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 MARCH 31, 1996 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, 1996, was 3,044,066.
This report, including all exhibits and attachments, contains nine pages.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISC, INC.
BALANCE SHEET
March 31, December 31,
--------- ------------
1996 1995
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(unaudited)
ASSETS
Current assets:
Cash $ 47,000 $ 298,000
Accounts receivable, net of allowance for doubtful
accounts of $107,000 and $102,000 983,000 1,144,000
Inventories 1,830,000 1,822,000
Prepaids and deposits 100,000 80,000
------------ ------------
Total current assets 2,960,000 3,344,000
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Property and equipment, net 523,000 437,000
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3,483,000 $ 3,781,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,464,000 $ 1,527,000
Borrowings under credit line 673,000 731,000
Other accrued liabilities 218,000 365,000
Accrued warranty 88,000 106,000
Current portion of capitalized lease obligations 36,000 48,000
------------ ------------
Total current liabilities 2,479,000 2,777,000
Shareholders' equity:
Series C Convertible Preferred Stock; no par value,
372,296 shares authorized, issued and outstanding 1,861,000 1,861,000
Series D Convertible Preferred Stock; no par value,
600,000 shares authorized, 444,444 and 444,444 shares
issued and outstanding 1,971,000 1,971,000
Series E Convertible Preferred Stock; no par value, 500,000
shares authorized, issued and outstanding 1,980,000 1,980,000
Series F Convertible Preferred Stock; no par value, 250,000
shares authorized, issued and outstanding 1,250,000 1,250,000
Series G Convertible Preferred Stock, no par value, 110,000
shares authorized, issued and outstanding 950,000 ---
Common Stock; no par value, 20,000,000 shares
authorized; 3,044,066 and 3,034,545 shares
issued and outstanding 10,837,000 10,835,000
Accumulated deficit (17,845,000) (16,893,000)
------------ ------------
Total shareholders' equity (deficit) 1,004,000 1,004,000
------------- ------------
$ 3,483,000 $ 3,781,000
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See the accompanying condensed notes to these Financial Statements.
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DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1996 1995
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Net sales 1,402,000 1,345,000
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Costs and expenses:
Cost of sales 1,342,000 997,000
Research and development 283,000 324,000
Marketing and sales 444,000 318,000
General and administrative 252,000 302,000
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Total costs and expenses 2,321,000 1,941,000
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Loss from operations (919,000) (596,000)
Interest and other expense (33,000) (24,000)
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Net loss $ (952,000) $ (620,000)
========== ==========
Net loss per share $ (0.31) $ (0.21)
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Weighted average common shares and equivalents 3,044,000 2,988,000
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See the accompanying condensed notes to these Financial Statements.
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DISC, INC.
STATEMENT OF CASH FLOWS
(DECREASE) INCREASE IN CASH
(UNAUDITED)
Three Months
Ended March 31,
---------------
1996 1995
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Cash flows from operating activities:
Net loss $(952,000) $ (620,000)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation expense 74,000 81,000
Changes in assets and liabilities:
Accounts receivable 161,000 207,000
Inventories (8,000) (823,000)
Prepaid and deposits (20,000) (13,000)
Accounts payable (63,000) 739,000
Accrued liabilities (147,000) (15,000)
Accrued warranty (18,000) 7,000
---------
Cash used in operating activities (973,000) (437,000)
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Cash flows used in investing activities for capital expenditures (160,000) (145,000)
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Cash flows from financing activities:
Borrowing under bank line of credit (58,000) 423,000
Proceeds from issuance of Common Stock 2,000 ---
Proceeds from issuance of Preferred Stock 950,000 1,040,000
Repayment of capitalized lease obligations (12,000) (15,000)
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Cash provided by financing activities 882,000 1,448,000
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Net increase (decrease) in cash (251,000) 866,000
Cash at beginning of period 298,000 113,000
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Cash at end of period 47,000 $ 979,000
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 33,000 $ 24,000
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See the accompanying condensed notes to these Financial Statements.
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DISC, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
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 therein for the years ended December 31, 1995 and 1994,
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, 1996.
NOTE 2 - INVENTORIES
The components of inventory were as follows:
March 31, December 31,
1996 1995
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Purchased component parts and subassemblies $ 1,022,000 $1,163,000
Work-in-process 487,000 541,000
Finished goods 321,000 118,000
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$ 1,830,000 $1,822,000
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NOTE 3 - RELATED PARTY TRANSACTIONS
In March 1996, the Company entered into an agreement with one of its
shareholders whereby the Company issued 47,500 shares of Series G
Preferred Stock at $20.00 per share which will raise approximately
$950,000 net of expenses. Each share is convertible into 10 shares of
Common Stock, subject to an adjustment for dilution, at the sole option
of the holder.
Each share of Series G Preferred Stock has the number of votes equal to
the number of shares of Common Stock into which it is then convertible.
In addition, holders of Series G Preferred Stock received five redeemable
Common Stock Purchase Warrants for every two shares of Series G
purchased. The Warrants expire five years from the date of issuance and
entitle the holder to purchase one share of Common Stock at an exercise
price of $2.50 per share, subject to adjustment for dilution.
Upon liquidation, holders of Series G Preferred Stock are entitled to
receive $20.00 per share.
The holders of Series G Preferred Stock are entitled to receive, when and
if declared by the Board of Directors, dividends at ten times the amount
per share as declared on the Company's Common Stock.
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The issuance of the Series G Preferred Stock triggered the anti-dilution
provisions of the Series E and Series F Preferred Stock. Because there
were insufficient shares of authorized and unissued Series E and Series F
Preferred Stock to fulfill the anti-dilution requirements, holders of
Series E Preferred Stock received 50,000 shares of Series G Preferred
Stock and holders of Series F Preferred Stock received an additional
93,750 shares of Series F and 12,500 shares of Series G Preferred Stock.
Series E Preferred Stock has no further anti-dilution rights and the
Series F anti-dilution rights will expire in September 1996.
The Company has reserved sufficient shares of Common Stock to allow for
the conversion of all outstanding Series C, Series D, Series E,
Series F and Series G Preferred Stock.
Also in March 1996, the Company entered into an agreement with one of its
shareholders to issue subordinated convertible debentures in the
aggregate principal amount of $1,400,000. At June 30, 1996, September 30,
1996 and December 31, 1996 the debentures issued during the quarter
ending on such dates will convert to preferred stock in amounts to be
determined and at a price per share based on the average closing price of
the Company's Common Stock for the five trading days prior to the
conversion date.
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PART II
OTHER INFORMATION
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 and Section 21E of the Securities Act
of 1934 and the Company intends that such forward-looking statements are subject
to the safe harbors created thereby. These forward-looking statements include
(i) the existence and development of the Company's technical and manufacturing
capabilities, (ii) anticipated competition, (iii) potential future decreases in
costs, and (iv) the need for, and availability of, additional financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business, which
involve judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, the business and operations of the Company are subject to substantial
risks which increase the uncertainty inherent in such forward-looking statements
(see "Certain Considerations" on page 5 of the Company's Annual Report on Form
10-K for the year ended December 31, 1995). 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
- - ----------------------
The Company had sales of $1,402,000 for the quarter ended March 31, 1996, as
compared to $1,345,000 in the first quarter of 1995. This increase was primarily
due to sales to an expanded customer base as a result of an increase in the
Company's direct sales personnel. However, in the first quarter of 1996, sales
continued to be affected by the federal government shutdown which stalled the
sales of several large capacity units. 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 96% in the first quarter of 1996,
as compared to 74% in the first quarter of 1995. Cost of sales in the first
quarter of 1996 was principally impacted by a shift in product mix towards
higher sales of smaller capacity units which have lower margins than the larger
capacity units. This shift was due in part to the federal government shutdown
which stalled several sales of large capacity units. In addition, in the first
quarter of 1996 as compared to the first quarter of 1995, gross margins were
also affected by an increase in manufacturing engineering personnel to allow for
a shift of sustaining product responsibility from research and development to
manufacturing. The Company's relatively low gross margin in the first quarters
of 1996 and 1995 reflected the early stages of the Company's operations. This
has resulted in unabsorbed manufacturing costs and high costs of materials due
to the inability to achieve purchasing economies of scale due to low sales
volume. The Company expects that, as product sales increase, costs of sales per
unit of product willdecrease because fixed manufacturing costs will be
distributed over the larger sales volume, and material costs will decrease as
the result of volume purchases.
Research and development expenses were $283,000 in the first quarter of 1996 as
compared to $324,000 in the first quarter of 1995. The primary reason for the
decrease in the first quarter of 1996 as compared to the first quarter of 1995
was a decrease in spending on temporary labor. The Company has restructured its
research and development group and is focused on building core competencies
internally. The Company believes that research and development expenses will
increase in 1996 due to current projects under consideration.
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Marketing and sales expenses were $444,000 in the first quarter of 1996 as
compared to $318,000 in the first quarter of 1995. The primary reason for the
increase was the hiring of additional marketing and sales personnel and an
increase in the support of our customer evaluation program. The Company believes
that marketing and sales expenses will continue to increase in connection with
the Company's continued efforts to achieve market acceptance of its products.
General and administrative expenses were $252,000 in the first quarter of 1996
as compared to $302,000 in the first quarter of 1995. The primary reason for the
decrease in expenses was due to a decrease in legal expenses related to
litigation that was resolved in 1995.
Liquidity and Capital Resources
- - --------------------------------
In the first quarter of 1996, the Company used $973,000 of cash in operations,
primarily to fund operating losses. In March 1996, the Company raised $950,000
through the issuance of Series G Preferred Stock. Also in March 1996, the
Company entered into an agreement to raise an additional $1,400,000 through the
issuance of subordinated convertible debentures. The Company believes that this
cash together with borrowing from the 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 1996, 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, 1996, will depend on the
Company's ability to significantly increase sales or raise significant
additional equity or debt financing. There is no assurance that any of these
conditions will be achieved. In particular, the Company expects to require
increasing amounts of cash to finance the Company's efforts to increase sales,
which the Company plans to achieve by increasing selling efforts to large system
integrators and OEMs by hiring additional sales and sales support staff and by
making evaluation units available. In addition, the Company intends to expand
its current network of resellers. The Company expects that it will require cash
to finance purchases of inventory to satisfy anticipated increased sales as the
Company's products achieve market acceptance.
Although the Company has not committed to make any material capital
expenditures, the budget for capital equipment epxenditures for the remainder of
1996 is approximately $340,000. The majority of these purchases are expected to
be in the areas of process and molding tooling to improve the cost and
producibility of the Company's products.
The terms of the Series C Preferred Stock and outstanding warrants may limit the
availability of financing for the Company, particularly equity financing.
Holders of Series C Preferred Stock are entitled to receive cumulative dividends
in the amount of approximately $112,000 per year. The Company has never paid
cash dividends and has no present plans to pay dividends.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
During the fiscal quarter ended March 31, 1996, the Registrant
did not file any reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DOCUMENT IMAGING SYSTEMS CORPORATION
Dated May 9, 1996 By:
----------------------------------
J. Richard Ellis
President
Chief Executive Officer
(Principal Executive Officer)
Dated May 9, 1996 By:
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Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Accounting Officer)