<PAGE> 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, 1997
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, 1997, was 3,380,484
This report, including all exhibits and attachments, contains 8 pages.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISC, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
Sept 30, December 31,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash $ 214,000 $ 305,000
Accounts receivable, net of allowance for doubtful
accounts of $120,000 and $114,000 1,457,000 1,430,000
Inventories 1,672,000 1,862,000
Prepaids and deposits 197,000 72,000
------------ ------------
Total current assets 3,540,000 3,669,000
Property and equipment, net 390,000 441,000
------------ ------------
$ 3,930,000 $ 4,110,000
============ ============
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,219,000 $ 1,585,000
Borrowings under credit line 1,256,000 1,087,000
Other accrued liabilities 330,000 211,000
Accrued warranty 79,000 95,000
------------ ------------
Total current liabilities 2,884,000 2,978,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock; no par value,
5,000,000 shares authorized, 2,728,637 and
2,114,880 shares issued and outstanding 12,142,000 10,442,000
Common Stock; no par value, 20,000,000 shares
authorized; 3,380,484 and 3,279,532 issued
and outstanding 11,053,000 10,925,000
Accumulated deficit (22,149,000) (20,235,000)
------------ ------------
Total shareholders' equity 1,046,000 1,132,000
------------ ------------
$ 3,930,000 $ 4,110,000
============ ============
</TABLE>
See the accompanying condensed notes to these Financial Statements.
1
<PAGE> 3
DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,306,000 $ 2,248,000 $ 6,153,000 $ 5,355,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 1,717,000 1,841,000 4,742,000 4,640,000
Research and development 381,000 346,000 1,039,000 976,000
Marketing and sales 522,000 556,000 1,511,000 1,581,000
General and
administrative 218,000 234,000 688,000 728,000
----------- ----------- ----------- -----------
2,838,000 2,977,000 7,980,000 7,925,000
----------- ----------- ----------- -----------
Loss from operations (532,000) (729,000) (1,827,000) (2,570,000)
Interest income (expense),
net (33,000) (29,000) (87,000) (89,000)
----------- ----------- ----------- -----------
Net loss $ (565,000) $ (758,000) $(1,914,000) $(2,659,000)
=========== =========== =========== ===========
Net loss per share $ (0.17) $ (0.25) $ (0.58) $ (0.87)
=========== =========== =========== ===========
Weighted average common
shares and equivalents 3,380,000 3,054,000 3,322,000 3,048,000
=========== =========== =========== ===========
</TABLE>
See the accompanying condensed notes to these Financial Statements.
2
<PAGE> 4
DISC, INC.
STATEMENT OF CASH FLOWS
(DECREASE) INCREASE IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,914,000) $(2,659,000)
Adjustments to reconcile net loss to cash used in operating
expenses
Depreciation expense 145,000 210,000
Changes in assets and liabilities:
Accounts receivable (27,000) (574,000)
Inventories 190,000 (130,000)
Prepaid and deposits (125,000) (29,000)
Accounts payable (366,000) (25,000)
Accrued liabilities 119,000 (109,000)
Accrued warranty (16,000) 6,000
----------- -----------
Cash used in operating activities (1,994,000) (3,310,000)
----------- -----------
Cash flows used in investing activities for capital expenditures (94,000) (72,000)
----------- -----------
Cash flows from financing activities:
Borrowings under bank line of credit 169,000 619,000
Proceeds from issuance of Common Stock 128,000 13,000
Proceeds from issuance of Preferred Stock 1,700,000 2,650,000
Repayment of capitalized lease obligations -- (29,000)
----------- -----------
Cash provided by financing activities 1,997,000 3,253,000
----------- -----------
Net decrease in cash (91,000) (129,000)
Cash at beginning of period 305,000 298,000
----------- -----------
Cash at end of period $ 214,000 $ 169,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 87,000 $ 89,000
=========== ===========
</TABLE>
See the accompanying condensed notes to these Financial Statements.
3
<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, 1996 and 1995, 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, 1997.
NOTE 2 - INVENTORIES
The components of inventory were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
<S> <C> <C>
Purchased component parts and subassemblies $ 1,001,000 $1,286,000
Work in process 567,000 545,000
Finished goods 104,000 31,000
---------- ----------
$1,672,000 $1,862,000
========== ==========
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
In April, 1997, the Company amended the March 1996 agreement, with one of its
shareholders to increase the total amount to be received upon issuance of
subordinated convertible debentures to $4,430,000. Through September 30, 1997,
the Company has received $4,130,000 pursuant to such agreement. The Company will
receive the remaining $300,000 in installments during the fourth quarter of
1997 in exchange for subordinated convertible debentures. The debentures will
convert to preferred stock at December 31, 1997 in an amount to be determined
at a price per share based on the closing bid price of the Company's Common
Stock on the last day of the calendar quarter.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENT
In February, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("FAS 128"). This
statement redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. The Company is required to adopt the new standard in
the fourth calendar quarter of 1997. The following table sets forth primary
earnings per share as reported and unaudited pro forma basic and diluted
earnings per share assuming FAS 128 had been applied during the periods
presented:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------- ----------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Primary earnings per share as reported $ (0.17) $ (0.25) $ (0.58) $ (0.87)
Pro forma basic net income per share $ (0.17) $ (0.25) $ (0.58) $ (0.87)
Pro forma diluted net income per share $ (0.17) $ (0.25) $ (0.58) $ (0.87)
</TABLE>
<PAGE> 6
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 increased sales, (iii) potential future decreases
in manufacturing 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 "Additional Factors that May Affect Future Operating Results" on page 5 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
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 nine months ended September 30, 1997, the Company had sales of
$2,306,000 and $6,153,000, respectively, compared to sales of $2,248,000 and
$5,355,000 for the three and nine month periods ended September 30, 1996. 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. 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 74% and 77% for the three and nine
month periods ended September 30, 1997, respectively, as compared to 82% and 87%
for the comparable 1996 periods. Although gross margin has improved in 1997 as
compared to 1996, 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
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, 1997, research and
development expenses were $381,000 and $1,039,000, respectively, compared to
$346,000 and $976,000 for the comparable periods of 1996. This increase is
primarily due to project material related to the Company's next generation
product line. The Company believes that research and development expenses will
continue to increase moderately in 1997 due to new projects currently under
consideration.
Marketing and sales expenses were $522,000 and $1,511,000 for the three and nine
month periods ended September 30, 1997, respectively, as compared to $556,000
and $1,581,000 for the comparable periods in 1996. The primary reason for the
decrease was due to a reduction in marketing management headcount. The Company
believes that marketing and sales expenses will remain relatively constant
during the remainder of 1997.
<PAGE> 7
General and administrative expenses were $218,000 and $688,000 for the three and
nine month periods ended September 30, 1997, respectively compared to $234,000
and $728,000 for the comparable periods in 1996. The primary reason for the
decrease in expenses was due to a reduction in headcount.
Liquidity and Capital Resources
During the nine months ended September 30, 1997, the Company used $1,994,000 of
cash in operations, primarily to fund operating losses. In April 1997, the
company amended its agreement to raise funds through the issuance of
subordinated convertible debentures. Pursuant to such Agreement, the Company
will receive $300,000 in installments during the remainder of 1997. 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 1997, 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,
1997, 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.
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 12, 1997. 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:
<TABLE>
<CAPTION>
ABSTENTIONS
AND
FOR AGAINST SHARES NOT VOTED
--------- ------ -------
<S> <C> <C> <C>
Frank T. Connors 6,568,980 30,160 759,429
Michael D. Kaufman 6,568,980 30,160 759,429
F. Rigdon Currie 6,568,980 30,160 759,429
Arch J. McGill 6,568,980 30,160 759,429
Michael A. McManus, Jr. 6,568,980 30,160 759,429
J. Richard Ellis 6,568,980 30,160 759,429
</TABLE>
2. Approval of appointment of Price Waterhouse LLP as independent auditors for
fiscal 1997.
<TABLE>
<CAPTION>
ABSTENTIONS
AND
FOR AGAINST SHARES NOT VOTED
--- ------- ----------------
<S> <C> <C>
6,587,376 5,764 765,429
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
No exhibits were required for the fiscal quarter ended September 30, 1997.
(b) Reports on Form 8-K
During the fiscal quarter ended September 30, 1997, the Registrant did not file
any reports on Form 8-K.
<PAGE> 8
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 November 14, 1997 By: /s/ J. Richard Ellis
-------------------------------
J. Richard Ellis
President
Chief Executive Officer
(Principal Executive Officer)
Dated November 14, 1997 By: /s/ Henry Madrid
-------------------------------
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Accounting Officer)
<PAGE> 9
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 214,000
<SECURITIES> 0
<RECEIVABLES> 1,457,000
<ALLOWANCES> 120,000
<INVENTORY> 1,672,000
<CURRENT-ASSETS> 3,540,000
<PP&E> 390,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,930,000
<CURRENT-LIABILITIES> 2,884,000
<BONDS> 0
0
12,142,000
<COMMON> 11,053,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,930,000
<SALES> 2,306,000
<TOTAL-REVENUES> 2,306,000
<CGS> 1,717,000
<TOTAL-COSTS> 2,838,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,000
<INCOME-PRETAX> (565,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (565,000)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> 0
</TABLE>
