, increased to 85% for the three month
period ended March 31, 2000, as compared to 70% for the comparable 1999 period,
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 month period ended March 31, 2000, research and development
expenses were relatively constant at $280,000 compared to $286,000 for the
comparable period of 1999. The Company believes that research and development
expenses will increase moderately in 2000 due to new projects currently under
consideration.
Marketing and sales expenses were $493,000 for the three month period ended
March 31, 2000 as compared to $508,000 for the comparable period in 1999. The
decrease is primarily due to an decrease in direct selling expenses related to
the decrease in sales. The Company believes that marketing and sales expenses
will increase during the remainder of 2000 as the Company adds significant
resources in marketing and business development to allow us to address new
markets and expand our customer base.
General and administrative expenses were $272,000 for the three month period
ended March 31, 2000, compared to $270,000 for the comparable period in 1999 and
are expected to remain relatively constant during the remainder of 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended March 31, 2000, the Company used $781,000 of
cash in operations, primarily to fund operating losses. During the first quarter
of 2000, the Company received $820,000 of equity financing from its largest
investor (see Note 3 Related Party Transactions in Condensed Notes to Financial
Statements). The largest investor also agreed to provide up to an additional
$1,180,000 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 2000, 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, 2000 will depend on
the Company's ability to significantly increase sales or raise significant
additional equity or debt financing. 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 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 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) the
existence and development of the Company's technical and manufacturing
capabilities, (ii) future research and development projects, (iii) anticipated
increased sales, (iv) potential future decreases in manufacturing costs, (v)
expected increases in information technology expenditures, (vi) the continuing
impact of Y2K on information technology expenditures, (vii) changes in
customers' businesses, (viii) increased manufacturing, sales and business
development resources, (ix) future general and administrative expenses, (x)
expected sales cycles and (xi) the need for, and availability of, additional
financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business, which
involve judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, the business and operations of the Company are subject to substantial
risks which increase the uncertainty inherent in such forward-looking statements
(see "Additional Factors that May Affect Future Operating Results 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). 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.
6
<PAGE> 7
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE MARKET PRICE OF OUR
STOCK
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 March 15, 2000, our executive officers, directors and
principal shareholders beneficially owned, in the aggregate, approximately 88%
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.
Please also refer to "Additional Factors That May Affect Future Operating
Results and the Market Price of Our Stock" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
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 amount of interest
income in Fiscal 2000. In addition, the Company does not use derivative
financial instruments of any kind and all of the Company's transactions are in
U.S. currency.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
7
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<TABLE>
<S> <C>
10.1 Twelfth Amendment to Convertible Debenture Purchase Agreement
dated March 31, 2000.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ending
March 31, 2000.
8
<PAGE> 9
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, 2000 By: /s/ J. Richard Ellis
-------------------------------------
J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
Dated May 15, 2000 By: /s/ Henry Madrid
-------------------------------------
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
9
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1 Twelfth Amendment to Convertible Debenture Purchase Agreement dated
March 31, 2000
27.1 Financial Data Schedule
</TABLE>
10
<PAGE> 1
EXHIBIT 10.1
TWELFTH AMENDMENT
TO
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS twelfth AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the
"Amendment") is entered into as of March 31, 2000, 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,
December 31, 1998, March 30, 1999, June 30, 1999, September 30, 1999 and
December 31, 1999 to increase the aggregate amount of Convertible Debenture to
be purchased thereunder to $8,610,000.
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 $9,430,000 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.
11
<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 Purchaser has also
executed this Amendment in duplicate, all as of the day and year indicated
above.
DISC, INC.
a California corporation
By: /s/ Henry Madrid
----------------------------------
Henry Madrid
Chief Financial Officer
PURCHASER:
MK GVD Fund
By: /s/ Greg Lahann
----------------------------------
Greg Lahann, General Partner
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 916,000
<SECURITIES> 0
<RECEIVABLES> 1,197,000
<ALLOWANCES> 168,000
<INVENTORY> 1,724,000
<CURRENT-ASSETS> 4,002,000
<PP&E> 442,000
<DEPRECIATION> 946,000
<TOTAL-ASSETS> 4,444,000
<CURRENT-LIABILITIES> 2,314,000
<BONDS> 0
0
17,942,000
<COMMON> 12,137,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,444,000
<SALES> 1,615,000
<TOTAL-REVENUES> 1,615,000
<CGS> 1,374,000
<TOTAL-COSTS> 2,419,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,000
<INCOME-PRETAX> (831,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (831,000)
<EPS-BASIC> (0.22)
<EPS-DILUTED> 0
</TABLE>
