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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A (AMENDMENT NO. 1)
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 15, 1996
BROWN DISC PRODUCTS COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Colorado 33-31068 84-1067075
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation File No.) Identification No.)
or organization)
1120-B Elkton Drive, Colorado Springs, Colorado 80907-3568
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(719) 593-1015
(Not applicable)
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(Former name or former address, if changed since last report)
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BROWN DISC PRODUCTS COMPANY, INC.
Brown Disc Products Company, Inc. (the "Company" of "Brown Disc")
previously filed a Current Report on Form 8-K dated as of May 15,
1996, relating to an Agreement and Plan of Reorganization (the
"Reorganization Agreement") with Kimbrough Computer Sales Inc. 3SI,
Inc. ("3SI") and certain parties affiliated with 3SI or the Company.
The Company amends Items 5 and 7 of its Report on Form 8-K dated
as of May 15, 1996 to reflect an Amendment to the Reorganization
Agreement and certain other recent information, as follows:
ITEM 5. OTHER EVENTS.
AGREEMENT AND PLAN OF REORGANIZATION TO ACQUIRE 3SI
The Company entered into the Reorganization Agreement on May 15,
1996 with Kimbrough Computer Sales Inc. 3SI, Inc., a Colorado
corporation ("3SI"), the three principal shareholders of 3SI (the "3SI
Shareholders"), Ronald H. Cole and Brown Disc Acquisition Corporation.
The Reorganization Agreement was amended by Amendment No. 1 thereto
dated August 2, 1996.
The 3SI Shareholders include Frank W. Backes, Frederick J. Slack
and Felipe Larry Valdez. Ronald H. Cole is the Chairman of the Board,
President and Chief Executive Officer of the Company. Brown Disc
Acquisition Corporation ("BDPC Acquisition") has been organized under
the laws of Colorado as a newly formed subsidiary of the Company.
Subject to completion or waiver of various conditions precedent
to closing, the Reorganization Agreement provides that 3SI will merge
into BDPC Acquisition with the result that 3SI will become a wholly-
owned subsidiary of the Company. The consideration to be received by
3SI Shareholders upon completion of the merger and closing of the
Reorganization Agreement will include: (i) $1,200,000 in cash to be
paid by the Company, and (ii) newly-issued common stock of the Company
in an amount equal to 60% of the total shares of Company common stock
then outstanding and reserved for issuance on a fully-diluted basis.
The Company is also obligated at closing to pay approximately
$1,014,000 of 3SI indebtedness incurred in connection with financing
the August 1993 acquisition of ownership in 3SI by the 3SI
Shareholders; such payment may be deemed additional consideration to
be paid at closing that would benefit the 3SI Shareholders.
ADDITIONAL EQUITY FINANCING AND CERTAIN OTHER CONDITIONS
Conditions to closing under the Reorganization Agreement include,
among others, requirements that the Company: (a) pay or make
provision for the payment and settlement of all of the Company's past
due debts and liabilities; and (b) obtain additional common stock
equity financing in an amount adequate to provide at least $1,250,000
in working capital available to the Company at closing after providing
for payment of (i) $1,200,000 at closing to the 3SI Shareholders as
described above, (ii) approximately $1,014,000 of 3SI's indebtedness
to its former owners, (iii) approximately $165,500 in contingent
obligations that will become due to the Company's former President, R.
Eugene Rider, as a result of the financing, and (iv) costs and
expenses of the private placement financing. The Company's management
estimates that at least $4.4 million in gross proceeds from an
offering and sale of common stock will be required for the Company to
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satisfy these requirements. There can be no assurance that the
Company will be successful in efforts to raise additional equity
capital.
In order to satisfy this additional financing condition, the
Company plans to offer additional common stock for sale in a private
placement financing transaction within the next 30 days. The amount
and pricing of securities that will be offered in an effort to obtain
this financing has been tentatively determined by the Company's Board
of Directors to be a minimum of 2.2 million shares up to a maximum of
2.5 million shares to be offered at a price of $2.00 per share.
Additional conditions to closing of the Reorganization Agreement
include, among others, completion of due diligence investigations by
the respective parties; completion of financial statements of 3SI in a
form required to be filed with a subsequent Report on Form 8-K;
execution of employment agreements at closing between the Company and
the three 3SI Shareholders; the absence of any material
misrepresentations as to, or material change in, the business, assets,
obligations or financial condition of the Company or 3SI; and the
filing of a certificate of merger to effect the merger of 3SI into
BDPC Acquisition as a wholly-owned subsidiary of the Company. Any of
the foregoing or other conditions to closing may be waived by the
parties to the Agreement. The Company does not anticipate that
approval of the Reorganization Agreement will require a vote of the
Company's shareholders.
VOTING AND MANAGEMENT AGREEMENTS
Ronald H. Cole, the Company's Chief Executive Officer and a
director, has agreed to support the Reorganization Agreement and to
vote all shares of the Company he is entitled to vote in favor of the
transactions provided by the Reorganization Agreement. Mr. Cole
currently holds proxies irrevocable until September 7, 1997 to vote
1,202,410 of the shares of the Company's common stock owned by R.
Eugene Rider and Eva-Forsberg Rider, 100,000 shares held by a Trustee
for the benefit of Mr. & Mrs. Rider and 62,000 shares of common stock
owned by Harry K. McCreery, a director of the Company. Such shares
represent, in the aggregate, approximately 29% of the 4,646,071 shares
of voting common stock currently outstanding. Upon closing of the
Reorganization Agreement, Mr. Cole has agreed to transfer his right to
exercise voting power represented by these irrevocable proxies to the
three principal 3SI Shareholders.
Upon closing of the Reorganization Agreement, Messrs. Mark R.
Lane, Daryl M. Silversparre and David J. Lopes are to resign as
directors of the Company, two incumbent directors (Ronald H. Cole and
Harry K. McCreery) will remain on the Board, and the three principal
3SI shareholders will be elected to the Board and will constitute a
majority of a five-person Board. In addition, all existing executive
officers of the Company will resign and be replaced by the principal
3SI shareholders and their nominees.
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OTHER COMMITMENTS
If the closing under the Reorganization Agreement occurs, Ronald
H. Cole and the Company have agreed to cause 2,391,217 of the
Company's outstanding Class A common stock purchase warrants and
741,379 of the Company's Class B common stock warrants, currently held
by certain members of the Company's Board and their affiliates, to be
cancelled. [The Class A warrants are exercisable at $0.25 per share
until expiration on September 7, 2000 and the Class B warrants are
exercisable at $0.10 per share until expiration on September 7, 2000.]
The Company has agreed to grant certain rights for the registration of
up to 200,000 shares under the Securities Act of 1933 of the shares
issuable upon remaining Class A and Class B warrants retained after
closing by certain members of the Company's Board and their
affiliates.
Employment agreements for the 3SI Shareholders required at
closing will each be for a term of 3 years, renewable on a year-to-
year basis thereafter except on 60 days' prior notice of intent not to
renew. Base annual salaries for each 3SI Shareholder as an executive
employee of the Company will be $100,000 in the first year, $110,000
in the second year and $120,000 in the third year. Each will be
entitled to participate in benefit programs generally available to all
executive employees of the Company including, without limitation,
health and group life insurance. If employment is terminated
involuntarily without cause (as defined in the employment agreements),
the executive will be entitled to receive severance payments monthly
for the balance of the remaining original terms of his employment
agreement equal to 150% of the base salary otherwise provided by his
employment agreement. Each employment agreement will require that the
executive employee devote his full business time and services to the
affairs of the Company and will contain inventions assignment
provisions in favor of the Company.
SUMMARY INFORMATION AS TO 3SI AND THE 3SI SHAREHOLDERS
The following information relating to 3SI and the 3SI
shareholders have been extracted from certain information provided to
the Company by 3SI and the 3SI Shareholders. Although the Company
does not have any knowledge that would indicate the statements and
summary data contained below are untrue, the Company is still in the
due diligence process of collecting information as to 3SI, and the
Company and its directors take no responsibility for the accuracy of
the following information or any failure to disclose additional facts
that may affect the significance or accuracy of such information.
After closing of transactions contemplated by the Reorganization
Agreement, the Company intends to file an amendment to this Form 8-K
Report to provide more comprehensive information.
SUMMARY OF 3SI BUSINESS
3SI was founded in 1979 as a Colorado corporation under the name
"Kimbrough Computer Sales" and initially concentrated exclusively on
providing software solutions for Digital Equipment Corporation ("DEC")
minicomputers in the Denver metropolitan area. By the late 1980's,
Kimbrough Computer Sales had become an authorized dealer for IBM,
Compaq and DEC equipment and Novell software. As the trend to replace
mainframe and minicomputers with more cost-effective PC LAN (Personal
Computer Local Area Network) or UNIX-based multiuser systems evolved,
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Kimbrough Computer Sales developed expertise in both PC LAN and UNIX-
based networking systems.
In August 1993, Kimbrough Computer Sales was purchased from its
former owners by the 3SI Shareholders and changed its business name
and style to "Kimbrough Solutions, Inc.". Three major changes
implemented by 3SI Shareholders as new management of 3SI included:
(i) reducing efforts on low margin PC business and significantly
increasing concentration on mid-range systems; (ii) expanding services
to include consulting, in addition to prior product support
activities; and (iii) development of a consulting model for business
solutions which allows 3SI to develop a longer-range associations with
its customers. These changes altered 3SI's primary focus from being
a hardware and network software dealer with value-added product
support services to a company whose primary focus is computer
consulting and services with product sales as a value-added item.
In October of 1995, 3SI changed its business name and style from
Kimbrough Solutions to 3SI (representing "Solution, System and Service
Integration") to better describe its focus and direction at assisting
customers in the design, develop, and implementation of business
solutions. The current business of 3SI includes design and
development of information technology solutions, such as client/server
systems design and implementation, network design and management,
Internet connection planning, design and implementation, systems
development and integration for UNIX, Windows NT and Windows-based
systems, database design and development, applications development and
anomaly identification and resolution. It is a supplier of over 20
major lines of computer products.
3SI's staff includes personnel qualified as Novell Enterprise
CNEs, Microsoft Certified Professionals, Oracle Masters, TCP/IP and
UNIX professionals. It designs and implements instructional programs
for clients and also offers in-depth educational programs at a fee of
approximately $195 per day specializing in Windows-based applications
such as Windows 3.1, Windows for Workgroups, Windows 95, Microsoft
Office and its components, PerfectOffice and its components, Lotus
SmartSuite and Lotus Notes, Novell system administration, the World
Wide Web ("WWW") and Internet applications. 3SI offers a broad range
of Internet and WWW services and equipment, including evaluation of
network requirements, installation and implementation of World Wide
Web servers and the design and maintenance of WWW pages. 3SI also
supplements a client's existing network resources by offering remote
net management and administration via modem connection. Hardware
services include on-site maintenance, depot repair of PCs and
printers, monitor repair, cable installation and customized service
programs for corporate clients.
3SI's customer base is located primarily in Colorado, Utah and
New Mexico and includes healthcare companies, federal and local
government agencies, prime contractors to federal government agencies,
and general commercial accounts.
As of June 30, 1996, 3SI had approximately 86 employees of which
52 are located at its facilities in Englewood, Colorado, 31 are
located at a facility in Raleigh, North Carolina and 3 are located at
3SI's branch office in Albuquerque, New Mexico. Of the total
employees, approximately 3 were engaged in product development
efforts, 16 were engaged in sales functions, 57 were engaged in
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technical support and 10 were engaged in management, clerical and
administrative functions. 3SI believes its employee relations are
excellent and it has not experienced any work stoppages.
The principal offices and facilities of 3SI are located in
approximately 15,384 square feet at 6886 South Yosemite Street,
Englewood, Colorado 80112, telephone number (303) 741-9123. This
facility is leased through September 2001 at a base rental of
approximately $10,256 per month. 3SI also maintains a small office of
684 square feet in Colorado Springs, Colorado, leased on a month-to-
month basis at a rental of $600 per month. In October 1995, 3SI
opened a new office in Albuquerque, New Mexico. The Albuquerque
office comprises 2,250 square feet leased through November 1998 at a
base rental of $1,490 per month. These facilities are considered to
be both suitable and adequate to meet 3SI's current and foreseeable
operating requirements.
MANAGEMENT OF 3SI: The owners of 3SI include Felipe Larry
Valdez, Frederick J. Slack and Frank W. Backes. The following sets
forth certain information as to the 3SI Shareholders and management of
3SI:
FREDERICK J. SLACK, age 41, has served as the Chief
Executive Officer of 3SI since July 1993. Mr. Slack has over 17 years
of marketing and sales experience in information technology and was
previously employed by Digital Equipment Corporation from November
1986 to July 1993. Mr. Slack's experience includes Program Management
of several government programs. He holds a BS from the University of
Northern Colorado.
FELIPE LARRY VALDEZ, age 43, has been Chairman of the Board
& Chief Operating Officer of 3SI since August 1993. Mr. Valdez has
over 25 years of business experience working in computer technology
companies including 16 years with Digital Equipment Corporation from
October 1997 to August 1993 in a variety of sales, services and
customer support management positions. Mr. Valdez holds a B.S. degree
in Business Administration from the University of Albuquerque and an
MBA from the University of Phoenix.
FRANK W. BACKES, age 35, has been the Vice President and
Director of Technology of 3SI since July 1993. Mr. Backes has over 12
years of technical experience in the computer industry. Mr. Backes
was a technical sales consultant for Digital Equipment Corporation
from January 1989 to July 1993, a senior software engineer and systems
analyst for Softech from November 1987 to January 1989 and held
various software programming and engineering positions with Science
Applications International Corp. from June 1982 to November 1987. As
a civilian Lead Engineer and Program Manager, Mr. Backes led the
design and implementation of U.S. Military Command and Control Systems
at NORAD, Peterson Air Force Base and Falcon Air Force Base. While
employed by Digital Equipment Corporation, Mr. Backes focused on
compartmented-mode workstations and secure networks. Mr. Backes holds
an B.S. degree in Electrical Engineering from the University of
California at San Diego.
PAUL KAUFHOLD, age 39, has been employed as 3SI's Chief
Financial Officer since December 1995. Mr. Kaufhold has over ten
years experience in finance, operations and management of emerging,
high technology companies. Mr. Kaufhold served as Chief Financial
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Officer at CWE, Inc. from 1990 to 1994. While at CWE, Mr. Kaufhold
was responsible for all financing and administrative functions. Prior
to his employment at CWE, Mr. Kaufhold was employed by KPMG Peat
Marwick from 1980 to 1990 serving numerous growth companies in
security, audit, accounting and tax requirements. Mr. Kaufhold is a
Certified Public Accountant and holds an MBA from the University of
Wisconsin and a B.S. in Business Administration from Ohio State
University.
SUMMARY FINANCIAL INFORMATION: The Company has been advised that
historical results of operations of 3SI for its fiscal years ended
December 31, 1994 and 1993 have been reviewed, but not audited, by an
independent public accountant. An audit of 3SI's historical financial
statements is expected to be completed within the next 60 days.
Subject to audit adjustments, if any, the following table summarizes
certain unaudited operating results and financial information as to
3SI for the periods indicated:
Kimbrough Computer Sales, Inc. dba 3SI
(Expressed in Thousands, 000 omitted)
<TABLE>
<CAPTION>
Year Ended December 31,
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1995 1994 1993
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Statement of
Operations Data:
Net sales .............. $21,774 $17,504 $ 9,574
Gross profit ........... 3,824 2,759 1,770
Selling, general
and administrative
expenses ............. 3,931 2,410 1,738
Other income (expense).. (69) 18 21
Net income (loss)....... (175) 367 53
<CAPTION>
December 31,
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1995 1994 1993
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Balance Sheet Data:
Current assets ......... $ 4,735 $ 3,019 $ 3,038
Current liabilities..... 4,530 2,297 2,488
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Working capital ........ 205 722 550
Total assets ........... 5,078 3,124 3,084
Long term debt ......... 99 -- --
Stockholders' equity ... 448 826 596
</TABLE>
Results of operations for 3SI in 1995 compared to 1994 were adversely
affected by an increase in selling and administrative expenses of
approximately 64% primarily due to increasing staff, opening an office
in Albuquerque, New Mexico and increasing the 3SI sales force.
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REASONS FOR THE REORGANIZATION AGREEMENT
As previously reported in the Company's prior filings with the
Securities and Exchange Commission, the Company operates in a mature
industry characterized by intense competition and narrow gross profit
margins, and has sustained continuing losses from operations since
inception. The Company has minimal cash resources, negative working
capital, past due secured debt obligations and a deficiency in
stockholders' equity. In view of declining sales trends and gross
margin deterioration, the Company's management has focused its efforts
primarily on the acquisition of another business enterprise in the
computer software and service industry and does not intend to expand
the Company's activities in software duplication and allied services.
In recent months, the Company and 3SI have jointly financed a
business plan for the development by 3SI of certain proprietary
software, designs and specifications relating to Internet security
applications. This system, named the Diamond Shield(TM) system, is
intended to develop security solutions for business use of the
Internet in cooperation with a third-party Internet access provider.
Further development and implementation of the Diamond Shield program
will require additional working capital, and a portion of private
placement funds proposed to be raised as a requirement of closing the
Reorganization Agreement will be dedicated to this purpose.
The Company's management believes that the acquisition of 3SI by
the Company, resulting in the acquisition of 3SI's computer consulting
and services businesses, will be in the best interests of the
Company's stockholders and provides the only viable alternative
currently available to the Company in its efforts to obtain additional
financing necessary to sustain itself as an operating company.
There can be no assurance that transactions contemplated by the
Reorganization Agreement will be successfully completed, and the
closing of the Reorganization Agreement is subject to certain material
conditions including, among others, the various conditions described
above.
THE DIAMOND SHIELD SECURITY SYSTEM; RECENT 3SI AGREEMENT WITH NETCOM
The Diamond Shield system developed by 3SI is designed to provide
security solutions for business use of the Internet in cooperation
with a third-party Internet access and service provider. This system
includes (1) a customer database, a proprietary database application
developed by 3SI to be implemented with a relational database; and (2)
Diamond Shield Web software, a proprietary software application used
to access the database and providing user interface through a Web
browser.
3SI intends to enter into agreements with independent software
vendors ("ISP") to certify their software and hardware to run in a
secure environment (as defined by the 3SI certification process) on
the ISP's network. The security services provided by 3SI are: (i)
evaluation and certification of security solutions; (ii) training of
the ISP sales channels on certified Diamond Shield security services;
(iii) business security audit and requirements evaluation, a 3SI
copyrighted process; (iv) configuration and distribution of Diamond
Shield certified security products; (v) installation of the
recommended Diamond Shield certified security system; and (vi) help
desk and support line for ongoing support.
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On July 11, 1996, 3SI entered into a Marketing Agreement with
NETCOM On-Line Communication Services, Inc. ("NETCOM"). NETCOM is the
leading provider in the United States of direct Internet access and
services. NETCOM has publicly announced that services to be offered
to NETCOM subscribers include a cost-effective assessment to identify
and implement a security application tailored to suit each customer's
situation. The assessment methodology was developed in conjunction
with security experts at 3SI, principally Frank Backes, 3SI's Director
of Technology, who has trained NETCOM personnel in the automated
assessment methodology process.
Under 3SI's agreement with NETCOM, NETCOM and 3SI will jointly
provide customized security solutions and services to Internet
subscribers. 3SI will design, manage and provide technical support for
Internet security applications to be made available to clients of
NETCOM. NETCOM will provide access to 3SI's Diamond Shield services
for Internet security applications on an exclusive basis for a period
of at least 24 months at its nationwide network hub and share the cost
of additional system hardware and third party software products when
additional systems are required for client support.
NETCOM's common stock is publicly-traded and NETCOM files
reports, proxy statements and other information with the Securities
and Exchange Commission ("Commission") which may be inspected and
copied at the public reference facilities maintained by the Commission
at its principal office in Washington D.C. and at its regional offices
in Chicago and New York.
Brown Disc's obligations under the Reorganization Agreement are
intended to obtain necessary financing for 3SI to meet its obligations
under 3SI's agreement with NETCOM, failing which Brown Disc has agreed
to surrender its interest in the Diamond Shield project so that 3SI
and NETCOM may continue development with financing from other sources.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
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(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED: Upon closing of the
Reorganization Agreement, the Company plans to file a Report on
Form 8-K containing additional information required by Items 1, 2
and 7 of Form 8-K. Financial statements of 3SI for the periods
required by Rule 3.05(b) of Regulation S-X required at that time
are not currently available, and are in the process of being
prepared. If the closing under the Reorganization Agreement
occurs, the Company expects that relevant financial statements of
3SI are expected to be filed as part of that subsequent Form 8-K
Report not later than 60 days after that closing of the proposed
business acquisition.
(b) PRO FORMA FINANCIAL INFORMATION: At the time financial
statements discussed in Item 7(a) above are available to the
Company, the Company plans to file pro forma financial
information relative to the acquired business as part of a
subsequent Form 8-K Report.
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(c) EXHIBITS:
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number Description
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2.1 Agreement and Plan of Reorganization dated May 1996 among
the Registrant, BDPC Acquisition Corp., Kimbrough Computer
Sales Inc. 3SI, Inc., Ronald H. Cole, Frank Backes,
Frederick Slack and Felipe Larry Valdez [incorporaated by
reference to Exhibit 2.1 filed with Registrant's Current
Report on Form 8-K dated May 15, 1996].
2.2 Amendment No. 1 dated August 2, 1996 to Agreement and Plan
of Reorganization described as Exhibit 2.1 above.
</TABLE>
SIGNATURES
Pursuant to the requirements 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.
Date: August 16, 1996
BROWN DISC PRODUCTS COMPANY, INC.
(Registrant)
By: /s/ Ronald H. Cole
-----------------------------
Ronald H. Cole, Chairman of the Board,
Chief Executive Officer,
Chief Financial Officer
and Chief Accounting Officer
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AMENDMENT NO. 1 to AGREEMENT AND PLAN OF REORGANIZATION
This AMENDMENT AGREEMENT ("Amendment") executed as of August 2,
1996 is by and among the following parties:
BROWN DISC PRODUCTS COMPANY, INC., a Colorado corporation (herein
called "BDPC");
BROWN DISC ACQUISITION CORP., a Colorado corporation recently
organized by BDPC as a wholly-owned subsidiary of BDPC (herein
called the "BDPC Subsidiary");
KIMBROUGH COMPUTER SALES INC. 3SI, INC., a Colorado corporation
(herein called "KSI;3SI");
RONALD H. COLE, an individual (herein called "COLE"); and
FRANK BACKES, FREDERICK SLACK and FELIPE LARRY VALDEZ (herein
called the "KSI;3SI Shareholders").
R E C I T A L S:
WHEREAS, the parties hereto have entered into that certain
Agreement and Plan of Reorganization dated May 1996 (the
"Reorganization Agreement"); and
WHEREAS, since execution of the Reorganization Agreement, BDPC
has (1) entered into an agreement dated June 7, 1996 with the Small
Business Administration to modify BDPC's payment obligations; (2)
received gross proceeds of $689,750 from the issuance and sale of
275,900 shares of BDPC Common Stock in a private placement; and (3)
certain other changes in BDPC's capitalization have occurred; and (4)
KSI;3SI and NETCOM On-Line Communication Services, Inc. have entered
into an agreement as publicly announced by NETCOM On-Line
Communication Services, Inc.
WHEREAS, Cole and BDPC are not now assured that they can raise
sufficient additional equity capital to satisfy the conditions of
Section 4.1 (a) and (b) of the Reorganization Agreement; and
WHEREAS, the parties desire to amend certain provisions of the
Reorganization Agreement as provided by this Amendment;
NOW, therefore, in consideration of the premises, the parties
agree as follows:
A. Terms defined in the Reorganization Agreement shall have the same
meanings when used in this Amendment as defined in the Reorganization
Agreement, except to that extent any such definition is expressly
modified and amended by this Amendment.
B. The paragraph set forth in Section 2 of the Reorganization
Agreement is amended in its entirety to read as follows:
<PAGE> 2
"Subject to the terms and conditions of the Reorganization
Agreement, the closing of the transactions contemplated by the
Reorganization Agreement (the "Closing") shall take place at the
offices of BROWN DISK PRODUCTS COMPANY, INC., commencing at 10:00
A.M. local time on September 15, 1996 (the "Closing Date"),
subject to the satisfaction of all conditions precedent to the
obligations of the parties to consummate the transactions
contemplated by the Reorganization Agreement. The Closing Date
may be adjourned by mutual agreement between BDPC and KSI;3SI to
any other mutually convenient date, but not later than September
15, 1996."
C. The two paragraphs comprising subclause A to Section 3.2.1 of the
Reorganization Agreement are hereby amended in their entirety to read
as follows:
"A. all of the issued and outstanding shares of KSI;3SI Common
Stock immediately prior to the Effective Time shall cease to
be issued and outstanding, and each such share of KSI;3SI
Common Stock shall become, and be converted into, a right to
receive a pro rata share of 60% of the fully diluted issued
and outstanding BDPC Common Stock after giving full effect
to completion of the private placement offering of newly-
issued BDPC common stock contemplated by the provisions of
Section 4.1 of this Agreement, and after giving full effect
to all conversions of Preferred Stock and all exercise of
existing warrants with respect to BDPC Common Stock prior to
or after the Closing Date.
Each holder of record of KSI;3SI Common Stock immediately
prior to the Effective Time shall receive at Closing that
number of full shares of BDPC Common Stock, representing his
or her pro rata share of the total of 60% of the fully
diluted BDPC Common Stock as the same may be calculated as
of the Closing Date, and adjusted for any conversions after
the Closing Date. Subsequent to Closing, and upon
completion of the private placement offering of a newly-
issued BDPC common stock contemplated by the provisions of
Section 4.1 of this Agreement in accordance with the terms
of such offering, additional shares of BDPC shall be issued
on a pro rata basis to the holders of record of KSI;3SI
Common Stock to provide for any adjustment necessary to give
those KSI;3SI holders 60% of the fully diluted aggregate
shares of BDPC Common Stock arising as a result of the
issuance and sale by BDPC of newly-issued BDPC common stock
subsequent to Closing hereunder in a private placement
offering as contemplated by the provisions of Section 4.1 or
any conversions of preferred stock or warrants into newly-
issued BDPC Common Stock prior to or subsequent to the
Closing Date; provided, however, that no fractional shares
of BDPC Common Stock shall be issued in distribution of the
Merger Consideration and, in lieu f fractions, each such
fractional share (after taking into account all shares to
which the holder thereof is entitled) shall be rounded up to
a full share of BDPC Common Stock in lieu of such fractional
interest."
D. The first paragraph of Subsection 4.1(b) of the Reorganization
Agreement is hereby amended in its entirety to read as follows:
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"(b) After giving effect to the payment and settlement of BDPC's
past due debts and liabilities, as aforesaid, the net cash
available to BDPC and the Surviving Corporation at Closing
shall be not less than at least $1,250,000 in cash available
for future working capital to finance continuing operations
of the Surviving Corporation after Closing and other
purposes determined by mutual agreement of BDPC and KSI;3SI,
after (i) payment of all offering expenses for the sale of
newly issued BDPC shares, (ii) $165,512.50 remaining to be
paid to the Riders from proceeds of the newly issued BDPC
shares, and (ii) $2,214,365 to finance the acquisition of
KSI;3SI as elsewhere provided by this Agreement.
Notwithstanding the foregoing, the private placement
offering of newly issued shares of BDPC Common Stock shall
continue shall continue in accordance with the terms of such
offering after minimum funds required hereafter have been
received, but not to exceed an aggregate private placement
offering of $5,000,000, and the number of shares of BDPC
Common Stock issuable to the KSI;3SI Shareholders under this
Agreement shall be adjusted after Closing hereunder and upon
the final completion of such private placement offering in
accordance with Section 3.2.1-A of this Agreement so that
such KSI;3SI Shareholders will hold 60% of all BDPC Common
Stock, after giving effect to all transactions provided for
herein, either prior to or subsequent to Closing.
The parties understand and agree that the obligations of
BDPC to the Small Business administration have been
renegotiated and that said indebtedness shall not be
considered a past due debt of BDPC for purposes of this
Agreement except to the extent of payments, if any,
currently due under such negotiated terms."
E. The parties acknowledge that the issuance and sale by BDPC in
June 1996 of 275,900 shares of BDPC Common Stock in a private
placement for gross proceeds to BDPC of $689,750 shall not be deemed a
breach of the provisions of Section 5.5 of the Reorganization
Agreement; provided that all of the proceeds thereof are used to pay
past due debts of BDPC or to fund working capital of the Surviving
Corporation; and further provided that the parties acknowledge KSI;3SI
had no participation in or responsibility for such private placement,
and therefore BDPC and Cole agree to indemnify and hold harmless
KSI;3SI and its shareholders, officer and directors against any and
all liability, including reasonable attorneys fees, arising from such
private placement.
F. Section 6.5 of the Reorganization Agreement is amended to
complete the blanks therein as follows:
"The authorized capital stock of KSI;3SI consists of 50,000
shares of KSI;3SI Common Stock. As of the date hereof,
there are 300 shares of KSI;3SI Common Stock issued and
outstanding and no further shares will be issued prior to
the Closing of the Reorganization."
G. BDPC and Cole acknowledge and consent to the execution of an
agreement between KSI;3SI and NETCOM On-Line Communication Services,
Inc. in the form previously provided by KSI;3SI to BDPC and as
publicly announced by NETCOM On-Line Communication Services, Inc. on
July 15, 1996."
<PAGE> 4
H. Section 12(A) of the Reorganization Agreement is hereby amended
in its entirety to read as follows:
"(A) 2,391,217 current Class A and 741,379 Class B Warrants
will be cancelled."
I Except as expressly amended herein, the Reorganization Agreement
is hereby confirmed, ratified and approved by the undersigned parties
hereto as of the date of this Amendment, subject to the express
conditions contained in the Reorganization Agreement.
BROWN DISC PRODUCTS COMPANY, INC.
By: /s/ Ronald H. Cole
---------------------------------
Ronald H. Cole, Chairman and Chief Executive Officer
BROWN DISC ACQUISITION CORP.
By: /s/ Ronald H. Cole
----------------------------------
Ronald H. Cole, President and Chief Executive Officer
KIMBROUGH COMPUTER SALES INC. 3SI, INC.
By:
----------------------------------
Larry Valdez, President
By: /s/ Frank Backes
----------------------------------
Frank Backes, Vice President
By: /s/ Fred Slack
----------------------------------
Fred Slack, Chief Executive Officer
INDIVIDUALS:
/s/ Ronald H. Cole
----------------------------------
RONALD H. COLE, an individual
/s/ Frank Backes
----------------------------------
FRANK BACKES, an individual
/s/ Frederick Slack
----------------------------------
FREDERICK SLACK, an individual
----------------------------------
FELIPE LARRY VALDEZ, an individual
