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 SEPTEMBER 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 October
31, 2000 was 3,817,509
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DISC, INC.
BALANCE SHEET
(UNAUDITED)
September 30, 2000 December 31, 1999
------------------ -----------------
ASSETS
Current assets:
Cash $ 606,000 $ 1,126,000
Accounts receivable 1,361,000 1,677,000
Inventories 1,669,000 1,447,000
Prepaids and deposits 125,000 129,000
------------ ------------
Total current assets 3,761,000 4,379,000
Property and equipment, net 454,000 469,000
------------ ------------
$ 4,215,000 $ 4,848,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 747,000 $ 1,026,000
Borrowings under credit line 733,000 1,165,000
Accrued expenses and other liabilities 664,000 588,000
------------ ------------
Total current liabilities 2,144,000 2,779,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock; no par value:
10,000,000 shares authorized; 5,070,515
and 4,950,501 shares issued and outstanding 19,792,000 17,022,000
Common Stock; no par value: 20,000,000
shares authorized; 3,817,509
and 3,711,592 shares issued and outstanding 12,146,000 12,065,000
Accumulated deficit (29,867,000) (27,018,000)
------------ ------------
Total shareholders' equity 2,071,000 2,069,000
------------ ------------
$ 4,215,000 $ 4,848,000
============ ============
See the accompanying condensed notes to these financial statements.
2
3
DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months ended September 30 Nine Months ended September 30
------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales $ 1,838,000 $ 2,206,000 $ 4,910,000 $ 7,241,000
-------------------------------- ---------------------------------
Costs and expenses:
Cost of sales 1,450,000 1,814,000 4,148,000 5,400,000
Research and development 280,000 265,000 838,000 854,000
Marketing and sales 726,000 525,000 1,919,000 1,635,000
General and administrative 250,000 271,000 772,000 819,000
-------------------------------- ---------------------------------
2,706,000 2,875,000 7,677,000 8,708,000
Loss from operations (868,000) (669,000) (2,767,000) (1,467,000)
Interest income (expense), net (27,000) (28,000) (82,000) (97,000)
-------------------------------- ---------------------------------
Net loss (895,000) (697,000) (2,849,000) (1,564,000)
================================ =================================
Net income (loss) (895,000) (697,000) (2,849,000) (1,564,000)
Deemed preferred stock dividend (50,000) -- (50,000) --
-------------------------------- --------------------------------
Net income (loss) attributable to
common stockholders $ (945,000) $ (697,000) $(2,899,000) $(1,564,000)
================================ ================================
Net income (loss) per share
attributable to
common stockholders:
Basic $ (0.25) $ (0.19) $ (0.76) $ (0.42)
Diluted $ (0.25) $ (0.19) $ (0.76) $ (0.42)
Shares used in computing net
income (loss) per share:
Basic: 3,816,000 3,702,000 3,796,000 3,700,000
Diluted: 3,816,000 3,702,000 3,796,000 3,700,000
See the accompanying condensed notes to these financial statements.
3
4
DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
Nine Months ended September 30,
-------------------------------
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss $(2,849,000) $(1,564,000)
Adjustments to reconcile net loss to cash
Depreciation expense 199,000 101,000
Changes in assets and liabilities:
Accounts receivable 316,000 680,000
Inventories (222,000) (118,000)
Prepaid and deposits 4,000 (30,000)
Accounts payable (279,000) 282,000
Accrued expenses and other liabilities 76,000 (134,000)
----------- -----------
Cash used in operating activities (2,755,000) (783,000)
----------- -----------
Cash flows used in investing activities for capital expenditures (184,000) (82,000)
----------- -----------
Cash flows from financing activities:
Net payments under bank line of credit (432,000) (727,000)
Proceeds from issuance of Common Stock 81,000 5,000
Proceeds from issuance of Preferred Stock 2,770,000 1,625,000
----------- -----------
Cash provided by (used in) financing activities 2,419,000 903,000
----------- -----------
Net increase (decrease) in cash (520,000) 38,000
Cash at beginning of period 1,126,000 828,000
----------- -----------
Cash at end of period $ 606,000 $ 866,000
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 82,000 $ 97,000
----------- -----------
See the accompanying condensed notes to these financial statements.
4
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 the fiscal year, which ends December 31, 2000, or for any other
period.
NOTE 2 - INVENTORIES
The components of inventory were as follows:
September 30, December 31,
2000 1999
---------- ----------
Purchased component parts and subassemblies $ 865,000 $ 824,000
Work in process 696,000 546,000
Finished goods 108,000 77,000
---------- ----------
$1,669,000 $1,447,000
========== ==========
NOTE 3 - RELATED PARTY TRANSACTIONS
In March, June and September 2000, the Company issued $820,000, $1,100,000 and
$850,000, 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, June 30, and September 30,
2000, such debentures were converted into 32,800 shares of Series X Preferred
Stock, 47,308 shares of Series Y Preferred Stock and 39,906 shares of Series Z
Preferred Stock, respectively, and warrants to purchase 82,000, 118,269 and
99,765 shares of Common Stock, respectively, at exercise prices of $3.13, $2.91
and $2.66 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.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
For the periods presented, there were no elements of comprehensive income
(loss), except for the net losses.
NOTE 5 - DEEMED PREFERRED STOCK DIVIDEND
The warrants, issued in conjunction with the Series Z preferred stock, were
valued at $.50 per share and are considered to be a beneficial conversion
feature. The value of the beneficial conversion feature of $50,000 was
recognized immediately as deemed preferred stock dividend in the quarter ended
September 30, 2000, as the holder has the right to exercise the warrants
immediately at its option.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2000, the Company had sales of
$1,838,000 and $4,910,000, respectively, compared to sales of $2,206,000 and
$7,241,000 for the three and nine month periods ended September 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 its sales efforts on a new product that is
sold as software only. This customer therefore addresses a different portion of
the market than it had previously addressed with a total solution product that
included our product. This has resulted in a significant decrease in sales to
that customer. 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
6
Cost of sales, as a percentage of sales, were 79% and 84% for the three and nine
month periods ended September 30, 2000, as compared to 82% and 75% for the
comparable 1999 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
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, 2000, research and
development expenses were relatively constant at $280,000 and $838,000,
respectively, compared to $265,000 and $854,000 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 $726,000 and $1,919,000 for the three and nine
month periods ended September 30, 2000, compared to $525,000 and $1,635,000 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 it to address new
markets and expand our customer base.
General and administrative expenses were $250,000 and $772,000 for the three and
nine month periods ended September 30, 2000, compared to $271,000 and $819,000
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 nine month period ended September 30, 2000, the Company used
$2,755,000 of cash in operations, primarily to fund operating losses. During the
first nine months of 2000, the Company received $2,770,000 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 a new line of credit. The Company believes that it will require
additional equity financing to meet its operating requirements during the
remainder 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 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.
6
7
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
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:
7
8
- - 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.
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
8
9
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 September 30, 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.
9
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Fourteenth Amendment to Convertible Debenture Purchase
Agreement dated September 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 September 30, 2000.
10
11
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 November 14, 2000 By: /s/ J. Richard Ellis
--------------------------------------
J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
Dated November 14, 2000 By: /s/ Henry Madrid
--------------------------------------
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
11
12
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Fourteenth Amendment to Convertible Debenture
Purchase Agreement dated September 30, 2000
27.1 Financial Data Schedule
12