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 SEPTEMBER 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 October
31, 1996, was 3,075,239.
This report, including all exhibits and attachments, contains ten pages.
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DISC, INC.
BALANCE SHEET
September 30, December 31,
------------- ------------
1996 1995
------ ------
(Unaudited)
ASSETS
Current assets:
Cash $ 169,000 $ 298,000
Accounts receivable, net of allowance for doubtful
accounts of $109,000 and $104,000 1,718,000 1,144,000
Inventories 1,952,000 1,822,000
Prepaid expenses and deposits 109,000 80,000
------------ ------------
Total current assets 3,948,000 3,344,000
Property and equipment, net 301,000 437,000
------------ ------------
$ 4,249,000 $ 3,781,000
============ -===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,504,000 $ 1,527,000
Borrowings under credit line 1,350,000 731,000
Other accrued liabilities 256,000 365,000
Accrued warranty 112,000 106,000
Current portion of capitalized lease obligations 19,000 48,000
------------ ------------
Total current liabilities $ 3,241,000 $ 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 --
Series H Convertible Preferred Stock, no par value,
26,109 shares authorized, issued and outstanding 1,000,000 --
Series I Convertible Preferred Stock, no par value,
167,065 shares authorized, issued and outstanding 700,000 --
Common Stock; no par value, 20,000,000 shares
authorized; 3,075,239 and 2,988,285 shares
issued and outstanding 10,848,000 10,835,000
Accumulated deficit (19,552,000) (16,893,000)
------------ ------------
Total shareholders' equity (deficit) 1,008,000 1,004,000
------------ ------------
$ 4,249,000 $ 3,781,000
============ -===========
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DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------ ------ ------ ------
Net sales 2,248,000 1,838,000 5,355,000 4,766,000
----------- ------------- ----------- -----------
Costs and expenses:
Cost of sales 1,841,000 1,506,000 4,640,000 3,780,000
Research and development 346,000 319,000 976,000 942,000
Marketing and sales 556,000 317,000 1,581,000 984,000
General and administrative 234,000 220,000 728,000 813,000
----------- ------------- ----------- -----------
2,977,000 2,362,000 7,925,000 6,519,000
----------- ------------- ----------- -----------
Loss from operations (729,000) (524,000) (2,570,000) (1,753,000)
Interest and other expense (29,000) (35,000) (89,000) (92,000)
----------- ------------- ----------- -----------
Net loss $ (758,000) $ (559,000) $(2,659,000) $(1,845,000)
=========== ============= ============ ===========
Net loss per share $ (.25) $ (.19) $ (.87) $ (.62)
=========== ============= =========== ===========
Weighted average common shares
and equivalents 3,054,000 3,010,000 3,048,000 3,000,000
=========== --=========== =========== ===========
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DISC, INC.
STATEMENT OF CASH FLOWS
(DECREASE) INCREASE IN CASH
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
1996 1995
------ ------
Cash flows from operating activities:
Net loss $(2,659,000) $(1,846,000)
Adjustments to reconcile net loss to cash used in operating expenses
Depreciation expense 210,000 258,000
Changes in assets and liabilities:
Accounts receivable (574,000) (38,000)
Inventories (130,000) (826,000)
Prepaid and deposits (29,000) 37,000
Accounts payable (25,000) 294,000
Accrued liabilities (109,000) (3,000)
Accrued warranty 6,000 (36,000)
----------- -----------
Cash used in operating activities (3,310,000) (2,160,000)
----------- -----------
Cash flows used in investing activities for capital expenditures (72,000) (195,000)
----------- -----------
Cash flows from financing activities:
Borrowing under bank line of credit 619,000 241,000
Proceeds from issuance of Common Stock 13,000 4,000
Proceeds from issuance of Preferred Stock 2,650,000 2,280,000
Repayment of capitalized lease obligations (29,000) (44,000)
----------- -----------
Cash provided by (used in) financing activities 3,253,000 2,481,000
----------- -----------
Net increase (decrease) in cash (129,000) 126,000
Cash at beginning of period 298,000 113,000
----------- -----------
Cash at end of period $ 169,000 $ 239,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 89,000 $ 92,000
=========== ===========
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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:
September 30, December 31,
1996 1995
------------- ------------
Purchased component parts and subassemblies $1,074,000 $1,163,000
Work-in-process 718,000 541,000
Finished goods 160,000 118,000
---------- ----------
$1,952,000 $1,822,000
========== ==========
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.
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
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Preferred Stock. Series E Preferred Stock has no further anti-dilution rights
and the Series F anti-dilution rights expired 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, Series H and Series I 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. In September, the agreement was amended to
increase the amount of convertible debentures available to issue up to a maximum
of $2,200,000. 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
quarters ended June 30, 1996, and September 30, 1996, the Company issued
$1,000,000 and $700,000, respectively, in principal amount of such debentures to
such shareholders. On June 30, 1996, and September 30, 1996, such debentures
were converted into 26,109 shares of Series H Preferred Stock and 167,065 shares
of Series I Preferred Stock at $38.30 and $4.19 per share, respectively. Each
share of Series H and Series I Preferred Stock is convertible into 10 shares and
one share, respectively, of Common Stock, subject to an adjustment for dilution,
at the sole option of the holder.
Each share of Series H and Series I 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 $4.85 per share, subject to
adjustment for dilution.
In addition, holders of Series I Preferred Stock received one redeemable Common
Stock Purchase Warrant for every four shares of Series I 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 $5.24 per share, subject to
adjustment for dilution.
Upon liquidation, holders of Series H and Series I Preferred Stock are entitled
to receive $38.30 and $4.19 per share, respectively.
The holders of Series H and Series I Preferred Stock are entitled to receive,
when and if declared by the Board of Directors, dividends at ten times and one
time, respectively, the amount per share as declared on the Company's Common
Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Introductory 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
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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 nine months ended September 30, 1996, the Company had sales of
$2,248,000 and $5,355,000 respectively compared to sales of $1,838,000 and
$4,766,000 for the three and nine month periods ended September 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. For the
nine months ended September 30, 1996, this increase was offset by a change over
in the industry to new higher capacity optical drives and 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 82% and 87% for the three and nine
month periods ended September 30, 1996, respectively, as compared to 82% and 79%
for the comparable 1995 periods. Cost of sales in 1996 was principally impacted
by a price reduction for all units of 15% in the fourth quarter of 1995 and 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 margins reflect
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.
For the three and nine month periods ended September 30, 1996, research and
development expenses were $346,000 and $976,000, respectively, compared to
$319,000 and $942,000 for the comparable periods 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 and new product development. The Company
believes that research and development expenses will increase moderately in 1996
due to current projects under development.
Marketing and sales expenses were $556,000 and $1,581,000 for the three and nine
month periods ended September 30, 1996, respectively, as compared to $317,000
and $984,000 for the comparable periods in 1995. The primary reason for the
increase was an expansion of the Company's direct sales personnel. The Company
believes that marketing and sales expenses will continue to increase in
connection with the Company's continued efforts to broaden market acceptance of
its products.
General and administrative expenses were $234,000 and $728,000 for the three and
nine month periods ended September 30, 1996, respectively, as compared to
$220,000 and $813,000 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 nine months ended September 30, 1996, the Company used $3,310,000 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. In
September 1996, the agreement was amended to increase the amount of convertible
debentures available to issue up to $2,200,000 of which $1,700,000 was received
by September 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
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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 may
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 $45,000. 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.
PART II
OTHER INFORMATION
Item 4. Submission of matters to a vote of Security Holders
The Company held its Annual Meeting of Shareholders on August 6, 1996. Matters
voted upon at the meeting, and the number of shares cast for, against, or
withheld were as follows:
1. Election of Board of Directors:
ABSTENTIONS
AND
FOR AGAINST SHARES NOT VOTED
--- ------- ----------------
Frank T. Connors 4,637,120 9,400 1,314,286
Michael D. Kaufman 4,636,120 10,400 1,314,286
F. Rigdon Currie 4,636,120 10,400 1,314,286
Arch J. McGill 4,637,120 9,400 1,314,286
Michael A. McManus, Jr. 4,637,120 9,400 1,314,286
J. Richard Ellis 4,637,120 9,400 1,314,286
2. Approval of the Amendment to the Company's amended and restated
Articles of Incorporation to increase the number of authorized shares of
Preferred Stock to 5,000,000.
ABSTENTIONS
AND
FOR AGAINST SHARES NOT VOTED
--- ------- ----------------
4,454,223 1,777,848 1,328,735
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3. Approval of appointment of Price Waterhouse as independent auditors
for fiscal 1996.
ABSTENTIONS
AND
FOR AGAINST SHARES NOT VOTED
--- ------- ----------------
4,640,520 5,000 1,315,286
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits.
No exhibits were required for the fiscal quarter ended September 30, 1996.
(b) Reports on Form 8-K
During the fiscal quarter ended September 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.
/s/ J. Richard Ellis
Dated November 14, 1996 By: ______________________________________
J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Henry Madrid
Dated November 14, 1996 By: ______________________________________
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit 27 Financial Data Schedule