1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 July 31,
1996, was 3,044,066.
This report, including all exhibits and attachments, contains nine pages.
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DISC, INC.
BALANCE SHEET
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 52,000 $ 298,000
Accounts receivable, net of allowance for doubtful
accounts of $109,000 and $102,000 1,226,000 1,144,000
Inventories 2,234,000 1,822,000
Prepaid expenses and deposits 157,000 80,000
------------ ------------
Total current assets 3,669,000 3,344,000
Property and equipment, net 363,000 437,000
------------ ------------
$ 4,032,000 $ 3,781,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,711,000 $ 1,527,000
Borrowings under credit line 913,000 731,000
Other accrued liabilities 223,000 365,000
Accrued warranty 105,000 106,000
Current portion of capitalized lease obligations 27,000 48,000
------------ ------------
Total current liabilities 2,979,000 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 400,000 shares
issued and outstanding 1,971,000 1,971,000
Series E Convertible Preferred Stock; no par value, --
500,000 shares authorized; 437,500 shares 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 --
Series H Convertible Preferred Stock, no par value,
shares authorized, 26,109 issued and outstanding 1,000,000 --
Common Stock; no par value, 20,000,000 shares
authorized; 3,044,066 and 2,988,285 shares --
issued and outstanding 10,835,000 10,835,000
Accumulated deficit (18,794,000) (16,893,000)
------------ ------------
Total shareholders' equity 1,053,000 1,004,000
------------ ------------
$ 4,032,000 $ 3,781,000
============ ============
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DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net sales $ 1,705,000 $ 1,583,000 $ 3,107,000 $ 2,928,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 1,457,000 1,279,000 2,799,000 2,276,000
Research and development 347,000 297,000 630,000 621,000
Marketing and sales 581,000 350,000 1,025,000 668,000
General and administrative 242,000 291,000 494,000 593,000
----------- ----------- ----------- -----------
2,627,000 2,217,000 4,948,000 4,158,000
----------- ----------- ----------- -----------
Loss from operations (922,000) (634,000) (1,841,000) (1,230,000)
Interest income -- --
Interest and other expense (27,000) (33,000) (60,000) (57,000)
----------- ----------- ----------- -----------
Net loss $ (949,000) $ (667,000) $(1,901,000) $(1,287,000)
----------- ----------- ----------- -----------
Net loss per share $ (.31) $ (.22) $ (.62) $ (.43)
----------- ----------- ----------- -----------
Weighted average common shares
and equivalents 3,044,000 3,000,000 3,044,000 2,996,000
=========== =========== =========== ===========
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DISC, INC.
STATEMENT OF CASH FLOWS
(DECREASE) INCREASE IN CASH
(UNAUDITED)
Six Months Ended June 30,
1996 1995
----------- -----------
Cash flows from operating activities:
Net loss $(1,901,000) $(1,287,000)
Adjustments to reconcile net loss to cash used in operating
expenses
Depreciation expense 139,000 171,000
Changes in assets and liabilities:
Accounts receivable (82,000) 45,000
Inventories (412,000) (738,000)
Prepaid and deposits (77,000) 42,000
Accounts payable 184,000 187,000
Accrued liabilities (142,000) 16,000
Accrued warranty (1,000) (34,000)
----------- -----------
Cash used in operating activities (2,292,000) (1,598,000)
----------- -----------
Cash flows used in investing activities for capital expenditures (65,000) (173,000)
----------- -----------
Cash flows from financing activities:
Borrowing under bank line of credit 182,000 257,000
Proceeds from issuance of Common Stock -- 4,000
Proceeds from issuance of Preferred Stock 1,950,000 1,730,000
Repayment of capitalized lease obligations (21,000) (29,000)
----------- -----------
Cash provided by (used in) financing activities 2,111,000 1,962,000
----------- -----------
Net increase (decrease) in cash (246,000) 191,000
Cash at beginning of period 298,000 113,000
----------- -----------
Cash at end of period $ 52,000 $ 304,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 60,000 $ 57,000
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DISC, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The information contained in the following Condensed Notes to Financial
Statements is condensed from that which would appear in the annual financial
statements; accordingly, the financial statements contained herein should be
reviewed in conjunction with the Company's Form 10-K for the year ended December
31, 1995.
The results of operations for the interim periods presented are not necessarily
indicative of the results expected for the entire year.
The financial information contained in this report is unaudited, but in the
opinion of management of the Company, all adjustments (consisting of only normal
recurring accruals) for a fair statement of results have been included.
NOTE 2 - INVENTORIES
The components of inventory were as follows:
June 30, December 31,
1996 1995
----------- -----------
Purchased component parts and subassemblies $ 1,358,000 $ 1,163,000
Work-in-process 631,000 541,000
Finished goods 245,000 118,000
----------- -----------
$ 2,234,000 $ 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 raised 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,
Series G and Series H 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. Pursuant to this agreement, during the quarter ended
June 30, 1996, the Company issued $1,000,000 in principal amount of such
debentures to such shareholders. On June 30, 1996, such debentures were
converted into 26,109 shares of Series H Preferred Stock at a conversion
price of $38.30 per share. Each share of Series H Preferred Stock 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 H 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 H Preferred Stock received five redeemable
Common Stock Purchase Warrants for every two shares of Series H
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 $4.79 per share, subject to adjustment for dilution.
Upon liquidation, holders of Series H Preferred Stock are entitled to
receive $38.30 per share.
The holders of Series H 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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PART II
OTHER INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introductor Note
This Quarterly Report on 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
For the three and six months ended June 30, 1996, the Company had sales of
$1,705,000 and $3,107,000 respectively compared to sales of $1,583,000 and
$2,928,000 for the three and six month periods ended June 30, 1995. Management
believes that the increase in sales is due to an expanded customer base
resulting from an increase in the Company's direct sales personnel. This
increase was offset by a change over in the industry to new higher capacity
optical drives. In addition, sales continued to be affected by the federal
government shutdown which began in late fourth quarter 1995 and continued until
March 1996. This shutdown stalled the sales of several large capacity units.
Management believes that the change to the higher capacity drives is
substantially complete in the market and that the Federal market is returning to
normal conditions. 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, were 85% and 90% for the three and six
month periods ended June 30, 1996, respectively, as compared to 81% and 78% for
the comparable 1995 periods. Cost of sales in 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 previously discussed. In addition, 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 continue to
increase, costs of sales per unit of product will decrease because fixed
manufacturing costs will be distributed over the larger sales volume, and
material costs will decrease as the result of volume purchases.
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For the three and six month periods ended June 30, 1996, research and
development expenses were $347,000 and $630,000, respectively, compared to
$297,000 and $621,000 for the comparable quarter of 1995. The primary reason for
the increase in 1996 as compared to 1995 is an increase in headcount.. 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
development.
Marketing and sales expenses were $581,000 and $1,025,000 for the three and six
month periods ended June 30, 1996, respectively, as compared to $350,000 and
$668,000 for the comparable periods in 1995. The primary reason for the increase
was the hiring of additional marketing and sales personnel. 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 $242,000 and $494,000 for the three and
six month periods ended June 30, 1996, respectively, as compared to $291,000 and
$593,000 for the comparable periods in 1995. The primary reason for the decrease
in expenses was due to a decrease in legal expenses related to litigation that
was resolved at the end of 1995.
Liquidity and Capital Resources
During the six months ended June 30, the Company used $2,292,000 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 of which $1,000,000
was received by June 30, 1996. 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 expenditures for the remainder of
1996 is approximately $170,000. 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
(a) Exhibits.
No exhibits were required for the fiscal quarter ended June
30, 1996.
(b) Reports on Form 8-K
During the fiscal quarter ended June 30, 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.
DISC, INC.
Dated August 14, 1996 By:
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J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
Dated August 14, 1996 By:
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Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Accounting Officer)