<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, 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)
<TABLE>
<S> <C>
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)
</TABLE>
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, 1998 was 3,695,434.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISC, INC.
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 667,000 $ 436,000
Accounts receivable, net of allowance for
doubtful accounts of $120,000 and $89,000 1,944,000 1,768,000
Inventories 1,809,000 1,465,000
Prepaids and deposits 100,000 73,000
------------ ------------
Total current assets 4,520,000 3,742,000
Property and equipment, net 438,000 402,000
------------ ------------
$ 4,958,000 $ 4,144,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 981,000 $ 1,332,000
Borrowings under credit line 1,511,000 1,338,000
Other accrued liabilities 363,000 324,000
Accrued warranty 76,000 79,000
------------ ------------
Total current liabilities 2,931,000 3,073,000
============ ============
Shareholders' equity:
Convertible Preferred Stock; no par value,
10,000,000 shares authorized, 4,616,936 and
3,395,304 shares issued and outstanding 14,637,000 12,742,000
Common Stock; no par value, 20,000,000 shares
authorized; 3,695,434 and 3,334,323 shares
issued and outstanding 12,053,000 11,053,000
Accumulated deficit (24,663,000) (22,724,000)
------------ ------------
Total shareholders' equity (deficit) 2,027,000 1,071,000
------------ ------------
$ 4,958,000 $ 4,144,000
============ ============
</TABLE>
See the accompanying condensed notes to these Financial Statements.
2
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DISC, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,311,000 $ 2,306,000 $ 6,372,000 $ 6,153,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 1,716,000 1,717,000 4,973,000 4,742,000
Research and development 340,000 381,000 992,000 1,039,000
Marketing and sales 482,000 522,000 1,490,000 1,511,000
General and administrative 251,000 218,000 764,000 688,000
----------- ----------- ----------- -----------
Total costs and expenses 2,789,000 2,838,000 8,219,000 7,980,000
----------- ----------- ----------- -----------
Loss from operations (478,000) (532,000) (1,847,000) (1,827,000)
Interest and other expense, net (31,000) (33,000) (92,000) (87,000)
----------- ----------- ----------- -----------
Net loss $ (509,000) $ (565,000) $(1,939,000) $(1,914,000)
=========== =========== =========== ===========
Net loss per share, basic and
fully diluted $ (0.15) $ (0.17) $ (0.58) $ (0.58)
=========== =========== =========== ===========
Weighted average common shares
for basic and diluted net loss
per share calculation 3,334,000 3,380,000 3,334,000 3,322,000
=========== =========== =========== ===========
</TABLE>
See the accompanying condensed notes to these Financial Statements.
3
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DISC, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,939,000) $ (1,914,000)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation expense 198,000 145,000
Changes in assets and liabilities:
Accounts receivable (176,000) (27,000)
Inventories (344,000) 190,000
Prepaids and deposits (27,000) (125,000)
Accounts payable (351,000) (366,000)
Accrued liabilities 39,000 119,000
Accrued warranty (3,000) (16,000)
------------- ------------
Cash used in operating activities (2,603,000) (1,994,000)
------------- ------------
Cash flows used in investing activities
for capital expenditures (234,000) (94,000)
------------- ------------
Cash flows from financing activities:
Borrowing under bank line of credit 173,000 169,000
Proceeds from issuance of Common Stock - - - - 128,000
Proceeds from issuance of Preferred Stock 2,895,000 1,700,000
------------- ------------
Cash provided by financing activities 3,068,000 1,997,000
------------- ------------
Net increase (decrease) in cash 231,000 (91,000)
Cash at beginning of period 436,000 305,000
------------- ------------
Cash at end of period $ 667,000 $ 214,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 90,000 $ 87,000
============ ============
</TABLE>
See the accompanying condensed notes to these Financial Statements.
4
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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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Purchased component parts and subassemblies $ 1,164,000 $ 1,052,000
Work in process 447,000 382,000
Finished goods 198,000 31,000
----------- -----------
$ 1,809,000 $ 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, June and September 1998, the Company received $300,000, $695,000 and
$500,000, 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.
In July 1998, 111,111shares of Series D Preferred Stock and 125,000 shares of
Series E Preferred Stock were converted into 236,111 shares of the Company's
Common Stock and 12,500 shares of Series G Preferred Stock were converted into
125,000 shares of the Company's Common Stock.
NOTE 4 - NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of common
shares outstanding during the period. 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
5
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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.
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 nine months ended September 30, 1998, the Company had sales of
$2,311,000 and $6,372,000, respectively, compared to sales of $2,306,000 and
$6,153,000 for the three and nine month periods ended September 30, 1997. These
increases were primarily due to sales to an expanded customer base. Management
believes, however, that the sales increase was limited by the continued Asian
market softness. In addition, several customers that were expected to place
large orders in the third quarter of 1998, deferred their purchasing decisions
into the fourth quarter. 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 78% for the three and nine
month periods ended September 30, 1998, as compared to 74% and 77% 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 a 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 nine month periods ended September 30, 1998, research and
development expenses were $340,000 and $992,000, respectively, compared to
$381,000 and $1,039,000 for the comparable periods of 1997. These decreases were
primarily due to a decrease in the expenses related to the Orion project, which
was substantially complete by the end of the second quarter of 1998. The Company
believes that research and development expenses will increase moderately in the
fourth quarter of 1998 due to new projects currently under development.
Marketing and sales expenses were relatively flat at $482,000 and $1,490,000 for
the three and nine month periods ended September 30, 1998 as compared to
$522,000 and $1,511,000 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 sales.
General and administrative expenses were $251,000 and $764,000 for the three and
nine month periods ended September 30, 1998, compared to $218,000 and $688,000
for the comparable periods in 1997. The increase is primarily due to an increase
in headcount. General and administrative expenses are expected to remain
relatively constant in absolute terms during the remainder of 1998.
Liquidity and Capital Resources
During the nine month period ended September 30, 1998, the Company used
$2,603,000 of cash in operations, primarily to fund operating losses. During the
first nine months of 1998, the Company received $2,895,000 of equity financing
from its largest investor.
6
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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 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.
Impact of Year 2000
Certain of the Company's business operations software programs were written
using two digits rather than four to define the applicable year. As a result,
those software programs are time-sensitive and recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including but not limited to,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company has been informed by the vendor of the business operations software
used by the Company that upgrades that will bring such software into Year 2000
compliance are available and will be provided to the Company under its existing
software maintenance agreement. The Company expects to effect this upgrade of
its internal business operations software by the end of the first quarter of
1999. The Company estimates that the cost of the conversion will be
approximately $75,000.
The Company sells certain products that include various software applications.
However, the Company believes that the software components of its products,
which are self-contained software programs that run independently of external
chronology, will not be significantly affected by the year 2000. The Company is
also in the process of requesting assurance from its good and services providers
that they are, or have programs in place to be, Year 2000 compliant. The
Company's costs to date for its Year 2000 compliance program, excluding the
salaries of its employees, has not been material. Although the Company has not
completed its assessment, it does not currently believe that the future costs
associated with its Year 2000 compliance program will be material.
The Company established a Year 2000 Steering Committee which reports directly to
the President and Chief Executive Officer. The committee members include
executive management and employees with expertise from various disciplines
including, but not limited to, information technology, engineering, finance,
customer service, sales, communications, facilities, procurement and human
resources. The Committee is responsible for addressing Year 2000 issues
associated with the Company's (1) business application systems including, but
not limited to, the Company's customer service, operations and financial systems
and end-user applications; (2) embedded systems, including equipment that
operates such items as the Company's telecommunications and facilities, (3)
software applications embedded in certain of the Company's products, (4) vendor
and supplier relationships; and (5) contingency planning.
The Company currently believes that neither the software developed by it as part
of its products, nor the software licensed by it for its internal use, will be
materially affected by the year 2000. However, there can be no assurance that
the Company's product software, its internal computer systems and networks or
those of its key vendors, developers and distributors will not be affected by
such Year 2000 issues, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company is currently unable to determine its most reasonably likely worst
case Year 2000 scenario, as it has not identified and assessed all of its
systems, particularly its non-IT systems. As the Company completes its
identification and assessment of internal and third-party systems, it expects
to develop contingency plans for various worst case scenarios. The Company
expects to have such contingency plans in place by September 1999. A failure to
address Year 2000 issues successfully could have a material adverse effect on
the Company's business financial condition or results of operations.
Item 4. Submission of matters to a vote of Security Holders
The Company held its Annual Meeting of Shareholders on August 25, 1998. 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 10,330,389 19,996 661,798
Michael D. Kaufman 10,330,389 19,996 661,798
F. Rigdon Currie 10,330,389 19,996 661,798
Arch J. McGill 10,330,389 19,996 661,798
Michael A. McManus, Jr. 10,330,389 19,996 661,798
J. Richard Ellis 10,330,389 19,996 661,798
</TABLE>
2. To increase the authorized number of shares of Preferred Stock of the
Company to 10,000,000.
<TABLE>
<CAPTION>
ABSTENTIONS
AND
FOR AGAINST SHARES NOT VOTED
---------- ------- ----------------
<S> <C> <C> <C>
8,833,452 60,359 2,118,372
</TABLE>
3. Approval of appointment of Pricewaterhouse Coopers LLP as independent
auditors for fiscal 1998.
<TABLE>
<CAPTION>
ABSTENTIONS
AND
FOR AGAINST SHARES NOT VOTED
---------- ------- ----------------
<S> <C> <C> <C>
10,340,485 9,900 661,798
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<S> <C>
3.1 Certificate of Determination of Series O Preferred Stock, as filed, March 31, 1998.
3.2 Certificate of Determination of Series P Preferred Stock, as filed, October 9, 1998.
3.3 Certificate of Determination of Series Q Preferred Stock, as filed, October 9, 1998.
10.2 Fifth Amendment to Convertible Debenture Purchase Agreement dated, September 25, 1998.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the fiscal quarter ended September 30, 1998, the Registrant did not
file any reports on Form 8-K.
7
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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.
<TABLE>
<S> <C>
DISC, INC.
Dated November 14, 1998 By: /s/ J. Richard Ellis
-------------------------------------
J. Richard Ellis
President and Chief Executive Officer
(Principal Executive Officer)
Dated November 14, 1998 By: /s/ Henry Madrid
-------------------------------------
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Accounting Officer)
</TABLE>
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Determination of Series O Preferred Stock, as filed, March 31, 1998.
3.2 Certificate of Determination of Series P Preferred Stock, as filed, October 9, 1998.
3.3 Certificate of Determination of Series Q Preferred Stock, as filed, October 9, 1998.
10.2 Fifth Amendment to Convertible Debenture Purchase Agreement dated, September 25, 1998.
27.1 Financial Data Schedule
</TABLE>
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EXHIBIT 3.1
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF
SERIES O PREFERRED STOCK
OF
DISC, INC.
We, J. Richard Ellis and Henry Madrid, hereby certify that we are the
President and the Chief Financial Officer, respectively, of DISC, INC., a
corporation organized and existing under the General Corporation Law of the
State of California, and further, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Articles of Incorporation of the said Corporation, the said Board of Directors
on February 20, 1998 adopted the following resolution creating a series of
1,320,755 shares of Preferred Stock designated as Series O Preferred Stock, none
of which shares have been issued:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation by the Articles of Incorporation, the Board of
Directors does hereby provide for the issuance of a series of Preferred
Stock, no par value, of the Corporation, to be designated "Series O
Preferred Stock," initially consisting of 1,320,755 shares and to the
extent that the designations, powers, preferences and relative and other
special rights and the qualifications, limitations and restrictions of the
Series O Preferred Stock are not stated and expressed in the Articles of
Incorporation, does hereby fix and herein state and express such
designations, powers, preferences and relative and other special rights and
the qualifications, limitations and restrictions thereof, as follows (all
terms used herein which are defined in the Articles of Incorporation shall
be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series O Preferred Stock," no par value, and the number of
shares constituting such series shall be 1,320,755.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of any
shares of Series C Preferred Stock ranking prior and superior to the shares
of Series O Preferred Stock with respect to dividends, and pari passu with
the rights of the holders of shares of Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series
H Preferred Stock, Series I Preferred Stock, Series J Preferred Stock,
Series K Preferred Stock, Series L Preferred Stock, Series M Preferred
Stock and Series N Preferred Stock with respect to dividends, subject to
the rights of any series of Preferred Stock which may hereafter come into
existence, the holders of shares of Series O Preferred Stock shall be
entitled to receive when, as and if declared by the Board of Directors out
of funds legally available for the purpose, dividends in the same amount
per share as declared on the Common Stock, treating such number of shares
of Series O Preferred Stock for this purpose as equal to the number of
shares of Common Stock into
<PAGE> 2
which it is then convertible. In the event any dividends are declared or
paid on the outstanding shares of Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series
H Preferred Stock, Series I Preferred Stock, Series J Preferred Stock,
Series K Preferred Stock, Series L Preferred Stock, Series M Preferred
Stock or Series N Preferred Stock, dividends shall simultaneously be
declared and paid on the outstanding shares of Series O Preferred Stock,
pari passu with the shares of Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock, Series H
Preferred Stock, Series I Preferred Stock, Series J Preferred Stock, Series
K Preferred Stock, Series L Preferred Stock, Series M Preferred Stock or
Series N Preferred Stock, based upon the number of shares of Common Stock
into which shares of Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock, Series H Preferred
Stock, Series I Preferred Stock, Series J Preferred Stock, Series K
Preferred Stock, Series L Preferred Stock, Series M Preferred Stock, Series
N Preferred Stock, and Series O Preferred Stock are then convertible. In
the event the Corporation shall at any time after the date of the filing of
this Certificate of Determination of Preferences (the "Rights Declaration
Date") (i) declare any dividend on Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case, the amount of Common Stock or other consideration to which holders of
shares of Series O Preferred Stock were entitled immediately prior to such
event under the preceding sentence shall be adjusted as set forth in
Section 4(C) hereof.
(B) The Corporation shall declare a dividend or distribution on
the Series O Preferred Stock as provided in paragraph (A) above prior to
declaring a dividend payable on shares of Common Stock.
Section 3. Voting Rights. The holders of shares of Series O Preferred
Stock shall have the following voting rights:
(A) Each holder of Series O Preferred Stock is entitled to a
number of votes equal to the number of shares of Common Stock into which
the holder's Series O Preferred Stock is then convertible. Except as
provided by law, the Common Stock and Series O Preferred Stock (and any
series of Preferred Stock which may be subsequently authorized which is
convertible into shares of Common Stock and which has voting rights equal
to the number of shares of Common Stock into which such series of Preferred
Stock is then convertible) shall vote together as a single class on all
matters to come before the shareholders for approval. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare
any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the
number of votes per share to which holders of shares of Series O Preferred
Stock were entitled immediately prior to such event shall be adjusted as
set forth in Section 4(C) hereof.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series O Preferred Stock and the holders of shares of Common
Stock (and any series of Preferred Stock which may be subsequently
authorized which is convertible into shares of
2
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Common Stock and which has voting rights equal to the number of shares of
Common Stock into which such series of Preferred Stock is then convertible)
shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(C) Except as required by law or under Section 8 hereof, holders
of Series O Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 4. Conversion Rights.
(A) Each holder of Series O Preferred Stock may, at any time, in
such holder's sole discretion, convert all or any part of such holder's
shares of Series O Preferred Stock into fully paid and nonassessable shares
of Common Stock at the rate of one (1) share of Common Stock for each share
of Series O Preferred Stock surrendered for conversion.
(B) Such conversion may be effected by surrender of such holder's
certificate or certificates for the shares of Series O Preferred Stock to
be converted, duly endorsed, at the principal office of the Corporation,
with a written notice stating (i) that such holder elects to convert all or
a specified number of shares of Series O Preferred Stock into shares of
Common Stock, and (ii) the name in which such holder desires a certificate
for the shares of Common Stock to be issued. Promptly thereafter, the
Company shall issue and deliver to such holder a certificate for the number
of shares of Common Stock to which such holder shall be entitled. Such
conversion shall be deemed to have been made at the close of business on
the date of such surrender, and such holder shall be treated for all
purposes as the record holder of such shares of Common Stock on that date.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then, in each case, the number of shares of Common Stock issuable upon the
conversion of each share of Series O Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that are
outstanding immediately prior to such event.
(D) In the event the Corporation shall at any time or from time
to time after the Rights Declaration Date make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive,
a dividend or other distribution payable in securities of the Corporation
or any of its subsidiaries, or of any other corporation or third party,
other than in shares of Common Stock, then, in each such event, provisions
shall be made so that the holders of Series O Preferred Stock shall
receive, upon the conversion thereof, securities of the Corporation or any
of its subsidiaries or of any other corporation
3
<PAGE> 4
or third party which they would have received had their stock been
converted into Common Stock on the date of such event.
Section 5. Reacquired Shares. Any shares of Series O Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, following the first priority liquidation
preference of the Series C Preferred Stock in the amount of $5.00 per share
plus any declared but unpaid dividends, and pari passu with the liquidation
preference of the Series D Preferred Stock in the amount of $5.00 per share
plus any declared but unpaid dividends ("Series D Liquidation Preference"),
the liquidation preference of the Series E Preferred Stock in the amount of
$4.00 per share plus any declared but unpaid dividends ("Series E
Liquidation Preference"), the liquidation preference of the Series F
Preferred Stock in the amount of $8.00 per share plus any declared but
unpaid dividends ("Series F Liquidation Preference"), the liquidation
preference of the Series G Preferred Stock in the amount of $20.00 per
share plus any declared but unpaid dividends ("Series G Liquidation
Preference"), the liquidation preference of the Series H Preferred Stock in
the amount of $38.30 per share plus any declared but unpaid dividends
("Series H Liquidation Preference"), the liquidation preference of the
Series I Preferred Stock in the amount of $4.19 per share plus any declared
but unpaid dividends ("Series I Liquidation Preference"), the liquidation
preference of the Series J Preferred Stock in the amount of $2.98 per share
plus any declared but unpaid dividends ("Series J Liquidation Preference"),
the liquidation preference of the Series K Preferred Stock in the amount of
$3.19 per share plus any declared but unpaid dividends ("Series K
Liquidation Preference"), the liquidation preference of the Series L
Preferred Stock in the amount of $2.76 per share plus any declared but
unpaid dividends ("Series L Liquidation Preference"), the liquidation
preference of the Series M Preferred Stock in the amount of $2.23 per share
plus any declared but unpaid dividends ("Series M Liquidation Preference"),
the liquidation preference of the Series N Preferred Stock in the amount of
$.90 per share plus any declared but unpaid dividends ("Series N
Liquidation Preference"), no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series O Preferred Stock unless, prior
thereto, the holders of shares of Series O Preferred Stock shall have
received an amount equal to $1.06 per share of Series O Preferred Stock
plus any declared but unpaid dividends ("Series O Liquidation Preference").
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series D Liquidation Preference,
the Series E Liquidation Preference, the Series F Liquidation Preference,
the Series G Liquidation Preference, the
4
<PAGE> 5
Series H Liquidation Preference, the Series I Liquidation Preference, the
Series J Liquidation Preference, the Series K Liquidation Preference, the
Series L Liquidation Preference, the Series M Liquidation Preference, the
Series N Liquidation Preference, and the Series O Liquidation Preference
and the liquidation preferences of all other series of Preferred Stock, if
any, which rank on a parity with the Series O Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
Section 7. No Redemption. The shares of Series O Preferred Stock shall
not be redeemable.
Section 8. Amendment. The Articles of Incorporation of the Corporation
shall not be further amended in any manner which would (a) alter or change
the powers, preferences or special rights or privileges of the Series O
Preferred Stock so as to affect them adversely or (b) grant to any other
class of shares any rights superior to those of the Series O Preferred
Stock without the affirmative vote of the holders of a majority or more of
the outstanding shares of Series O Preferred Stock, voting separately as a
class.
Section 9. Fractional Shares. Series O Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all
other rights of holders of Series O Preferred Stock."
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing Certificate are true of their own knowledge.
Executed at Milpitas, California on February 23, 1998.
/S/ J. Richard Ellis
-----------------------------------------
J. Richard Ellis
President and Chief Executive Officer
/S/ Henry Madrid
-----------------------------------------
Henry Madrid
Chief Financial Officer
5
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF
SERIES P PREFERRED STOCK
OF
DISC, INC.
We, J. Richard Ellis and Henry Madrid, hereby certify that we are the
President and the Chief Financial Officer, respectively, of DISC, INC., a
corporation organized and existing under the General Corporation Law of the
State of California, and further, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Articles of Incorporation of the said Corporation, the said Board of Directors
on June 30, 1998 adopted the following resolution creating a series of 36,585
shares of Preferred Stock designated as Series P Preferred Stock, none of which
shares have been issued:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation by the Articles of Incorporation, the Board of
Directors does hereby provide for the issuance of a series of Preferred
Stock, no par value, of the Corporation, to be designated "Series P
Preferred Stock," initially consisting of 36,585 shares and to the extent
that the designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions of the Series P
Preferred Stock are not stated and expressed in the Articles of
Incorporation, does hereby fix and herein state and express such
designations, powers, preferences and relative and other special rights and
the qualifications, limitations and restrictions thereof, as follows (all
terms used herein which are defined in the Articles of Incorporation shall
be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series P Preferred Stock," no par value, and the number of
shares constituting such series shall be 36,585.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of any
shares of Series C Preferred Stock ranking prior and superior to the shares
of Series P Preferred Stock with respect to dividends, and pari passu with
the rights of the holders of shares of Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series
H Preferred Stock, Series I Preferred Stock, Series J Preferred Stock,
Series K Preferred Stock, Series L Preferred Stock, Series M Preferred
Stock, Series N Preferred Stock and Series O Preferred Stock with respect
to dividends, subject to the rights of any series of Preferred Stock which
may hereafter come into existence, the holders of shares of Series P
Preferred Stock shall be entitled to receive when, as and if declared by
the Board of Directors out of funds legally available for the purpose,
dividends in the same amount per share as declared on the Common Stock,
treating such number of shares of Series P Preferred Stock for this purpose
as equal to the number of shares of Common
1
<PAGE> 2
Stock into which it is then convertible. In the event any dividends are
declared or paid on the outstanding shares of Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock, Series H Preferred Stock, Series I Preferred Stock, Series J
Preferred Stock, Series K Preferred Stock, Series L Preferred Stock, Series
M Preferred Stock, Series N Preferred Stock or Series O Preferred Stock,
dividends shall simultaneously be declared and paid on the outstanding
shares of Series P Preferred Stock, pari passu with the shares of Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series
G Preferred Stock, Series H Preferred Stock, Series I Preferred Stock,
Series J Preferred Stock, Series K Preferred Stock, Series L Preferred
Stock, Series M Preferred Stock, Series N Preferred Stock or Series O
Preferred Stock, based upon the number of shares of Common Stock into which
shares of Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock, Series H Preferred Stock, Series
I Preferred Stock, Series J Preferred Stock, Series K Preferred Stock,
Series L Preferred Stock, Series M Preferred Stock, Series N Preferred
Stock, Series O Preferred Stock and Series P Preferred Stock are then
convertible. In the event the Corporation shall at any time after the date
of the filing of this Certificate of Determination of Preferences (the
"Rights Declaration Date") (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case, the amount of Common Stock or other consideration
to which holders of shares of Series P Preferred Stock were entitled
immediately prior to such event under the preceding sentence shall be
adjusted as set forth in Section 4(C) hereof.
(B) The Corporation shall declare a dividend or distribution on
the Series P Preferred Stock as provided in paragraph (A) above prior to
declaring a dividend payable on shares of Common Stock.
Section 3. Voting Rights. The holders of shares of Series P Preferred
Stock shall have the following voting rights:
(A) Each holder of Series P Preferred Stock is entitled to a
number of votes equal to the number of shares of Common Stock into which
the holder's Series P Preferred Stock is then convertible. Except as
provided by law, the Common Stock and Series P Preferred Stock (and any
series of Preferred Stock which may be subsequently authorized which is
convertible into shares of Common Stock and which has voting rights equal
to the number of shares of Common Stock into which such series of Preferred
Stock is then convertible) shall vote together as a single class on all
matters to come before the shareholders for approval. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare
any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the
number of votes per share to which holders of shares of Series P Preferred
Stock were entitled immediately prior to such event shall be adjusted as
set forth in Section 4(C) hereof.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series P Preferred Stock and the holders of shares of Common
Stock (and any series of
2
<PAGE> 3
Preferred Stock which may be subsequently authorized which is convertible
into shares of Common Stock and which has voting rights equal to the number
of shares of Common Stock into which such series of Preferred Stock is then
convertible) shall vote together as one class on all matters submitted to a
vote of shareholders of the Corporation.
(C) Except as required by law or under Section 8 hereof, holders
of Series P Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 4. Conversion Rights.
(A) Each holder of Series P Preferred Stock may, at any time, in
such holder's sole discretion, convert all or any part of such holder's
shares of Series P Preferred Stock into fully paid and nonassessable shares
of Common Stock at the rate of ten (10) shares of Common Stock for each
share of Series P Preferred Stock surrendered for conversion.
(B) Such conversion may be effected by surrender of such holder's
certificate or certificates for the shares of Series P Preferred Stock to
be converted, duly endorsed, at the principal office of the Corporation,
with a written notice stating (i) that such holder elects to convert all or
a specified number of shares of Series P Preferred Stock into shares of
Common Stock, and (ii) the name in which such holder desires a certificate
for the shares of Common Stock to be issued. Promptly thereafter, the
Company shall issue and deliver to such holder a certificate for the number
of shares of Common Stock to which such holder shall be entitled. Such
conversion shall be deemed to have been made at the close of business on
the date of such surrender, and such holder shall be treated for all
purposes as the record holder of such shares of Common Stock on that date.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then, in each case, the number of shares of Common Stock issuable upon the
conversion of each share of Series P Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that are
outstanding immediately prior to such event.
(D) In the event the Corporation shall at any time or from time
to time after the Rights Declaration Date make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive,
a dividend or other distribution payable in securities of the Corporation
or any of its subsidiaries, or of any other corporation or third party,
other than in shares of Common Stock, then, in each such event, provisions
shall be made so that the holders of Series P Preferred Stock shall
receive, upon the conversion thereof, securities of the Corporation or any
of its subsidiaries or of any other corporation
3
<PAGE> 4
or third party which they would have received had their stock been
converted into Common Stock on the date of such event.
Section 5. Reacquired Shares. Any shares of Series P Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, following the first priority liquidation
preference of the Series C Preferred Stock in the amount of $5.00 per share
plus any declared but unpaid dividends, and pari passu with the liquidation
preference of the Series D Preferred Stock in the amount of $5.00 per share
plus any declared but unpaid dividends ("Series D Liquidation Preference"),
the liquidation preference of the Series E Preferred Stock in the amount of
$4.00 per share plus any declared but unpaid dividends ("Series E
Liquidation Preference"), the liquidation preference of the Series F
Preferred Stock in the amount of $8.00 per share plus any declared but
unpaid dividends ("Series F Liquidation Preference"), the liquidation
preference of the Series G Preferred Stock in the amount of $20.00 per
share plus any declared but unpaid dividends ("Series G Liquidation
Preference"), the liquidation preference of the Series H Preferred Stock in
the amount of $38.30 per share plus any declared but unpaid dividends
("Series H Liquidation Preference"), the liquidation preference of the
Series I Preferred Stock in the amount of $4.19 per share plus any declared
but unpaid dividends ("Series I Liquidation Preference"), the liquidation
preference of the Series J Preferred Stock in the amount of $2.98 per share
plus any declared but unpaid dividends ("Series J Liquidation Preference"),
the liquidation preference of the Series K Preferred Stock in the amount of
$3.19 per share plus any declared but unpaid dividends ("Series K
Liquidation Preference"), the liquidation preference of the Series L
Preferred Stock in the amount of $2.76 per share plus any declared but
unpaid dividends ("Series L Liquidation Preference"), the liquidation
preference of the Series M Preferred Stock in the amount of $2.23 per share
plus any declared but unpaid dividends ("Series M Liquidation Preference"),
the liquidation preference of the Series N Preferred Stock in the amount of
$.90 per share plus any declared but unpaid dividends ("Series N
Liquidation Preference"), the liquidation preference of the Series O
Preferred Stock in the amount of $1.06 per share of Series O Preferred
Stock plus any declared but unpaid dividends (the "Series O Liquidation
Preference"), no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series P Preferred Stock unless, prior
thereto, the holders of shares of Series P Preferred Stock shall have
received an amount equal to $.82 per share of Series P Preferred Stock plus
any declared but unpaid dividends ("Series P Liquidation Preference").
4
<PAGE> 5
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series D Liquidation Preference,
the Series E Liquidation Preference, the Series F Liquidation Preference,
the Series G Liquidation Preference, the Series H Liquidation Preference,
the Series I Liquidation Preference, the Series J Liquidation Preference,
the Series K Liquidation Preference, the Series L Liquidation Preference,
the Series M Liquidation Preference, the Series N Liquidation Preference,
the Series O Liquidation Preference and the Series P Liquidation Preference
and the liquidation preferences of all other series of Preferred Stock, if
any, which rank on a parity with the Series P Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
Section 7. No Redemption. The shares of Series P Preferred Stock shall
not be redeemable.
Section 8. Amendment. The Articles of Incorporation of the Corporation
shall not be further amended in any manner which would (a) alter or change
the powers, preferences or special rights or privileges of the Series P
Preferred Stock so as to affect them adversely or (b) grant to any other
class of shares any rights superior to those of the Series P Preferred
Stock without the affirmative vote of the holders of a majority or more of
the outstanding shares of Series P Preferred Stock, voting separately as a
class.
Section 9. Fractional Shares. Series P Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all
other rights of holders of Series P Preferred Stock."
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing Certificate are true of their own knowledge.
Executed at Milpitas, California on October 1, 1998.
/S/ J. Richard Ellis
-----------------------------------------
J. Richard Ellis
President and Chief Executive Officer
/S/ Henry Madrid
-----------------------------------------
Henry Madrid
Chief Financial Officer
5
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF
SERIES P PREFERRED STOCK
OF
DISC, INC.
We, J. Richard Ellis and Henry Madrid, hereby certify that we are the
President and the Chief Financial Officer, respectively, of DISC, INC., a
corporation organized and existing under the General Corporation Law of the
State of California, and further, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Articles of Incorporation of the said Corporation, the said Board of Directors
on June 30, 1998 adopted the following resolution creating a series of 36,585
shares of Preferred Stock designated as Series P Preferred Stock, none of which
shares have been issued:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation by the Articles of Incorporation, the Board of
Directors does hereby provide for the issuance of a series of Preferred
Stock, no par value, of the Corporation, to be designated "Series P
Preferred Stock," initially consisting of 36,585 shares and to the extent
that the designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions of the Series P
Preferred Stock are not stated and expressed in the Articles of
Incorporation, does hereby fix and herein state and express such
designations, powers, preferences and relative and other special rights and
the qualifications, limitations and restrictions thereof, as follows (all
terms used herein which are defined in the Articles of Incorporation shall
be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series P Preferred Stock," no par value, and the number of
shares constituting such series shall be 36,585.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of any
shares of Series C Preferred Stock ranking prior and superior to the shares
of Series P Preferred Stock with respect to dividends, and pari passu with
the rights of the holders of shares of Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series
H Preferred Stock, Series I Preferred Stock, Series J Preferred Stock,
Series K Preferred Stock, Series L Preferred Stock, Series M Preferred
Stock, Series N Preferred Stock and Series O Preferred Stock with respect
to dividends, subject to the rights of any series of Preferred Stock which
may hereafter come into existence, the holders of shares of Series P
Preferred Stock shall be entitled to receive when, as and if declared by
the Board of Directors out of funds legally available for the purpose,
dividends in the same amount per share as declared on the Common Stock,
treating such number of shares of Series P Preferred Stock for this purpose
as equal to the number of shares of Common
1
<PAGE> 2
Stock into which it is then convertible. In the event any dividends are
declared or paid on the outstanding shares of Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock, Series H Preferred Stock, Series I Preferred Stock, Series J
Preferred Stock, Series K Preferred Stock, Series L Preferred Stock, Series
M Preferred Stock, Series N Preferred Stock or Series O Preferred Stock,
dividends shall simultaneously be declared and paid on the outstanding
shares of Series P Preferred Stock, pari passu with the shares of Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series
G Preferred Stock, Series H Preferred Stock, Series I Preferred Stock,
Series J Preferred Stock, Series K Preferred Stock, Series L Preferred
Stock, Series M Preferred Stock, Series N Preferred Stock or Series O
Preferred Stock, based upon the number of shares of Common Stock into which
shares of Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock, Series H Preferred Stock, Series
I Preferred Stock, Series J Preferred Stock, Series K Preferred Stock,
Series L Preferred Stock, Series M Preferred Stock, Series N Preferred
Stock, Series O Preferred Stock and Series P Preferred Stock are then
convertible. In the event the Corporation shall at any time after the date
of the filing of this Certificate of Determination of Preferences (the
"Rights Declaration Date") (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case, the amount of Common Stock or other consideration
to which holders of shares of Series P Preferred Stock were entitled
immediately prior to such event under the preceding sentence shall be
adjusted as set forth in Section 4(C) hereof.
(B) The Corporation shall declare a dividend or distribution on
the Series P Preferred Stock as provided in paragraph (A) above prior to
declaring a dividend payable on shares of Common Stock.
Section 3. Voting Rights. The holders of shares of Series P Preferred
Stock shall have the following voting rights:
(A) Each holder of Series P Preferred Stock is entitled to a
number of votes equal to the number of shares of Common Stock into which
the holder's Series P Preferred Stock is then convertible. Except as
provided by law, the Common Stock and Series P Preferred Stock (and any
series of Preferred Stock which may be subsequently authorized which is
convertible into shares of Common Stock and which has voting rights equal
to the number of shares of Common Stock into which such series of Preferred
Stock is then convertible) shall vote together as a single class on all
matters to come before the shareholders for approval. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare
any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the
number of votes per share to which holders of shares of Series P Preferred
Stock were entitled immediately prior to such event shall be adjusted as
set forth in Section 4(C) hereof.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series P Preferred Stock and the holders of shares of Common
Stock (and any series of
2
<PAGE> 3
Preferred Stock which may be subsequently authorized which is convertible
into shares of Common Stock and which has voting rights equal to the number
of shares of Common Stock into which such series of Preferred Stock is then
convertible) shall vote together as one class on all matters submitted to a
vote of shareholders of the Corporation.
(C) Except as required by law or under Section 8 hereof, holders
of Series P Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 4. Conversion Rights.
(A) Each holder of Series P Preferred Stock may, at any time, in
such holder's sole discretion, convert all or any part of such holder's
shares of Series P Preferred Stock into fully paid and nonassessable shares
of Common Stock at the rate of ten (10) shares of Common Stock for each
share of Series P Preferred Stock surrendered for conversion.
(B) Such conversion may be effected by surrender of such holder's
certificate or certificates for the shares of Series P Preferred Stock to
be converted, duly endorsed, at the principal office of the Corporation,
with a written notice stating (i) that such holder elects to convert all or
a specified number of shares of Series P Preferred Stock into shares of
Common Stock, and (ii) the name in which such holder desires a certificate
for the shares of Common Stock to be issued. Promptly thereafter, the
Company shall issue and deliver to such holder a certificate for the number
of shares of Common Stock to which such holder shall be entitled. Such
conversion shall be deemed to have been made at the close of business on
the date of such surrender, and such holder shall be treated for all
purposes as the record holder of such shares of Common Stock on that date.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then, in each case, the number of shares of Common Stock issuable upon the
conversion of each share of Series P Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that are
outstanding immediately prior to such event.
(D) In the event the Corporation shall at any time or from time
to time after the Rights Declaration Date make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive,
a dividend or other distribution payable in securities of the Corporation
or any of its subsidiaries, or of any other corporation or third party,
other than in shares of Common Stock, then, in each such event, provisions
shall be made so that the holders of Series P Preferred Stock shall
receive, upon the conversion thereof, securities of the Corporation or any
of its subsidiaries or of any other corporation
3
<PAGE> 4
or third party which they would have received had their stock been
converted into Common Stock on the date of such event.
Section 5. Reacquired Shares. Any shares of Series P Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, following the first priority liquidation
preference of the Series C Preferred Stock in the amount of $5.00 per share
plus any declared but unpaid dividends, and pari passu with the liquidation
preference of the Series D Preferred Stock in the amount of $5.00 per share
plus any declared but unpaid dividends ("Series D Liquidation Preference"),
the liquidation preference of the Series E Preferred Stock in the amount of
$4.00 per share plus any declared but unpaid dividends ("Series E
Liquidation Preference"), the liquidation preference of the Series F
Preferred Stock in the amount of $8.00 per share plus any declared but
unpaid dividends ("Series F Liquidation Preference"), the liquidation
preference of the Series G Preferred Stock in the amount of $20.00 per
share plus any declared but unpaid dividends ("Series G Liquidation
Preference"), the liquidation preference of the Series H Preferred Stock in
the amount of $38.30 per share plus any declared but unpaid dividends
("Series H Liquidation Preference"), the liquidation preference of the
Series I Preferred Stock in the amount of $4.19 per share plus any declared
but unpaid dividends ("Series I Liquidation Preference"), the liquidation
preference of the Series J Preferred Stock in the amount of $2.98 per share
plus any declared but unpaid dividends ("Series J Liquidation Preference"),
the liquidation preference of the Series K Preferred Stock in the amount of
$3.19 per share plus any declared but unpaid dividends ("Series K
Liquidation Preference"), the liquidation preference of the Series L
Preferred Stock in the amount of $2.76 per share plus any declared but
unpaid dividends ("Series L Liquidation Preference"), the liquidation
preference of the Series M Preferred Stock in the amount of $2.23 per share
plus any declared but unpaid dividends ("Series M Liquidation Preference"),
the liquidation preference of the Series N Preferred Stock in the amount of
$.90 per share plus any declared but unpaid dividends ("Series N
Liquidation Preference"), the liquidation preference of the Series O
Preferred Stock in the amount of $1.06 per share of Series O Preferred
Stock plus any declared but unpaid dividends (the "Series O Liquidation
Preference"), no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series P Preferred Stock unless, prior
thereto, the holders of shares of Series P Preferred Stock shall have
received an amount equal to $.82 per share of Series P Preferred Stock plus
any declared but unpaid dividends ("Series P Liquidation Preference").
4
<PAGE> 5
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series D Liquidation Preference,
the Series E Liquidation Preference, the Series F Liquidation Preference,
the Series G Liquidation Preference, the Series H Liquidation Preference,
the Series I Liquidation Preference, the Series J Liquidation Preference,
the Series K Liquidation Preference, the Series L Liquidation Preference,
the Series M Liquidation Preference, the Series N Liquidation Preference,
the Series O Liquidation Preference and the Series P Liquidation Preference
and the liquidation preferences of all other series of Preferred Stock, if
any, which rank on a parity with the Series P Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
Section 7. No Redemption. The shares of Series P Preferred Stock shall
not be redeemable.
Section 8. Amendment. The Articles of Incorporation of the Corporation
shall not be further amended in any manner which would (a) alter or change
the powers, preferences or special rights or privileges of the Series P
Preferred Stock so as to affect them adversely or (b) grant to any other
class of shares any rights superior to those of the Series P Preferred
Stock without the affirmative vote of the holders of a majority or more of
the outstanding shares of Series P Preferred Stock, voting separately as a
class.
Section 9. Fractional Shares. Series P Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all
other rights of holders of Series P Preferred Stock."
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing Certificate are true of their own knowledge.
Executed at Milpitas, California on October 1, 1998.
/S/ J. Richard Ellis
-----------------------------------------
J. Richard Ellis
President and Chief Executive Officer
/S/ Henry Madrid
-----------------------------------------
Henry Madrid
Chief Financial Officer
5
<PAGE> 1
EXHIBIT 10.2
SIXTH AMENDMENT
TO
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS SIXTH AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the
"Amendment") is entered into as of September 25, 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, March 27, 1998 and June 30, 1998 to increase the
aggregate amount of Convertible Debenture to be purchased thereunder to
$5,725,000.
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 $6,225,000 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
<PAGE> 2
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.
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
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 667,000
<SECURITIES> 0
<RECEIVABLES> 1,944,000
<ALLOWANCES> 120,000
<INVENTORY> 1,809,000
<CURRENT-ASSETS> 4,520,000
<PP&E> 438,000
<DEPRECIATION> 1,303,000
<TOTAL-ASSETS> 4,958,000
<CURRENT-LIABILITIES> 2,931,000
<BONDS> 0
0
15,637,000
<COMMON> 11,053,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,958,000
<SALES> 2,311,000
<TOTAL-REVENUES> 2,311,000
<CGS> 1,716,000
<TOTAL-COSTS> 2,789,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,000
<INCOME-PRETAX> (509,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (509,000)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
