<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
DISC, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
DISC, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] $125 per Exchange Act Rules 0-11(c)(I)(ii), 14a-6(i)(1), or 14a-6(j)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11.*
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
*Set forth the amount on which the filing fee is calculated and state
how it was determined.
[ ] Fee previously paid by written preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
Notes:
<PAGE> 2
DISC, INC.
372 TURQUOISE STREET
MILPITAS, CA 95035
(408) 934-7000
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------------------
TO BE HELD AUGUST 25, 1998
The 1998 Annual Meeting of Shareholders of DISC, Inc. (the "Company") will
be held at the Company's facility, 372 Turquoise Street, Milpitas, California,
on Tuesday, August 25, 1998, beginning at 9:30 A.M. local time, for the
following purposes:
1. To elect six (6) directors to serve until the next Annual Meeting of
Shareholders or until their successors are elected and qualified;
2. To increase the authorized number of shares of Preferred Stock of the
Company to 10,000,000;
3. To ratify the appointment of Price Waterhouse LLP as independent
auditors of the Company for the fiscal year ending December 31, 1998;
and
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on July 6, 1998, are
entitled to notice of and to vote at the meeting.
All shareholders are cordially invited to attend the meeting. However, to
assure your representation at the meeting, you are urged to mark, sign, date and
return the enclosed proxy as promptly as possible in the postage prepaid
envelope enclosed for that purpose. Any shareholder attending the meeting may
vote in person even if he or she has returned a proxy.
By Order of the Board of Directors,
J. Richard Ellis
President and Chief Executive Officer
Milpitas, California
July 20, 1998
<PAGE> 3
PROXY STATEMENT
OF
DISC, INC.
This Proxy Statement and the accompanying Notice of Annual Meeting and
Proxy Card are being furnished to the shareholders of DISC, Inc. (the "Company")
in connection with the solicitation of proxies by the Board of Directors of the
Company for use at the 1998 Annual Meeting of Shareholders of the Company (the
"Annual Meeting") to be held at the Company's facility at 372 Turquoise Street,
Milpitas, California 95035, on Tuesday, August 25, 1998 at 9:30 A.M., local
time, and any and all adjournments thereof. These proxy materials are being
mailed on or about July 20, 1998, to all holders of the Company's Common Stock,
Series C Preferred Stock, 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, Series P Preferred Stock, and Series Q Preferred Stock
("Preferred Stock") of record as of July 6, 1998.
PERSONS MAKING THE SOLICITATION
All expenses of the Company in connection with this solicitation will be
borne by the Company. In addition to solicitation by mail, proxies may be
solicited by directors, officers and other employees of the Company by
telephone, telegraph, telefax or telex, in person or otherwise, without
additional compensation. The Company will also request brokerage firms,
nominees, custodians and fiduciaries to forward proxy materials to the
beneficial owners of shares held of record by such persons and will reimburse
such persons and the Company's transfer agent for their reasonable out-of-pocket
expenses in forwarding such material.
VOTING AT THE MEETING
Holders of record of the Company's Common Stock and Preferred Stock at the
close of business on July 6, 1998 are entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof. On that date, 3,334,323 shares of
Common Stock, 372,296 shares of Series C Preferred Stock, 444,444 shares of
Series D Preferred Stock, 500,000 shares of Series E Preferred Stock, 250,000
shares of Series F Preferred Stock, 110,000 shares of Series G Preferred Stock,
26,109 shares of Series H Preferred Stock, 167,065 shares of Series I Preferred
Stock, 244,966 shares of Series J Preferred Stock, 235,110 shares of Series K
Preferred Stock, 199,275 shares of Series L Preferred Stock, 179, 372 shares of
Series M Preferred Stock, 666,667 shares of Series N Preferred Stock, 1,320,755
shares of Series O Preferred Stock, 36,585 shares of Series P Preferred Stock,
and 112,097 shares of Series Q Preferred Stock were outstanding and entitled to
vote. Pursuant to the Company's Amended and Restated Articles of Incorporation,
the Company's outstanding shares of Preferred Stock vote together with the
Common Stock on all matters except as required by law, and each share of
Preferred Stock is entitled to a number of votes equal to the number of shares
of Common Stock into which it is then convertible. Each share of the Company's
Series C, D, E, I, J, K, L, M, N and O Preferred Stock is convertible into one
share of Common Stock and is entitled to one vote per share. Each share of the
Company's Series F Preferred Stock is convertible into two shares of Common
Stock and is entitled to two votes per share. Each share of Series G, H, P and Q
Preferred Stock is convertible into ten shares of Common Stock and is entitled
to ten votes per share.
An automated system administered by the Company's transfer agent will
tabulate votes cast at the Annual Meeting. A majority of the shares entitled to
vote, represented in person or by proxy, will constitute a quorum at the Annual
Meeting. Abstentions and broker non-votes are each included in the determination
of the number of shares present and voting for the purpose of determining
whether a quorum is present, and each is tabulated separately. In determining
whether a proposal has been approved, abstentions are counted as votes against a
proposal and broker non-votes are not counted as votes for or against a proposal
or as votes present and voting on the proposal.
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of June 30, 1998, as to (a) all
directors, (b) the named executive officers identified in the Summary
Compensation Table located at page 7, (c) all directors and executive officers
as a group, and (d) each person known to the Company to be the beneficial owner
of more than 5% of the Company's voting securities. Each share of the Company's
Series C, Series D, Series E, Series I, Series J, Series K, Series L, Series M,
Series N and Series O Preferred Stock is convertible into one share of Common
Stock and is entitled to one vote per share. Each share of the Company's Series
F Preferred Stock is convertible into two shares of Common Stock and is entitled
to two votes per share. Each share of Series G, Series H, Series P and Series Q
Preferred Stock is convertible into ten shares of Common Stock and is entitled
to ten votes per share. Because the Company's outstanding Preferred Stock votes
together with and has the same rights to cumulative voting as the Common Stock,
the number of shares held by such owner, includes all shares of Common Stock and
Preferred Stock on an as-if-converted basis, and "Percentage of Class"
represents the total Common and outstanding Preferred Stock, on an
as-if-converted basis, of the Company issued and outstanding as of June 30,
1998. Except as otherwise indicated, the Company believes, based on information
furnished by such owners, that the beneficial owners of the Common Stock and
Preferred Stock have sole investment and voting power with respect to such
shares, subject to applicable community property laws.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
<S> <C> <C>
MK Global Ventures.................................... 773,744(1) 6.0%
2471 E. Bayshore Road
Palo Alto, CA 94303
MK Global Ventures II................................. 913,982(2) 7.1%
2471 E. Bayshore Road
Palo Alto, CA 94303
MK GVD FUND........................................... 8,626,525(3) 66.7%
2471 E. Bayshore Road
Palo Alto, CA 94303
Michael D. Kaufman.................................... 10,354,251(4)(7) 80.0%
2471 E. Bayshore Road
Palo Alto, CA 94303
Frank T. Connors...................................... 112,558(5) *
J. Richard Ellis...................................... 114,583(6) 1.2%
F. Rigdon Currie...................................... 40,000(7) *
Arch J. McGill........................................ 40,000(7) *
Michael A. McManus, Jr................................ 40,000(7) *
Ronald F. Reynolds.................................... 43,750(8) *
Henry Madrid.......................................... 44,661(9) *
Directors and Executive Officers as a group (9)
persons............................................. 10,789,803(10) 81.1%
</TABLE>
- ---------------
* Less than 1%
(1) According to a report filed with the Securities and Exchange Commission, MK
Global Ventures beneficially owns 759,093 shares of the Company's Common
Stock and 10,465 Shares, or 3%, of the Company's Series C Preferred Stock.
Also includes warrants for 4,186 shares of Common Stock exercisable during
the 60-day period following June 30, 1998.
(2) According to a report filed with the Securities and Exchange Commission, MK
Global Ventures II beneficially owns 310,462 shares of the Company's Common
Stock, 361,831 shares, or 97%, of the Company's Series C Preferred Stock,
and 77,566 shares, or 46%, of the Company's Series I Preferred Stock. Also
includes warrants for 164,123 shares of Common Stock exercisable during the
60-day period following June 30, 1998.
(3) According to a report filed with the Securities and Exchange Commission, MK
GVD FUND beneficially owns 333,333 shares, or 75%, of the Company's Series
D Preferred Stock, 375,000 shares, or
2
<PAGE> 5
75%, of the Company's Series E Preferred Stock, 250,000 shares, or 100%, of
the Company's Series F Preferred Stock, 97,500 shares, or 89%, of the
Company's Series G Preferred Stock, 26,109 shares, or 100%, of the
Company's Series H Preferred Stock, 89,499 shares, or 54%, of the Company's
Series I Preferred Stock, 244,966 shares, or 100%, of the Company's Series
J Preferred Stock, 235,110 shares, or 100%, of the Company's Series K
Preferred Stock, 199,275 shares, or 100%, of the Company's Series L
Preferred Stock, 179,372 shares, or 100%, of the Company's Series M
Preferred Stock, 666,667 shares, or 100%, of the Company's Series N
Preferred Stock, 1,320,755 shares, or 100%, of the Company's Series O
Preferred Stock, 36,585 shares, or 100%, of the Company's Series P
Preferred Stock and 112,097 shares, or 100%, of the Company's Series Q
Preferred Stock. Shares of Series C, D, E, J, K, L, M, N and O Preferred
Stock are convertible into Common Stock on a one to one basis, Series F
Preferred Stock is convertible on a one to two basis and Series G, H, P and
Q stock are convertible on a one to ten basis at the option of the holder.
Also includes warrants for 1,759,638 shares of Common Stock exercisable
during the 60-day period following June 30, 1998.
(4) Includes 759,093 shares of Common Stock owned by MK Global Ventures,
310,462 shares of Common Stock owned by MK Global Ventures II, 10,465
shares of Series C Preferred Stock owned by MK Global Ventures, 361,831
shares of Series C Preferred Stock and 77,566 shares of Series I Preferred
Stock owned by MK Global Ventures II, 333,333 shares of Series D Preferred
Stock, 375,000 shares of Series E Preferred Stock, 250,000 shares of Series
F Preferred Stock, 97,500 shares of Series G Preferred Stock, 26,109 shares
of Series H Preferred Stock, 89,499 shares of Series I Preferred Stock,
244,966 shares of Series J Preferred Stock, 235,110 shares of Series K
Preferred Stock, 199,275 shares of Series L Preferred Stock, 179,372 shares
of Series M Preferred Stock, 666,667 shares of Series N Preferred Stock,
1,320,755 shares of Series O Preferred Stock, 36,585 shares of Series P
Preferred Stock and 112,097 shares of Series Q Preferred Stock owned by MK
GVD Fund. Also includes warrants for 1,894,029 shares of Common Stock
exercisable during the 60-day period following June 30, 1998. Mr. Kaufman,
a director of the Company, is a general partner of these funds and may be
deemed to have voting and investment power with respect to such shares. Mr.
Kaufman disclaims beneficial ownership of all shares of Common Stock and
Preferred Stock so owned; however, the aggregate voting power represented
by Mr. Kaufman's beneficial ownership of all such Common Stock and
Preferred Stock is indicated in the appropriate column.
(5) Includes 55,000 shares issuable upon exercise of stock options exercisable
during the 60-day period following June 30, 1998.
(6) Includes 114,583 shares issuable upon exercise of stock options exercisable
during the 60-day period following June 30, 1998.
(7) Includes 40,000 shares issuable upon exercise of stock options exercisable
during the 60-day period following June 30, 1998.
(8) Includes 43,750 shares issuable upon exercise of stock options exercisable
during the 60-day period following June 30, 1998.
(9) Includes 14,000 shares issuable upon exercise of stock options exercisable
during the 60-day period following June 30, 1998.
(10) Includes 397,125 shares issuable upon exercise of stock options and
warrants exercisable during the 60-day period following June 30, 1998.
REVOCABILITY OF PROXY
A proxy may be revoked by a shareholder prior to the voting at the Annual
Meeting by written notice to the Secretary of the Company, by submission of
another proxy bearing a later date or by voting in person at the Annual Meeting.
Such notice or later proxy will not affect a vote on any matter taken prior to
the receipt thereof by the Company. The mere presence at the Annual Meeting of
the shareholder who has appointed a proxy will not revoke the prior appointment.
If not revoked, the proxy will be voted at the Annual Meeting in accordance with
the instructions indicated on the Proxy Card by the shareholder or, if no
instructions are indicated, will be voted "FOR" the slate of directors described
herein, "FOR" increasing the authorized
3
<PAGE> 6
shares of Preferred Stock to 10,000,000, "FOR" the appointment of Price
Waterhouse LLP as independent auditors of the Company, and as to any other
matter that may be properly brought before the Annual Meeting, in accordance
with the judgment of the proxy holder.
PROPOSAL ONE
ELECTION OF DIRECTORS
NOMINEES
A board of six directors is to be elected at the meeting. If any Management
nominee is unable or declines to serve as a director at the time of the Annual
Meeting, the proxies will be voted for any nominee who shall be designated by
the present Board of Directors to fill the vacancy. The Company is not aware of
any nominee who will be unable or will decline to serve as a director. The term
of office for each person elected as a director will continue until the next
Annual Meeting of Shareholders or until his successor has been elected and
qualified. Election of the six nominees to the Board of Directors will require
the affirmative vote of the holders of a majority of the outstanding shares of
Common Stock and Preferred Stock, voting together, present or represented at the
Annual Meeting and entitled to vote thereat.
In accordance with California law, each shareholder may cumulate his or her
votes and give any one nominee a number of votes equal to the number of
directors to be elected multiplied by the number of shares which the shareholder
is entitled to vote at the meeting or to distribute the votes on the same
principle among as many candidates as the shareholder may elect, if (i) the name
of the candidate for whom such votes are cast has been properly placed in
nomination prior to the voting, and (ii) a shareholder has given notice at the
meeting prior to voting of that shareholder's intention to cumulate his or her
votes. If any one shareholder has given such notice, all shareholders may
cumulate their votes for candidates who have properly been placed in nomination.
The Board of Directors is soliciting discretionary authority to cumulate
votes represented by proxies and (unless authority to do so is withheld) to
distribute the total of such votes among the nominees in such numbers as may be
determined by the named proxies, because in the event nominations are made in
opposition to the nominees of the Board of Directors, it is the intention of the
persons named in the enclosed proxy to cumulate votes represented by proxies for
individual nominees in accordance with their best judgment in order to assure
the election of as many of the nominees to the Board of Directors as possible.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL NOMINEES LISTED BELOW.
The names of the nominees and certain information about them are set forth
below:
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
---- --- --------------
<S> <C> <C>
J. Richard Ellis........................... 53 Chairman of the Board, President and
Chief Executive Officer
Frank T. Connors........................... 64 Director and Secretary
Michael D. Kaufman......................... 57 Director
F. Rigdon Currie........................... 67 Director
Arch J. McGill............................. 66 Director
Michael A. McManus, Jr..................... 54 Director
</TABLE>
J. RICHARD ELLIS joined the Company as President and Chief Operating
Officer in July 1994 and became Chief Executive Officer in January 1995. Mr.
Ellis was appointed to the Board of Directors on July 13, 1994 and became
Chairman of the Board of Directors in August 1996. From November 1993 to June
1994, Mr. Ellis worked as an independent management consultant. From June 1991
to October 1993, Mr. Ellis was employed by Cygnet Systems Inc. ("Cygnet"), a
manufacturer of optical disk library units as President and Chief Executive
Officer. From December 1988 to May 1991, Mr. Ellis was employed by Cygnet as
Vice President of Operations and then as Chief Operating Officer. In June 1993,
Cygnet filed a voluntary
4
<PAGE> 7
petition of bankruptcy under Chapter 11 of the federal bankruptcy law. The plan
of reorganization was approved and the bankruptcy proceedings terminated in
October 1993.
FRANK T. CONNORS has been Secretary of the Company since May 1990 and was
Chairman of the Board of Directors of the Company from June 1988 to August 1996,
Chief Executive Officer of the Company from May 1990 to December 1994. Since
October 1994, Mr. Connors has been Vice Chairman of the Board of Directors and
Executive Vice President of STM Wireless, Inc., a publicly held manufacturer of
satellite communication networks.
MICHAEL D. KAUFMAN became a director of the Company in December 1988. Since
October 1987, he has been the Managing General Partner of each of MK Global
Ventures, MK Global Ventures II and MK GVD FUND of Palo Alto, California,
venture capital firms specializing in early-stage and start-up financing of high
technology companies. From August 1981 until October 1987, Mr. Kaufman was
General Partner and Special Limited Partner of Oak Investment Partners I, II,
and III, venture capital firms, which also focused on the formation of high
technology companies. Mr. Kaufman also serves on the Boards of Directors of
Davox Corp., a telecommunications company, Document Technologies, Inc., which
also develops and sells high resolution document image processing subsystems,
Hypermedia Communications, Inc., which publishes Newmedia magazine, a periodical
dedicated to interactive multimedia technology, and Proxim, Inc., a wireless
communications company.
F. RIGDON CURRIE became a director of the Company in December 1988. Since
February 1988, he has been Special Limited Partner of MK Global Ventures II and
MK GVD FUND. Mr. Currie serves on the Boards of Directors of Document
Technologies, Wonderware Corporation, a supplier of software to the process
control and industrial automation markets and QMS Inc., a laser printer systems
company.
ARCH J. MCGILL became a director of the Company in August 1993. Since
October 1985, he has been President of Chardonnay, Inc., a venture capital
investment and executive business advisory services company. From March 1983 to
October 1985, Mr. McGill was President and Chief Executive Officer of Rothchild
Ventures, Inc., a venture capital fund. From January 1981 to March 1983, Mr.
McGill was President of AIS/ American Bell, a subsidiary of AT&T. Mr. McGill
serves on the Boards of Directors of Apertus Technologies, Inc., a data
networking company, and Employee Benefit Plans, Inc., a managed health-care
company.
MICHAEL A. MCMANUS, JR. became a director of the Company in August 1993.
Since November 1991, he has been President and Chief Executive Officer of New
York Bancorp, Inc., the holding company for Home Federal Savings Bank. From July
1990 to October 1991, Mr. McManus was President and Chief Executive Officer of
Jencor Pharmaceuticals, Inc., a pharmaceutical company. From July 1986 to July
1990, Mr. McManus was Vice President, Business Planning & Development for the
Consumer Division of Pfizer, Inc., a health-care company. Mr. McManus also
serves on the Board of Directors of New York Bancorp, Inc.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of four meetings during
1997 with 100% attendance at each meeting. The Board of Directors has a
Compensation Committee and an Audit Committee. The functions of the Compensation
Committee include advising the Company on salaries and incentive compensation
for employees of, and consultants to, the Company. The Compensation Committee,
which consists of Messrs. Connors, McManus and Currie, held one meeting during
1997. The Audit Committee is responsible for recommending to the Board of
Directors the appointment of the Company's outside auditors, examining the
results of audits and reviewing internal accounting controls. The Audit
Committee, which consists of Messrs. Kaufman and McGill, held one meeting during
1997, with 100% attendance.
OTHER EXECUTIVE OFFICERS
HENRY MADRID, 41, joined the Company as Vice President of Finance and Chief
Financial Officer in January 1990. From July 1987 to December 1989, Mr. Madrid
was employed by Zentec Corporation, a manufacturer of computer terminals, as
Controller and later Vice President, Finance. From August 1979 to
5
<PAGE> 8
May 1987, Mr. Madrid was employed by Price Waterhouse, San Jose, California, in
various positions, the last of which was as manager in the Audit Department. Mr.
Madrid is a Certified Public Accountant.
BRIAN IRVINE, 52, joined the Company in April 1990, and has held various
engineering positions in the Company including Director of Engineering before
being promoted to Vice President of Engineering in December 1997.
RONALD F. REYNOLDS, 60, joined the Company in February 1996, as Vice
President of Sales. From March 1995 to February 1996, Mr. Reynolds was an
independent consultant for start-up companies. From December 1992 to February
1995, Mr. Reynolds served as Vice President of Sales for the Lago Division of
Storage Tek, a manufacturer of storage products for the Unix marketplace. From
January 1988 to November 1992, Mr. Reynolds was Chief Executive Officer of
Century Financial, a leasing and consulting company for computer related
products.
There are no family relationships between any director, executive officer
or person nominated or chosen by the Company to become a director or executive
officer.
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows compensation paid by the
Company for services rendered during fiscal years 1997, 1996 and 1995 to the
person who was the Company's Chief Executive Officer and the other executive
officers of the Company who received salary and bonus compensation which
exceeded $100,000 in fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION COMPENSATION AWARDS
NAME AND ----------------- LONG-TERM ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) OPTIONS(1) COMPENSATION($)(2)
------------------ ---- --------- ---------- -------------------
<S> <C> <C> <C> <C>
J. Richard Ellis.............................. 1997 152,000 75,000 1,000
President and Chief Executive Officer 1996 152,000 50,000 1,000
1995 152,000 -- 1,000
Henry Madrid.................................. 1997 108,000 50,000 1,000
Vice President -- Finance 1996 110,000 -- 1,000
1995 111,000 -- 1,000
Ronald F. Reynolds............................ 1997 141,000 45,000 1,000
Sr. Vice President, Sales and Marketing(3) 1996 118,000 100,000 1,000
</TABLE>
- ---------------
(1) Options are awarded pursuant to the Company's Stock Plan, which is
administered by the Board of Directors. The Board of Directors determines
the eligibility of employees and consultants, the number of shares to be
granted and the terms of such grants. Options generally have a term of ten
years from the date of grant.
(2) The amounts shown represent life insurance premiums paid by the Company.
(3) Mr. Reynolds joined the Company in February 1996.
OPTION GRANTS
<TABLE>
<CAPTION>
PERCENT OF TOTAL
SECURITIES UNDERLYING OPTIONS GRANTED TO EXERCISE
NAME OPTIONS GRANTED(#) EMPLOYEES IN FY 1997 PRICE($/SH) EXPIRATION DATE
---- --------------------- -------------------- ----------- ---------------
<S> <C> <C> <C> <C>
J. Richard Ellis................ 75,000 15.8% $1.16 December 2002
Henry Madrid.................... 50,000 10.5% $1.16 December 2002
Ronald F. Reynolds.............. 45,000 9.5% $1.16 December 2002
</TABLE>
6
<PAGE> 9
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information on the value of unexercised
in-the-money options held by the named executive officers as of December 31,
1997.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Richard Ellis............ -- -- 98,959 126,041 $ -- $ --
Henry Madrid................ -- -- 14,000 50,000 -- --
Ronald F. Reynolds.......... -- -- 33,334 111,666 -- --
</TABLE>
- ---------------
(1) Market value of underlying securities at year-end minus the exercise price
of "in-the-money" options. The closing sale price for the Company's Common
Stock as of December 31, 1997 on the NASDAQ Small Cap Market System was
$0.875.
COMPENSATION OF DIRECTORS
Pursuant to the Company's 1995 Stock Option Plan for Non-Employee
Directors, each non-employee director receives an initial grant of options to
purchase 25,000 shares of the Company's Common Stock upon commencement of
service as a director. In addition to such initial grant of 25,000 options, each
non-employee director is granted an option to purchase 5,000 shares of the
Company's Common Stock during each year of service as a director commencing with
fiscal year 1995.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Based upon its review of the copies of reporting forms furnished to the
Company, the Company believes that all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934 applicable to its directors, officers,
and any persons holding ten percent or more of the Company's Common Stock with
respect to the Company's fiscal year ended December 31, 1997, were satisfied.
CERTAIN TRANSACTIONS
On March 29, 1996, the Company entered into a Series G Preferred Stock
Purchase Agreement with MK GVD FUND whereby MK GVD FUND agreed to purchase
47,500 shares of Series G Preferred Stock, each initially convertible into ten
(10) shares of Common Stock at a price of $20.00 per share, and 118,750 warrants
to purchase additional shares of Common Stock at an exercise price of $2.50 per
share, at a price of $0.01 per warrant.
In connection with such sale, in satisfaction of the Company's antidilution
obligations under the Series F Purchase Agreement, the Company issued to J.F.
Shea Co., Inc. an additional 12,500 shares of Series G Preferred Stock. J.F.
Shea Co., Inc. is a holder of more than 5% of the voting stock of the Company.
Also in connection with such sale, in satisfaction of the Company's antidilution
obligations under the Series E and Series F Purchase Agreement, the Company
issued to MK GVD FUND an additional 93,750 and 50,000 shares of Series F and
Series G Preferred Stock, respectively. Michael D. Kaufman, a director of the
Company, is a general partner of MK GVD FUND, and is a beneficial owner of more
than 5% of the voting stock of the Company.
On March 29, 1996, the Company entered into a Convertible Debenture
Purchase Agreement with MK GVD FUND whereby MK GVD FUND agreed to purchase an
aggregate of $1,400,000 in principal amount of subordinated convertible
debentures, each mandatorily convertible into shares of Preferred Stock and
warrants to purchase Common Stock at a conversion price based on the average
closing price for the Common Stock for the five trading days ended three days
prior to the conversion date. In December 1996, the agreement was amended to
increase the amount to a total of $3,400,000 and the Conversion Price was
changed to the closing bid price of the Company's Common Stock on the last day
of the calendar quarter. In addition, MK GVD FUND assigned a portion of its
obligations under the agreement to MK Global
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Ventures II. During the quarters ended June 30, September 30 and December 31,
1996, the Company issued $1,000,000, $700,000 and $730,000 in principal amount
of such debentures. On June 30, September 30 and December 31, 1996 such
debentures were converted by MK GVD Fund into 26,109, 89,499 and 244,966 shares
of Series H, Series I and Series J Preferred Stock, respectively, and MK Global
Ventures II converted into 77,566 shares of Series I Preferred Stock at $38.30,
$4.19 and $2.98 for Series H, Series I and Series J Preferred Stock,
respectively. In addition, MK GVD Fund received for Series H, Series I and
Series J Preferred Stock warrants to purchase 65,272, 22,375 and 61,241 shares
of Common Stock at exercise prices of $4.85, $5.24 and $3.73 per share,
respectively. MK Global Ventures II received with Series I Preferred Stock a
warrant to purchase 19,291 shares of Common Stock at an exercise price of $5.24
per share.
In April 1997, the agreement was amended to increase to $4,430,000 the
total principal amount of subordinated debentures which MK GVD FUND has agreed
to purchase. During the quarters ended March 31, June 30, September 30 and
December 31, 1997, the Company issued $750,000, $550,000, $400,000 and $600,000,
respectively, in principal amount of such debentures to MK GVD Fund. On March
31, June 30, September 30 and December 31, 1997, such debentures were converted
into 235,110, 199,275, 179,372 and 666,667 shares of Series K, Series L, Series
M and Series N Preferred Stock, and warrants to purchase 58,777, 49,819, 44,843
and 166,666 shares of Common Stock at exercise prices of $3.98, $3.45, $2.78 and
$1.13, respectively. In December 1997, the agreement was further amended to
increase to $4,730,000 the total principal amount of subordinated convertible
debentures which MK GVD FUND has agreed to purchase. In March 1998, the
agreement was further amended to increase to $5,380,000 the total principal
amount of subordinated convertible debentures which MK GVD FUND has agreed to
purchase. During the quarters ended March 31 and June 30, 1998, the Company
issued $300,000 and $695,000, respectively, in principal amount of such
debentures to MK GVD Fund. On March 31 and June 30, 1998, such debentures were
converted into 36,585 and 112,097 shares of Series P and Series Q Preferred
Stock, and warrants to purchase 91,462 and 280,242 shares of Common Stock at
exercise prices of $1.12 and $0.78, respectively.
In February 1998, the Company sold 1,320,755 shares of Series O Preferred
Stock and warrants to purchase 330,188 shares of Common Stock at an exercise
price of $1.33 per share to MK GVD FUND for a total purchase price of
$1,400,000.
The above transactions were unanimously approved by the Board of Directors
of the Company. One of the directors of the Company was, and continues to be, an
affiliate of MK GVD FUND and MK Global Ventures II. However, the Company
believes that the terms and provisions of the above transactions were as fair to
the Company as they could have been if made with unaffiliated third parties.
PROPOSAL TWO
AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED
ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF PREFERRED STOCK
The Board of Directors has directed that there be submitted to the
shareholders of the Company at the Annual Meeting a proposed amendment to
Article III of the Company's Amended and Restated Articles of Incorporation. The
proposed amendment can be used to make a change in control of the Company more
difficult.
Currently, Article III authorizes the Company to issue up to 20,000,000
shares of Common Stock, no par value per share, and 5,000,000 shares of
Preferred Stock, no par value per share. The proposed amendment, which was
unanimously approved by the Company's Board of Directors, will increase the
authorized number of shares of Preferred Stock from 5,000,000 to 10,000,000. The
Board of Directors is authorized to provide for the issuance of the Preferred
Stock in one or more series, to establish the number of shares to be included in
each such series and to fix the designations, powers, preferences and relative,
participating, optional or other special rights of such series, along with any
other qualifications, limitations and restrictions thereon. There are no
pre-emptive rights to purchase or otherwise acquire any Preferred Stock that may
be issued in the future.
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It is not possible to state the effects of the proposed amendment upon the
rights of holders of Common Stock and/or already designated series of Preferred
Stock until the Board of Directors determines the respective rights, including
any dividend rates, conversion prices or voting rights, of the holders of one or
more additional series of Preferred Stock. The effects of such issuance could
include, however, (i) reduction of the amount otherwise available for payment on
dividends on Common Stock and/or one or more series of Preferred Stock, (ii)
restrictions on dividends on Common Stock and/or one or more series of Preferred
Stock, (iii) dilution of the voting power of Common Stock and/or Preferred
Stock, and (iv) restrictions on the rights of holders of Common Stock and/or one
or more series of Preferred Stock to share in the Company's assets on
liquidation until satisfaction of any liquidation preference granted to the
holders of such subsequently designated series of Preferred Stock.
The proposed amendment will give the Company increased financial
flexibility as it will allow additional shares of Preferred Stock to be
available for issuance from time to time as determined by the Board for any
proper corporate purpose. Such purpose could include, without limitation,
issuance for cash as a means of obtaining capital for use by the Company, or
issuance as part or all of the consideration required to be paid by the Company
for acquisitions of other businesses or properties. The Company anticipates that
it will issue additional shares of Preferred Stock during the next twelve months
to finance its operations.
Shares of voting or convertible Preferred Stock could be issued, or rights
to purchase such shares could be issued, to create voting impediments or to
frustrate persons seeking to effect a takeover or otherwise gain control of the
Company. The ability of the Board of Directors to issue such additional shares
of Preferred Stock, with rights and preferences it deems advisable, could
discourage an attempt by a party to acquire control of the Company by tender
offer or other means. Such issuances could therefore deprive shareholders of
benefits that could result from such an attempt, such as the realization of a
premium over the market price for their shares in a tender offer or the
temporary increase in market price that such an attempt could cause. Moreover,
the issuance of such additional shares of Preferred Stock to persons friendly to
the Board of Directors could make it more difficult to remove incumbent managers
and directors from office even if such change were to be favorable to
shareholders generally.
While the amendment may have anti-takeover ramifications, the Board of
Directors believes that financial flexibility offered by the amendment outweighs
any disadvantages. To the extent that it may have anti-takeover effects, the
amendment may encourage persons seeking to acquire the company to negotiate
directly with the Board of Directors, enabling the Board to consider the
proposed transaction in a manner that best serves the shareholders' interests.
The affirmative vote of the holders of the majority of the outstanding
shares of Common Stock and Preferred Stock, voting together as a class, as well
as the affirmative vote of the holders of the majority of the outstanding shares
of Preferred Stock, voting as a class, are required to authorize the proposed
amendment regarding the issuance of Preferred Stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE
COMPANY'S AMENDED AND RESTATED ARTICLES OF INCORPORATION TO INCREASE THE
AUTHORIZED SHARES OF PREFERRED STOCK TO 10,000,000.
PROPOSAL THREE
APPOINTMENT OF AUDITORS
The Board of Directors has approved a resolution retaining Price Waterhouse
LLP as its independent auditors for the fiscal year ending December 31, 1998.
Price Waterhouse LLP has audited the Company's financial statements since 1989.
A representative of Price Waterhouse LLP will be present at the Annual Meeting
and will have an opportunity at the meeting to make a statement if he desires to
do so and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPOINTMENT OF PRICE
WATERHOUSE LLP AS THE COMPANY'S AUDITORS.
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SHAREHOLDER PROPOSALS
Any shareholder desiring to submit a proposal for action at the 1999 Annual
Meeting of Shareholders which is desired to be presented in the Company's Proxy
Statement with respect to such meeting should arrange for such proposal to be
delivered to the Company at its principal place of business no later than April
15, 1999. Matters pertaining to such proposals, including the number and length
thereof, the eligibility of persons entitled to have such proposals included and
other aspects are regulated by the Securities Exchange Act of 1934, Rules and
Regulations of the Commission and other laws and regulations to which interested
persons should refer.
OTHER MATTERS
Management is not aware of any other matters to come before the meeting. If
any other matter not mentioned in this Proxy Statement is brought before the
meeting, the persons named in the enclosed form of proxy will have discretionary
authority to vote all proxies with respect thereto in accordance with their
judgment.
By Order of the Board of Directors
J. Richard Ellis
Chairman of the Board, President and
Chief
Executive Officer
July 20, 1998
The Annual Report to Shareholders of the Company for the fiscal year ended
December 31, 1997 is being mailed concurrently with this Proxy Statement to all
shareholders of record as of July 6, 1998. The Annual Report is not to be
regarded as proxy soliciting material or as a communication by means of which
any solicitation is to be made.
COPIES OF THE COMPANY'S ANNUAL REPORT TO THE COMMISSION ON FORM 10-K WILL
BE PROVIDED TO SHAREHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST TO THE CHIEF
FINANCIAL OFFICER, DISC, INC., 372 TURQUOISE STREET, MILPITAS, CALIFORNIA 95035.
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