<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 JUNE 30, 1998 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,
1998 was 3,695,434.
This report, including all exhibits and attachments, contains 10 pages.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISC, INC.
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 660,000 $ 436,000
Accounts receivable, net of allowance for
doubtful accounts of $109,000
and $89,000 1,703,000 1,768,000
Inventories 1,881,000 1,465,000
Prepaids and deposits 66,000 73,000
------------ ------------
Total current assets 4,310,000 3,742,000
Property and equipment, net 358,000 402,000
------------ ------------
$ 4,668,000 $ 4,144,000
============ ============
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 978,000 $ 1,332,000
Borrowings under credit line 1,241,000 1,338,000
Other accrued liabilities 412,000 403,000
------------ ------------
Total current liabilities 2,631,000 3,073,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock; no par value,
5,000,000 shares authorized,
4,865,547 and 3,395,304 shares
issued and outstanding 15,137,000 12,742,000
Common Stock; no par value, 20,000,000
shares authorized; 3,334,323
issued and outstanding 11,053,000 11,053,000
Accumulated deficit (24,153,000) (22,724,000)
------------ ------------
Total shareholders' equity 2,037,000 1,071,000
------------ ------------
$ 4,668,000 $ 4,144,000
============ ============
</TABLE>
See the accompanying condensed notes to these Financial Statements.
2
<PAGE> 3
DISC, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 2,234,000 $ 2,146,000 $ 4,061,000 $ 3,847 ,000
---------------- ---------------- ---------------- ----------------
Costs and expenses:
Cost of sales 1,721,000 1,620,000 3,257,000 3,025 ,000
Research and development 357,000 338,000 652,000 658,000
Marketing and sales 546,000 529,000 1,008,000 989,000
General and administrative 262,000 230,000 512,000 470,000
---------------- ---------------- ---------------- ----------------
Total cost and expenses 2,886,000 2,717,000 5,429,000 5,142,000
---------------- ---------------- ---------------- ----------------
Loss from operations (652,000) (571,000) (1,368,000) (1,295,000)
Interest and other expense, net (28,000) (27,000) (61,000) (54,000)
---------------- ---------------- ---------------- ----------------
Net loss (680,000) (598,000) (1,429,000) (1,349,000)
---------------- ---------------- ---------------- ----------------
Net loss per share, basic and $ (0.20) $ (0.18) $ (0.43) $ (0.41)
================ ================ ================ =================
fully diluted
Weighted average common
shares and equivalents 3,334,000 3,279,000 3,334,000 3,279,000
================ ================ ================ =================
</TABLE>
See the accompanying condensed notes to these Financial Statements.
3
<PAGE> 4
DISC, INC.
STATEMENT OF CASH FLOWS
(DECREASE) INCREASE IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,429,000) $(1,349,000)
Adjustments to reconcile
net loss to cash used in operations
Depreciation expense 131,000 91,000
Changes in assets and liabilities:
Accounts receivable 65,000 226,000
Inventories (416,000) 191,000
Prepaid and deposits 7,000 (96,000)
Accounts payable (354,000) (194,000)
Accrued liabilities 9,000 38,000
----------- -----------
Cash used in operating activities (1,987,000) (1,093,000)
----------- -----------
Cash flows used in investing activities for capital (87,000) (36,000)
----------- ----------
expenditures
Cash flows from financing activities:
Repayments under bank line of credit (97,000) (197,000)
Proceeds from issuance of Preferred Stock 2,395,000 1,300,000
----------- -----------
Cash provided by financing activities 2,298,000 1,103,000
----------- -----------
Net increase (decrease) in cash 224,000 (26,000)
Cash at beginning of period 436,000 305,000
----------- -----------
Cash at end of period $ 660,000 $ 279,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 59,000 $ 55,000
=========== ===========
</TABLE>
See the accompanying condensed notes to these Financial Statements.
4
<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, 1997 and 1996, 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, 1998.
NOTE 2 - INVENTORIES
The components of inventory were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- -----------
<S> <C> <C>
Purchased component parts and $1,197,000 $1,052,000
subassemblies
Work in process 507,000 382,000
Finished goods 177,000 31,000
---------- ----------
$1,881,000 $1,465,000
========== ==========
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
In February 1998, the Company sold $1,400,000 of Preferred Stock to its largest
investor. The Company issued 1,320,755 shares of Series O Preferred Stock at
$1.06 per share in connection with such sale of Preferred stock. In addition,
holders of Series O Preferred Stock received 330,188 Common Stock Purchase
Warrants.
In March 1998 and June 1998, the Company received $300,000 and $695,000,
respectively, through the issuance of subordinated convertible debentures under
its 1996 agreement (the "Agreement"), as amended, with its largest shareholder.
In accordance with the Agreement such debentures were converted into preferred
stock on the last day of the quarter in which the debentures were issued. The
conversion price of the debentures was 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.
NOTE 4 - NET LOSS PER SHARE
Options and warrants to purchase shares, and Convertible Preferred Stock
outstanding were not included in the computation of diluted net loss per share,
as their effect was antidilutive for the periods presented. Therefore, both the
basic and diluted net loss per share computations resulted in the same number
and there were no reconciling items.
PART II - OTHER INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 increased
sales, (iii) potential future decreases in manufacturing costs, and (iv) the
need for, and availability of, additional financing. For this purpose, any
statements contained in this Quarterly Report on Form 10-Q except for historical
information may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may", "will", "expect", believe",
anticipate", "intend", "could", "estimate", or "continue" or the negative or
other variations thereof, or comparable terminology are intended to identify
forward-looking statements.
5
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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 6 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
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, 1998, the Company had sales of
$2,234,000 and $4,061,000, respectively, compared to sales of $2,146,000 and
$3,847,000 for the three and six month periods ended June 30, 1997. 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, management
believes that the sales increase was hampered somewhat by the Asian market
softness, the changeover in the second quarter to a new generation of optical
drives, and the late availability at the end of the second quarter of the
Company's new Orion series of products. 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 77% and 80% for the three and six
month periods ended June 30, 1998, as compared to 75% and 79% for the comparable
1997 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 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. The Company also expects that its
recently introduced Orion Series of products will increase the Company's overall
margins.
For the three and six month periods ended June 30, 1998, research and
development expenses were relatively flat at $357,000 and $652,000,
respectively, compared to $338,000 and $658,000 for the comparable period of
1997. The Company believes that research and development expenses will increase
moderately in 1998 due to new projects currently under development.
Marketing and sales expenses were relatively flat at $546,000 and $1,008,000 for
the three and six month periods ended June 30, 1998 as compared to $529,000 and
$989,000 for the comparable periods in 1997. The Company believes that marketing
and sales expenses will increase moderately during the remainder of 1998
primarily related to increased direct selling expenses due to an expected
increase in revenue.
General and administrative expenses were $262,000 and $512,000 for the three and
six month periods ended June 30, 1998, compared to $230,000 and $470,000 for the
comparable periods in 1997. The increase is primarily due to an increase in
headcount. Expenses are expected to remain relatively constant during the
remainder of 1998.
Liquidity and Capital Resources
During the six month period ended June 30, 1998, the Company used $1,987,000 of
cash in operations, primarily to fund operating losses. During the six months of
1998, the Company received $2,395,000 of equity financing from its largest
investor. 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 1998, 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, 1998, 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
6
<PAGE> 7
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Fifth Amendment to Convertible Debenture Purchase Agreement dated
June 30, 1998.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the fiscal quarter ended June 30, 1998, the Registrant did not
file any reports on Form 8-K.
7
<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 August 14, 1998 By: /s/ J. Richard Ellis
--------------------
J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
Dated August 14, 1998 By: /s/ Henry Madrid
--------------------
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Accounting Officer)
8
<PAGE> 9
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Fifth Amendment to Convertible Debenture Purchase
Agreement dated June 30, 1998.
27 Financial Data Schedule
</TABLE>
9
<PAGE> 1
EXHIBIT 10.1
FIFTH AMENDMENT
TO
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS FIFTH AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the
"Amendment") is entered into as of June 30, 1998, by and between DISC, Inc., a
California corporation (the "Company"), and MK GVD FUND (the "Purchaser").
R E C I T A L S :
A. WHEREAS on March 29, 1996 the Company and Purchaser entered into a
Convertible Debenture Purchase Agreement pursuant to which the Company agreed to
sell, and Purchaser agreed to purchase, an aggregate of $1,400,000 in principal
amount of Convertible Debentures, each convertible into shares of the Company's
Preferred Stock, which Agreement was amended as of December 31, 1996, April 11,
1997, December 31, 1997 and March 27, 1998 to increase the aggregate amount of
Convertible Debenture to be purchased thereunder to $5,380,000.
B. The Company and Optionee now seek to amend the Agreement to increase
the total amount of Convertible Debentures which Purchaser agrees to purchase
thereunder.
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, and in consideration of the mutual covenants set forth
herein, the parties hereto agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, capitalized terms used
in this Amendment shall have the same meanings ascribed to them in the
Convertible Debenture Purchase Agreement.
2. AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE AGREEMENT. Section 1.1(a)
of the Convertible Debenture Purchase Agreement is hereby amended to provide
that Purchase agrees to purchase, and the Company agrees to issue and sell, an
aggregate of $5,725,000 in principal amount of Convertible Debentures.
3. ENTIRE AGREEMENT; AMENDMENT. The Convertible Debenture Purchase
Agreement, as amended by this Amendment, constitutes the full and complete
agreement and understanding between the parties hereto regarding the subject
matter of the Convertible Debenture Purchase Agreement and shall supersede all
prior communications, representations, understandings or agreements, if any,
whether oral or written, concerning the subject matter contained in the
Convertible Debenture Purchase Agreement, as so amended, and that no provision
of the Convertible Debenture Purchase Agreement, as so amended, may be modified,
amended, waived or discharged, in whole or in part, except in accordance with
its terms.
4. FORCE AND EFFECT. Except as modified by this Amendment, the terms and
provisions of the Convertible Debenture Purchase Agreement are hereby ratified
and confirmed and are and shall remain in full force and effect. Should any
inconsistency arise between this Amendment and the Convertible Debenture
Purchase Agreement as to the specific matters which are the subject of this
Amendment, the terms and conditions of this Amendment shall control. This
Amendment shall be construed to be part of the Convertible Debenture Purchase
Agreement and shall be deemed incorporated into the Convertible Debenture
Purchase Agreement by this reference.
<PAGE> 2
5. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed in
duplicate on its behalf by its duly authorized officer and Optionee has also
executed this Amendment in duplicate, all as of the day and year indicated
above.
DISC, INC.
a California corporation
By: /s/ J. Richard Ellis
-----------------------------
J. Richard Ellis,
President and Chief Executive Officer
PURCHASER:
MK GVD FUND
By: /s/ Michael D. Kaufman
-----------------------------
Michael D. Kaufman, General Partner
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 660,000
<SECURITIES> 0
<RECEIVABLES> 1,703,000
<ALLOWANCES> 109,000
<INVENTORY> 1,881,000
<CURRENT-ASSETS> 4,310,000
<PP&E> 358,000
<DEPRECIATION> 1,236,000
<TOTAL-ASSETS> 4,668,000
<CURRENT-LIABILITIES> 2,631,000
<BONDS> 0
0
15,137,000
<COMMON> 11,053,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,668,000
<SALES> 2,234,000
<TOTAL-REVENUES> 2,234,000
<CGS> 1,721,000
<TOTAL-COSTS> 2,886,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,000
<INCOME-PRETAX> (680,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (680,000)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> 0
</TABLE>
