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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the Fiscal Year ended JUNE 30, 1996.
-----------------------------------------
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission File No. 33-31068
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BROWN DISC PRODUCTS COMPANY, INC.
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(Name of small business issuer in its charter)
COLORADO 84-1067075
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1120-B Elkton Drive, Colorado Springs, Colorado 80907-3568
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (719) 593-1015
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such re-
ports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. YES [X] NO [ ]
State issuer's revenues for its most recent fiscal year: $1,256,641 for the
Fiscal Year ended June 30, 1996.
The aggregate market value of 4,365,937 shares of registrant's voting common
stock held by non-affiliates of the Registrant was $3,536,409 as of November
19, 1996, based upon the closing sale price of $0.81 per share for the Common
Stock in the over-the-counter market on such date.
Number of shares of common stock outstanding as of November 20, 1996:
5,729,837 shares of common stock.
Documents Incorporated By Reference: None.
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BROWN DISC PRODUCTS COMPANY, INC.
FORM 10-KSB ANNUAL REPORT
Table of Contents
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Item No. Page
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PART I:
1. Description of Business ......................................... 1
2. Description of Property ......................................... 4
3. Legal Proceedings ............................................... 4
4. Submission of Matters to a Vote of Security Holders ............. 4
PART II:
5. Market for Common Equity and Related Stockholder Matters ........ 5
6. Management's Discussion and Analysis or Plan of Operation ....... 6
7. Financial Statements ............................................ 11
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................... 25
PART III:
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ............ 25
10. Executive Compensation .......................................... 26
11. Security Ownership of Certain Beneficial Owners and Management .. 30
12. Certain Relationships and Related Transactions .................. 31
13. Exhibits and Reports on Form 8-K ................................ 37
SIGNATURE PAGE ........................................................ 41
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information in this Report under the caption "Management's
Discussion and Analysis or Plan of Operation" and elsewhere constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results or performance of the Company to be materially different from future
results or performance expressed or implied by such forward-looking
statements. Such factors, include, among others: the sufficiency of financial
resources available to the Company to sustain its operations, economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, services and prices, and other factors described in this
Report and in prior filings with the Securities and Exchange Commission. The
Company's actual results could differ materially from those suggested or
implied by any forward-looking statements as a result of such risks.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Brown Disc Products Company, Inc. (the "Company" or "Brown Disc") is
primarily engaged in providing software duplication and packaging services to
software companies and in the sale and distribution of portable 3.5" and 5.25"
diskettes, magnetic tape, CD-ROM and CD-R electronic media storage devices.
The Company also provides custom labelling and specialized packaging for
certain accounts and manufactures a limited amount of 5.25" computer
diskettes. The Company's portable electronic media devices are used to record
and store digital information for use in applications such as personal
computers, word processors, minicomputers, data terminals, telecommunications
equipment and portable data collection equipment. The Company offers its
products and services to customers throughout the United States, Canada and
Europe.
Due to declining sales and continuing losses from operations, the
Company's management is pursuing a business strategy of seeking the
acquisition of additional assets or business operations in a related computer
services industry. A transaction of this nature may involve the issuance of
additional equity securities which may be dilutive to the interests of
existing stockholders.
The Company was incorporated in Colorado on September 22, 1987. Its
offices and production facilities are located at 1120-B Elkton Drive, Colorado
Springs, Colorado 80907, telephone number (719) 593-1015.
PRODUCTS AND SERVICES
PORTABLE MEDIA STORAGE DEVICES: Since its inception in 1987, Brown
Disc has marketed media storage products for computers, primarily 5.25" and
3.5" diskettes. In late 1995, the Company increased its product line to
include magnetic tape, CD-ROM (read-only memory compact discs) and CD-R
(recordable compact discs) storage devices, thereby enhancing the Company's
position as a full service supplier. The Company can also add the customer's
logo to the disk or tape through wet ink pad print procedures, producing a
customized diskette or tape cartridge.
The Company currently manufactures a small number of 5.25" diskettes
that are specialty products required by several of the Company's customers.
Due to reduced sales volumes, at present the Company's remaining requirements
for all size diskettes and other media storage devices are purchased from
outside sources to reduce overhead expense.
The Company is seeking to expand its customer base by offering private
label products and specialty products, and to expand its product line to
include the LS120 MB diskette developed by Ortechnology, Compaq and 3M. The
LS120 diskette is a 120 megabyte 3.5" diskette, currently manufactured only by
3M and Maxell, used in a new form of 3.5" disk drive. Although conventional
3.5" disk drives will not read the new LS120 diskettes, new 3.5" disk drives
developed for the LS120 diskettes will also be capable of reading existing
3.5" 1.44 MB diskettes. Compaq Computer is reportedly increasing the number
of its models incorporating the new 3.5" disk drive developed for the LS120
diskette, and Brown Disc's management believes the LS120 diskette will become
a standard within the next five years as an alternative to 3.5" 1.44 MB discs.
The Company is seeking to negotiate license rights to produce the LS120 floppy
diskette to expand the Company's product line for media storage devices.
There can be no assurance that the Company will be successful in its efforts
to obtain licensing rights.
SOFTWARE DUPLICATION AND PACKAGING SERVICES: The Company duplicates
software media on media storage devices for various software developers, and
offers packaging and software distribution services for these products. Brown
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Disc offers a complete turn-key solution to software developer customers by
offering packaging services and distribution of the software in addition to
software duplication. The Company's largest software duplication customers
are Concept Development Corp., Fisher-Rosemount Systems and MCI
Telecommunications. The Company generally performs internally duplication on
5.25" and 3.5" diskettes, magnetic tape and one-off CD-Rs, and supplies all
packaging and requirements. Replication of CD-ROMs is outsourced to a
contractor, although the Company is currently evaluating the possibility of
acquiring CD-ROM duplication equipment.
Brown Disc is one of only a few software duplicators that also
manufactures diskettes. The Company therefore applies the same level of
environmental and quality controls to the software duplication process as it
applies to the manufacture of media diskettes. This ensures that the customer
receives the highest quality available of media and software production.
PRIVATE LABEL: The Company offers a broad spectrum of specialized
packaging and product mixes for several large companies and is capable of
offering custom combinations at competitive prices for relatively small
volumes. The Company's three largest private label customers are Honeywell,
Siemens and Hewlett-Packard. The Company offers a service to its private
label customers that is generally unavailable through its competitors. The
first shipment of a private label customer's logo on the shutter of a 3.5"
diskette can be made five working days after the customer has given final
approval of artwork and packaging, and only a minimum order of 10,000 pieces
over a twelve month period is required.
NEW PROGRAM TO DISTRIBUTE SOFTWARE VIA THE INTERNET: In order to
expand its sources of revenues, the Company plans to introduce its electronic
software distribution Internet site on the World Wide Web by approximately the
end of calendar 1996. Brown Disc's Channelsoft(TM) software distribution Web
site, URL address http:/www.channelsoft.com, will distribute various software
products through the Internet by offering downloads to the requesting
customer's computer. The Company will receive a fee for each specific
download. The Web site will also include a catalogue enabling customers to
order the same products in a hard copy disk format.
MARKETING AND DISTRIBUTION
The Company markets and distributes its products throughout the United
States, Canada and Europe. Due to limited capital resources, sales and
marketing activities are limited to telemarketing, direct mail, participation
in selective trade shows, direct contact with potential private label
customers, OEMs and large software developers. During the fiscal year ended
June 30, 1996, there were three customers that accounted for more than 5% of
sales volume and no single customer exceeded 10% of annual sales for that
fiscal year.
At present, Brown Disc employs a direct sales force of three employees.
These individuals manage and achieve results through a combination of
telemarketing, direct mail, on-site visits, trade show participation and
custom solutions. Subject to the availability of capital, the Company plans
to increase this direct sales force to expand market penetration.
Management believes that the Company's location in Colorado Springs,
Colorado gives it convenient and centrally located access to distribution and
transportation systems for obtaining supplies from vendors and for marketing
and shipment to its customers.
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QUALITY ASSURANCE
The Company applies rigid standards for incoming and finished
inspections, which are combined with the use of high quality test equipment to
ensure a virtually defect-free final product. The Company's "Double
Confidence Warranty", a two-for-one replacement guarantee, is believed to be
unique in the industry.
The Company trains its personnel in all aspects of quality control as it
relates to the specific job function. The Company also cross-trains many of
its employees to guarantee the availability of qualified individuals to meet
any unique production schedules. During peak periods, the Company supplements
its standard workforce with temporary employees.
PRODUCTION CAPACITY
The nature of the Brown Disc customer base requires finished products
to be available in relatively short lead times. Brown Disc's software
duplication capabilities are currently a maximum of 7,200 units per eight hour
shift. The Company's equipment was used equipment when originally acquired by
the Company and requires a high level of maintenance.
RESEARCH AND DEVELOPMENT
Brown Disc engaged in research activities during the last fiscal year
relating to the development of an electronic software distribution model for
distribution of software through the Internet. The amount of funds invested
in this project was approximately $43,250 for the fiscal year ended June 30,
1996. The Company plans to introduce its electronic software distribution
Internet site by approximately the end of calendar 1996.
No funds were invested in research and development activities during the
prior fiscal years ended June 30, 1995 and 1994.
COMPETITION
There are numerous companies involved in the software duplication
industry, many of which have financial resources, staffs, facilities and
marketing abilities that are substantially greater than those of the Company.
The largest of these competitors are R.R. Donnelley & Company, IBM, KAO and
Logistix. Another competitive factor is that certain large software companies
elect to duplicate software internally and therefore do not use the services
of independent companies such as the Company.
In some cases, the Company is able to attract customers from large
competitors due to the Company's flexibility in scheduling and customizing.
The Company thus considers its primary competitors are businesses of similar
size to the Company who can offer flexibility to potential customers. The
principal competitive factors affecting the Company's products and services
are price, delivery time and quality of performance.
PROPRIETARY RIGHTS
The Company's products and manufacturing methods are technically mature
and the Company holds no patent rights. The Company relies upon trademark
rights to its "Brown Disc" name and trade secret agreements for its products
and customer lists where management believes that protection of proprietary
information is possible. The Company has registered the trademarks "Brown
Disc" and "Scholar by brown disc" with the U.S. Patent and Trademark Office.
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EMPLOYEES
Brown Disc currently has 16 employees, of which five are dedicated to
sales and marketing, one to process engineering and quality control, four are
clerical and administrative and the remaining six are engaged in production,
procurement, packaging and distribution. The Company's staff has been
downsized since September 1995 by approximately four employees. The Company
believes that its relations with employees are good and the Company has never
experienced any work stoppages.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 14,000 square feet of space at 1120-B
Elkton Drive, Colorado Springs, Colorado 80907-3568, where it maintains its
corporate offices, production operations and equipment for quality control and
product development. The lease term expired on July 31, 1996 and has been
extended by the Company for an additional term expiring December 31, 1996.
Rental expense under this lease for the year ended June 30, 1996 was
approximately $88,000. The Company believes that its facilities are in good
operating condition and repair and are more than adequate for the Company's
existing requirements.
The Company is currently looking for alternative facilities which are
more suitable for its current requirements.
ITEM 3. LEGAL PROCEEDINGS
On August 27, 1996, the Company entered into an agreement to acquire
from First New Hampshire Bank all the assets and equipment of Softwise
Services, Inc. as a result of Softwise Services' defaulting on a promissory
note. The Company paid $102,000 and agreed to assume a $200,000 note payable
bearing interest at 6% at the time of closing to be repaid over 11 years. The
Company operated Softwise Services' assets until First New Hampshire Bank
requested that the Company cease use of the equipment. In connection with
this transaction, First New Hampshire Bank could not warrant to the Company
that First New Hampshire Bank had legal title to the assets. As a result, the
Company is of the opinion that First New Hampshire Bank has breached the
agreement, and has requested a return of the $102,000 and release from the
$200,000 note payable plus expenses and damages. The Company's legal counsel
is attempting to negotiate a settlement, but if a settlement cannot be
reached, the Company plans to bring legal action against the bank for return
of $102,000 and release from the $200,000 note payable plus expenses and
damages. However, the Company's legal counsel has advised management that at
this preliminary stage the outcome of any legal action is indeterminable. The
Company believes that it will prevail in this matter and no accrual for
possible loss has been made in the financial statements of the Company at June
30, 1996.
The Company is a party from time to time to other legal proceedings in
the ordinary course of business. There are no other legal proceedings
pending, either separately or in the aggregate, that if adversely determined
could reasonably be expected to have a material adverse effect on the
Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been publicly traded in the over-the-
counter market since an initial public offering in December 1989 and is
currently quoted on the NASD's Electronic Bulletin Board under the trading
symbol "BDPC". Until November 1995, the Company's Common Stock was
infrequently traded and quotes are not available for the periods prior to
November 1995. The following table sets forth the high and low bid prices for
the Common Stock since November 1995, as reported by the National Quotation
Bureau, Inc. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission, and may not necessarily represent actual
transactions.
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Period High Low
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1995:
Quarter ended Dec 31
(from November 1995) 1.00 0.375
1996:
Quarter ended Mar 31 0.562 0.187
Quarter ended Jun 30 4.625 0.375
Quarter ended Sep 30
(through August 31) 4.50 1.125
</TABLE>
On November 19, 1996, the closing sale price for the Company's common
stock as reported in the over-the-counter market was $0.81 and the closing bid
and asked prices were $0.81 bid and $1.00 asked. As of September 11, 1996,
there were 202 holders of record of the Company's Common Stock. Additional
beneficial owners of the Common Stock are represented by 2 record holders
representing approximately 1,712,229 shares held in brokerage or other nominee
accounts.
There were 13 holders of record of the Company's 12,613 outstanding
shares of Series A preferred stock and 3 holders of record of 6,000
outstanding shares of Series B preferred stock at November 20, 1996.
No cash dividends have been declared or paid by the Company since its
inception. A reverse stock split of 1-for-100 shares was effected as to the
Common Stock in April 1991. The Company intends to employ all available funds
for development of its business and, accordingly, does not intend to pay cash
dividends in the foreseeable future. There are no contractual provisions
that would prohibit the Company from payment of dividends on its common stock
except that dividends on Common Stock may not be paid if dividend payments on
preferred shares of any series are in arrears. Preferred dividends in
arrears totaled $4,334 for the Series B preferred stock at June 30, 1996, of
which $3,020 have been waived by subsequent conversion of an additional 14,000
shares of Series B preferred into 140,000 shares of Common Stock.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Financial Statements and notes thereto appearing elsewhere in this Report.
INTRODUCTION
The Company commenced operations in September 1987. To date, the
Company has not operated on a profitable basis and it was required to
reorganize under the protection of Chapter 11 of the U.S. Bankruptcy Act in
1992 and 1993 to restructure and extend payment terms of its secured and
unsecured debt obligations.
The Company has incurred net losses from operations since inception and
its sales trend during the last three fiscal years has been unfavorable.
Revenues for the fiscal year ended June 30, 1996 of $1,257,000 reflect a
continuing sales decline compared to $1,669,000 and $2,693,000 in net sales
for the fiscal years ended June 30, 1995 and 1994, respectively. As a result
of declining revenues, gross profits before operating costs and expenses for
the year ended June 30, 1996 was $245,000 compared to gross profits of
$271,000 and $613,000 for the years ended June 30, 1995 and 1994,
respectively. For the most recent full fiscal year ended June 30, 1996, the
Company incurred a net loss of $847,000, notwithstanding a non-recurring
$274,000 gain on restructuring troubled debt, compared to a net loss of
$372,000 for the prior fiscal year ended June 30, 1995 and a net loss of
$124,000 in the fiscal year ended June 30, 1994.
At June 30, 1996, the Company had total liabilities of approximately
$1,132,000, redeemable Series A preferred stock of $134,000 requiring
mandatory redemption from future net income, an accumulated deficit from
operations since inception in 1987 of $2,729,000, and a deficit in
stockholders' equity of $256,000. The Company's liabilities were
significantly reduced during the year ended June 30, 1996 by debt settlements
which resulted in $274,000 of debt forgiveness, payment of $291,000 in debt in
cash and securities, and the conversion of $515,000 of Series A redeemable
preferred stock into common stock.
Increases in revenues are required for the Company to absorb existing
overhead levels. In view of historical losses from operations, continuing
unfavorable sales trends, limited working capital and the necessity of
applying certain cash flows for debt service obligations, the Company has not
been able to invest significantly in sales and marketing programs, and
accordingly has generally limited these activities to telemarketing and
selected trade shows.
THE REPORT OF STOCKMAN KAST RYAN AND SCRUGGS, PC ON THE FINANCIAL
STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED JUNE 30, 1996 CONTAINS A
PARAGRAPH EXPRESSING SUBSTANTIAL DOUBT CONCERNING THE ABILITY OF THE COMPANY
TO CONTINUE AS A GOING CONCERN. Management's plan to address these matters
is discussed below and in Note 1 of the Notes to Financial Statements included
elsewhere herein.
Results of operations in the future will be influenced by a variety of
factors, some of which cannot be accurately predicted at the present time.
These include, among others, the ability of the Company to successfully
negotiate the acquisition of another business enterprise, the Company's
ability to raise additional equity capital, development and implementation of
new channels of distribution via the Internet, demand for software products of
customers serviced by the Company, competitive conditions and the ability of
the Company to control costs. There can be no assurance the Company will
achieve revenue growth or profitability on a quarterly or annual basis.
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MANAGEMENT'S PLAN
The Company's core business involves the manufacture and sale of
software media storage discs. Notwithstanding continuing growth in demand for
software media storage, this is a mature industry with limited capital entry
requirements in which the Company and its competitors hold no significant
proprietary rights, and therefore is characterized by intense competition and
narrow gross profit margins. Former management's strategic plan to expand
sales was focused on the magnetic media industry and complementary markets,
specifically software duplication and allied printing and customization
services. The Company has added revenue from this business in recent years,
but such revenues were inadequate to compensate for significant sales declines
in media storage devices.
The Company's current management is pursuing several business strategies
to increase sales and improve results of operation by (1) reducing costs, (2)
expanding the Company's services and product line, (3) development of
electronic software distribution via the Internet, and (4) seeking the
acquisition of an additional business in the computer services industry.
Since February 1996, cost containment programs resulted in downsizing
the Company's workforce by three employees and certain debt restructuring
agreements reduced annual interest expenses by approximately $47,000. During
the first quarter of the current fiscal year commencing July 1996, the Company
increased the range of services internally processed by the Company's software
duplication and distribution business to include tape duplication and CD-R
replication capabilities. This internal capacity is expected to improve gross
margins for these services. The Company is also evaluating the possibility of
adding capacity to process CD-ROM replications internally.
In a plan to expand storage device revenues, the Company is seeking to
expand its product line by pursuing the negotiation of licensing rights to
produce the LS120 floppy diskette as described in Item 1 of this Report.
Another element of management's strategy to increase unit sales and
reduce costs associated with software duplication and distribution is the
development of a World Wide Web site as a channel of distribution. The
Company's Channelsoft(TM) Web site currently in development will be devoted to
distribution of clients' software via electronic download to customers
desiring immediate access to software purchases. Channelsoft will also
include a catalogue to order disc copy versions of software. Software
distributed electronically through the Internet will reduce raw material costs
otherwise required for disks and packaging, equipment and labor costs of disc
duplication and expenses of transportation and warehousing. Adding the
Internet as a method of advertising and channel of electronic distribution is
also projected to increase unit sales.
The Company is actively seeking the acquisition of additional assets or
another business in a related computer services industry. A proposed merger
with another corporation proposed in May 1996 was subsequently abandoned --
see "Abandonment of Proposed Merger with KSI;3SI" in Item 12 of this Report.
The Company is continuing to seek and evaluate other candidates for possible
acquisition, although there can be no assurance that an acquisition will be
obtained or successfully completed. A transaction of this nature may involve
the issuance of additional equity securities that might be dilutive to the
interests of current stockholders and/or may result in a change in control of
the Company.
Management intends to monitor the progress of the Company's software
media storage and duplication businesses and reserves the right to redeploy
its assets if satisfactory progress is not achieved.
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RESULTS OF OPERATIONS:
FISCAL YEAR ENDED JUNE 30, 1996 ("1996 YEAR") COMPARED TO THE FISCAL YEAR
ENDED JUNE 30, 1995 ("1995 YEAR"):
REVENUES: The Company's revenues for the fiscal year ended June 30,
1996 were $1,257,000, a decline of $413,000, or approximately 24.7%, from
$1,669,000 in revenues for the prior 1995 Year. The decline in sales was
attributable to a severe downturn in orders for software duplication and
packaging. Since the software duplication business has become extremely
competitive in recent years, former management was endeavoring to focus on
added value services and products where higher gross margins were expected to
be available. This program has been largely unsuccessful, and current
management is seeking to retain and expand the Company's customer base for
both media storage devices and software duplication while seeking the
acquisition of another business enterprise in the computer software and
service industry. See "Management's Plan" above.
COST OF SALES: Cost of sales for the 1996 Year were $1,012,000, or
80.5% of net sales, resulting in a gross profit of $245,000, or 19.5% of net
sales, compared to a gross profit of $271,000, or 16.3% of net sales in the
1995 Year. The improvement in gross profit margins, notwithstanding reduced
sales, was due to cost reductions. In view of its high level of fixed
overhead costs relative to sales volumes, further improvement in gross margins
will be substantially dependent upon revenue increases, as to which there are
no assurances.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses during the 1996 Year were $554,000, of which
approximately $138,000 were selling and marketing expenses and $416,000 were
general and administrative costs. Total selling, general and administration
expenses were reduced by approximate $13,000 from the comparable 1995 Year
when selling, general and administrative expenses were $567,000 consisting of
$210,000 in selling and marketing expenses and $357,000 of general and
administrative costs. As a result of limited capital, the Company's sales
and marketing in the last two years have been generally limited to
telemarketing, direct contact of customers and prospects by internal sales
staff and participation in selected trade shows. General and administrative
expenses increased by $60,000 in the 1996 Year compared to the 1995 Year
primarily as a result of expenses incurred in raising additional capital and
negotiating debt settlements.
SPECIAL CHARGES: The Company incurred $754,000 in special charges
during the 1996 Year. These charges were nonrecurring in nature and no such
charges were incurred in the prior 1995 Year. Nonrecurring charges for the
1996 Year include $600,000 incurred in the third quarter relating to a
settlement with the Company's former President and $154,000 incurred in the
fourth quarter to write-down idle, underperforming and obsolete assets to
their estimated net realizable value.
INTEREST EXPENSE: Interest expense in the 1996 Year was $58,000,
compared to $77,000 for the 1995 Year. The reduction in interest expense is
due to debt settlements resulting in reduced debt service obligations.
EXTRAORDINARY ITEM: During the 1996 Year, the Company recognized a
$274,000 extraordinary gain for debt forgiveness relating to restructuring
troubled debt. This compromise and payment of the remaining balance due
enabled the Company to eliminate $467,000 of secured and unsecured debt that
had been classified as current liabilities at June 30, 1995.
OPERATING RESULTS: Net loss for the 1996 Year was $847,000 after giving
effect to special charges of $754,000 offset in part by a $274,000
extraordinary gain in restructuring troubled debt, as discussed above. Before
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giving effect to special charges and the gain on debt restructuring, net loss
for the 1996 Year would have been $368,000 compared to a net loss for the
prior 1995 Year of $372,000. Apart from nonrecurring items, the primary
differences in results of operations for the 1996 Year compared to the 1995
Year were a $13,000 reduction in selling, general and administrative expenses
and an $18,000 decrease in interest expense that were largely offset by a
$27,0000 decrease in gross profits due to the decline in revenues.
FISCAL YEAR ENDED JUNE 30, 1995 ("1995 YEAR") COMPARED TO THE FISCAL YEAR
ENDED JUNE 30, 1994 ("1994 YEAR"):
REVENUES: Revenues for the 1995 Year were $1,669,000, a decline of
$1,024,000, or approximately 38%, from $2,693,000 in revenues in the 1994
Year. The decline in revenues was attributable to continuing changes in the
customer base and the complete elimination of bulk diskette sales based on
former management's decision to focus on added value services and products
where higher gross margins were believed to be available. In addition, the
industry has become even more competitive in recent years. The Company's
primary competition for media storage devices since 1993 has shifted from
Asian producers of bulk media and major suppliers, such as 3M, Verbatim and
Maxell, as to which the Company enjoyed certain competitive advantages such as
generally offering shorter lead times, to other software manufacturers such as
R.R. Donnelley, Microdisk Services, S/W Production, StarPak and a number of
smaller companies.
COST OF SALES: Cost of sales for the 1995 Year were $1,398,000, or
83.7% of net sales, resulting in a gross profit of $271,000, or 16.3% of net
sales. Gross profit margins were lower compared to the 1994 Year, in which
cost of sales were 77.2% of net sales for a gross profit margin of 22.8%.
Gross profit margins in the 1995 Year were adversely affected by an inventory
write-down of $121,000. Due to the inventory write-down and a decline in
overall net sales, dollar gross profits of $271,000 were $342,000 lower than
in the 1994 Year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses during the 1995 Year were $567,000, of which
approximately $210,000 were selling and marketing expenses and $357,000 were
general and administrative costs. These levels are reduced from the 1994 Year
when selling, general and administrative expenses were $663,000, of which
approximately $282,000 were selling and marketing expenses and $382,000 were
general and administrative costs. Due to limited capital, the Company's sales
and marketing have been generally limited to telemarketing, direct contact of
customers and prospects by internal sales staff and participation in selected
trade shows.
INTEREST EXPENSE: Interest expense in the 1995 Year was $77,000,
compared to $70,000 in the 1994 Year.
OPERATING RESULTS: Net loss for the 1995 Year was $372,000, an increase
in net loss compared to the net loss of $124,000 incurred in the prior 1994
Year. As discussed above, the increase in net loss was primarily due to an
inventory write-down of $121,000 and to a decline in sales revenues yielding a
lower dollar amount of gross profits.
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1996, the Company had cash resources of $615,000, current
assets of $909,000 and current liabilities of $779,000, resulting in a working
capital position of $130,000. Included in current liabilities is a contingent
liability of $166,000 due the Company's former President under a settlement
agreement that is required to be paid only from 5% of the proceeds realized
from a subsequent financing by the Company. The Company's working capital of
$130,000 at June 30, 1996 represents an significant improvement compared to
- 9 -
<PAGE>
its negative working capital position of $842,000 at the prior fiscal year-end
on June 30, 1995. The improvement in the amount of the Company's working
capital during the 1996 Year was primarily due to (1) net proceeds of
$571,000 from the sale of common stock in the fourth quarter; (2) net proceeds
of $253,000 from the sale of Series B preferred stock in the third quarter, a
portion of which was applied to payment of $143,000 in secured bank debt that
had been classified as a current liability at June 30, 1995; (3) $274,0000 in
debt forgiveness as a result of restructuring troubled debt obligations; and
(4) reclassification of $294,000 of secured debt to the Small Business
Administration that was past due and had been classified as a current
liability at June 30, 1995; terms of the Small Business Administration debt
were renegotiated during the 1996 Year and the amount outstanding at June 30,
1996 of $314,000 is no longer a current liability and has been reclassified to
long-term debt. These items financed the Company's net loss before
extraordinary items of $1,121,000 for the 1996 Year and restored a positive
working capital to the Company's balance sheet.
The Company's management anticipates that the Company will incur losses
from operations for the immediate future. Losses from operations are expected
to continue until such time as sales increase to a level necessary to absorb
fixed costs, as to which there is no assurance. Revenue increases will be
dependent upon a variety of factors and the success of programs currently in
process, such as the electronic distribution of software via the Internet
currently in development, negotiations to license rights to produce the LS120
MB 3.5" diskette and/or the acquisition of another business to expand the
Company's products and services. The Company plans to seek additional equity
and/or debt financing to sustain its operations and/or to provide for the
acquisition of an additional business or assets. There can be no assurance
that adequate financing will be obtained to support planned expansion of the
Company's products and services.
During the 1996 Year, capital asset additions were $6,000 and
approximately $14,000 was realized from the sale of equipment. Subsequent to
June 30, 1996, the Company paid $102,000 in cash under an agreement to acquire
certain assets from First New Hampshire Bank. This asset acquisition
transaction was not finalized because First New Hampshire Bank could not
warrant to the Company that First New Hampshire Bank had legal possession of
the assets, and the Company has requested a return of the $102,000 plus
expenses and damages. The Company's legal counsel is currently attempting to
negotiate a settlement, but if a settlement cannot be reached, the Company
plans to bring legal action against the bank for return of $102,000 plus
expenses and damages. The Company's management believes that the Company will
prevail in this matter. See Item 3 of this Report. The Company currently
has no other material obligations or commitments for additional capital
expenditures and would be unable to finance material capital asset additions
unless additional equity capital is obtained. During recent years, the
Company has been operating with used software duplication and printing
equipment. As this equipment has aged, productivity has declined, the cost of
maintenance has increased and expenses to maintain product quality have
increased. If sufficient capital is obtained, the Company may incur capital
asset additions to increase production rates and expand capacity.
The Company had approximately $3,100,000 of net operating loss carry-
forwards available as of June 30, 1996 to offset future taxable income for
federal income tax purposes. Federal operating loss carryforwards expire
during the years from 2005 to 2020. In the event the Company successfully
obtains additional equity capital, the federal net operating loss carryforward
may be subject to certain limitations if there are greater than 50% changes in
equity ownership of the Company.
The Company believes that the relatively minor rate of inflation over
the past few years has not had a significant impact on the Company's revenues
and results of operations.
- 10 -
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included in this Report:
<TABLE>
<CAPTION>
BROWN DISC PRODUCTS COMPANY, INC.
FINANCIAL STATEMENTS AT JUNE 30, 1996
<S> <C> <C>
Independent Auditors' Report ........................................... 12
Financial Statements as of June 30, 1996:
Balance Sheet at June 30, 1996 .................................... 13
Statements of Operations for the Years ended
June 30, 1996 and June 30, 1995 ................................. 14
Statements of Changes in Stockholders' Deficiency
for the Years ended June 30, 1996 and June 30, 1995 ............. 15
Statements of Cash Flows for the Years ended
June 30, 1996 and June 30, 1995 ................................. 16
Notes to Financial Statements ..................................... 17
</TABLE>
- 11-
<PAGE>
STOCKMAN KAST RYAN & SCRUGGS, PC CERTIFIED PUBLIC ACCOUNTANTS
----------------------------
Western National Bank Bldg.
P.O. Box 938
Colorado Springs
Colorado 80901-0938
102 N. Cascade Ave.
Suite 450
Colorado Springs
Colorado 80903
Voice: 719/630-1186
FAX: 719/630-1187
INDEPENDENT AUDITORS' REPORT
Brown Disc Products Company, Inc.
Colorado Springs, CO
We have audited the accompanying balance sheet of Brown Disc Products Company,
Inc. (the Company) as of June 30, 1996 and the related statements of
operations, stockholders' deficiency, and cash flows for each of the two years
in the period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1996 and the
results of its operations and its cash flows for the each of the two years in
the period ended June 30, 1996 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company had a net capital deficiency as of June
30, 1996 and has had recurring losses. These factors, among others, raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might arise from
the outcome of this uncertainty.
/s/ Stockman Kast Ryan & Scruggs, P.C.
Colorado Spring, Colorado
October 10, 1996
- 12-
<PAGE>
BROWN DISC PRODUCTS COMPANY, INC.
BALANCE SHEET
JUNE 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................. $ 615,229
Accounts receivable -- net (Notes 1 and 4) ................. 187,827
Inventory (Notes 2 and 4) .................................. 86,411
Other ...................................................... 19,280
------------
Total ...................................................... 908,747
PROPERTY AND EQUIPMENT -- Net (Notes 3 and 4) .............. 94,868
OTHER ASSETS ............................................... 6,271
------------
TOTAL ...................................................... $ 1,009,886
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................... $ 360,296
Accrued liabilities ........................................ 93,539
Accrued liabilities to related parties (Note 12) ........... 235,400
Current portion of notes payable to related parties (Note 5) 54,409
Current portion of notes payable (Note 4) .................. 35,102
------------
Total ...................................................... 778,746
LONG-TERM DEBT
Notes payable to related parties (Note 5) .................. 39,798
Note payable (Note 4) ...................................... 313,520
------------
Total ...................................................... 353,318
------------
Total liabilities .......................................... 1,132,064
------------
REDEEMABLE PREFERRED STOCK -- Series A, no par value;
63,000 shares authorized, 12,613 shares issued and
outstanding (Note 7) ..................................... 133,698
------------
STOCKHOLDERS' DEFICIENCY (Note 8)
Preferred stock, no par value, 49,937,000 shares authorized:
200,000 shares designated 10% Series B convertible
preferred stock, liquidation preference $5.00
per share, 20,000 shares outstanding ..................... 96,368
Common stock -- no par value; 50,000,000 shares
authorized, 5,070,671 shares issued and outstanding ...... 1,770,889
Warrants ................................................... 61,323
Additional paid-in capital ................................. 554,560
Accumulated deficit ........................................ (2,729,016)
------------
Stockholders' deficiency ................................... (255,876)
------------
TOTAL ...................................................... $ 1,009,886
============
</TABLE>
See notes to financial statements.
- 13 -
<PAGE>
BROWN DISC PRODUCTS COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
NET SALES ............................................. $ 1,256,641 $ 1,669,171
COST OF SALES ......................................... 1,011,800 1,397,702
----------- -----------
GROSS MARGIN .......................................... 244,841 271,469
----------- -----------
OPERATING COSTS AND EXPENSES
General and administrative ............................ 416,372 356,574
Selling ............................................... 137,900 210,238
Special charges (Note 10) ............................. 753,787 --
----------- -----------
Total ................................................. 1,308,059 566,812
----------- -----------
OPERATING LOSS ........................................ (1,063,218) (295,343)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense .................................... (58,270) (76,535)
----------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEM .................... (1,121,488) (371,878)
EXTRAORDINARY ITEM -- Gain on restructuring of
troubled debt (Note 11) ............................. 274,151 --
----------- -----------
NET LOSS .............................................. (847,337) (371,878)
INCREASE IN CARRYING VALUE OF REDEEMABLE PREFERRED
STOCK AND PREFERRED STOCK DIVIDENDS (Note 7) ........ (10,156) (12,451)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES ................ $ (857,493) $ (384,329)
=========== ===========
PER COMMON SHARE
Loss before extraordinary item ........................ $ (.35) $ (.14)
Extraordinary item .................................... .08 --
Increase in carrying value of redeemable preferred
stock and preferred stock dividends ................. -- --
----------- -----------
NET LOSS .............................................. $ (.27) $ (.14)
=========== ===========
</TABLE>
See notes to financial statements.
- 14-
<PAGE>
BROWN DISC PRODUCTS COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED JUNE 30, 1996 and 1995
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
Series B Common Stock Warrants Additional
------------------ ---------------------- ------------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
-------- -------- --------- ----------- --------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
JULY 1, 1994.... -- -- 2,751,641 $ 93,180 60,000 $ 100 $ 562,743 $(1,509,801) $ (853,778)
Expiration
of warrants..... -- -- -- -- (60,000) (100) 100 -- --
Increase in
carrying value
of redeemable
preferred
stock (Note 7).. -- -- -- -- -- -- (12,451) -- (12,451)
Net loss........ -- -- -- -- -- -- -- (371,878) (371,878)
-------- -------- --------- ----------- --------- -------- --------- ----------- -----------
BALANCES,
JUNE 30, 1995... -- -- 2,751,641 $ 93,180 -- -- $ 550,392 $(1,881,679) $(1,238,107)
-------- -------- --------- ----------- --------- -------- --------- ----------- -----------
Sale of common
stock for
cash (Note 8)... -- -- 874,000 570,945 -- -- -- -- 570,945
Issuance of
common stock to
satisfy accounts
payable (Note 8) -- -- 270,000 67,500 -- -- -- -- 67,500
Issuance of common
stock for services
to related party
(Notes 8 and 12) -- -- 250,000 337,500 -- -- -- -- 337,500
Issuance of
common stock for
services (Note 8) -- -- 50,000 12,500 -- -- -- -- 12,500
Issuance of
warrants to
satisfy accounts
payable (Note 8) -- -- -- -- 351,950 73,959 -- -- 73,959
Conversion of
Series A
preferred stock
to common stock
(Note 7)....... -- -- 496,430 519,596 -- -- -- -- 519,596
Issuance of
Series B
preferred stock
for cash ......
(Note 8)....... 52,000 250,554 -- -- -- -- -- -- 250,554
Warrants issued
to satisfy
offering
costs (Note 8). -- -- -- -- 10,000 2,250 -- -- 2,250
Conversion of
Series B
preferred stock
to common stock
(Note 8)....... (32,000) (154,186) 320,000 154,186 -- -- -- -- --
Warrants
exercised
(Note 9)....... -- -- 59,600 15,482 (59,600) (14,886) -- -- 596
Increase in
carrying value
of redeemable
preferred
stock (Note 7).. -- -- -- -- -- -- (5,832) -- (5,832)
Net loss........ -- -- -- -- -- -- -- (847,337) (847,337)
-------- -------- --------- ----------- --------- -------- --------- ----------- -----------
BALANCES,
JUNE 30, 1996 20,000 $ 96,368 5,070,671 $ 1,770,889 302,350 $ 61,323 $ 544,560 $(2,729,016) $ (255,876)
======== ======== ========= =========== ========= ======== ========= =========== ===========
</TABLE>
See notes to financial statements.
- 15-
<PAGE>
BROWN DISC PRODUCTS COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss .............................................. $ (847,337) $ (371,878)
Adjustments to reconcile net loss to cash (used in)
provided by operating activities:
Stock issued for services (Note 8) ................ 350,000 --
Asset write-downs ................................. 153,514 --
Depreciation ...................................... 39,707 81,968
Loss on sale of equipment ......................... 3,169 --
Gain on restructuring of troubled debt ............ (274,151) --
Changes in operating assets and liabilities:
Accounts receivable ............................. (50,631) 100,527
Inventory ....................................... 55,668 133,694
Other assets .................................... 1,708 (11,905)
Accounts payable ................................ 76,487 150,350
Accrued liabilities ............................. 47,227 (10,230)
Accrued liabilities to related parties .......... 246,400 --
----------- -----------
Cash (used in) provided by operating activities ....... (198,239) 72,526
----------- -----------
INVESTING ACTIVITIES
Proceeds from sale of equipment ....................... 13,500 --
Purchases of equipment ................................ (6,024) (17,866)
----------- -----------
Cash provided by (used in) investing activities ....... 7,476 (17,866)
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock ................ 570,945 --
Proceeds from issuance of preferred stock ............. 252,804 --
Proceeds from exercise of warrants .................... 596 --
Proceeds from borrowings .............................. 127,773 --
Repayment of notes payable ............................ (150,016) (72,904)
Repayment of capital lease obligations ................ -- (949)
----------- -----------
Cash provided by (used in) financing activities ....... 802,102 (73,853)
----------- -----------
NET INCREASE (DECREASE) IN CASH ....................... 611,339 (19,193)
CASH, Beginning of period ............................. 3,890 23,083
----------- -----------
CASH, End of period ................................... $ 615,229 $ 3,890
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ................................ $ 45,930 $ 66,978
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES
Redeemable preferred stock exchanged for common stock . $ 519,596 $ --
Stock issued for services ............................. 350,000 --
Warrants issued to satisfy accounts payable ........... 73,959 --
Common stock issued to satisfy accounts payable ....... 67,500 --
</TABLE>
See notes to financial statements.
- 16-
<PAGE>
BROWN DISC PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL -- Brown Disc Products Company, Inc. (the Company) is a
manufacturer and supplier of magnetic media for desk-top computers. The
Company's major line of business is software duplicating and turnkey
packaging and fulfillment.
BASIS OF PRESENTATION -- The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and the liquidation of liabilities in the normal course of
business. The Company had a net capital deficiency of $256,000 at June
30, 1996 and has sustained substantial operating losses in recent years.
These factors, among others, adversely affect the ability of the Company
to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities
that might be necessary should the Company be unable to continue as a
going concern.
During the year ended June 30, 1996, management has taken steps to
decrease costs, increase margins and increase revenues. Additionally,
the Company expanded its product capabilities which are expected to
enhance gross margins and improve revenue. The Company also intends to
introduce electronic software distribution services which are expected
to increase revenues. The Company will also continue to focus on
acquisitions of similar or related businesses.
Management believes these actions and others presently being taken will
allow the Company to successfully meet its obligations and sustain
profitable operations.
ACCOUNTS RECEIVABLE -- Accounts receivable are presented net of an
allowance for doubtful accounts which is based on management's estimate
of uncollectible accounts. At June 30, 1996, the allowance for doubtful
accounts is $17,609.
INVENTORY -- Inventory is stated at the lower of first-in, first-out
cost or market.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost, less
accumulated depreciation. Depreciation is provided on a straight-line
basis over estimated useful lives as follows: manufacturing equipment
-- five to seven years; quality control equipment -- five years; office
furniture and equipment -- three to seven years; and leasehold
improvements -- five years.
REVENUE RECOGNITION -- Sales are recognized upon shipment of products to
customers.
NET LOSS PER SHARE -- Net loss per share of common stock is based on the
weighted average number of shares of common stock outstanding during the
periods presented. Net loss per share does not give effect to the
exercise of common stock purchase warrants or conversion of the
redeemable preferred stock as such effect is antidilutive. Net loss per
share is based upon 3,180,707 and 2,751,641 shares outstanding for the
years ended June 30, 1996 and 1995, respectively.
- 17-
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
USE OF ESTIMATES -- The preparation of the Company's financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
2. INVENTORY
Inventory consists of the following:
<TABLE>
<S> <C>
Raw materials ........................................ $ 28,571
Work-in-process ...................................... 31,140
Finished goods ....................................... 26,700
-----------
Total $ 86,411
===========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Manufacturing equipment .............................. $ 1,139,329
Quality control equipment ............................ 126,292
Office furniture and equipment ....................... 138,771
Leasehold improvements ............................... 17,821
-----------
1,422,213
Less accumulated depreciation ........................ 1,327,345
-----------
Property and equipment -- net ........................ $ 94,868
===========
</TABLE>
- 18-
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<S> <C>
Note payable to Small Business Administration at
8.5%, collateralized by equipment, inventory and
accounts receivable. The Company defaulted on
this note in 1995 and a modification of the note
was signed in June 1996. The modification agreement
requires monthly payments beginning July 7, 1996
of $1,800 per month and increasing to $2,900 per
month during the term of the note. Monthly payments
are not sufficient to pay accrued interest until
July 2002. The balance is due July 7, 2006........... $ 313,520
Note payable to a Regional Development Corporation,
bearing interest at 8%, collateralized by equipment,
payable in monthly installments of $1,014 through
May 1999. At June 30, 1996, the Company was in
default on this note and the balance is callable
by the lender and accordingly is classified as a
current liability. ................................... 35,102
------------
Total ................................................ 348,622
Less current portion ................................. 35,102
------------
Long term portion .................................... $ 313,520
============
</TABLE>
Management believes the fair values of its notes payable are not
materially different from their carrying values based on the terms
and characteristics of the notes.
5. NOTE PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
<TABLE>
<S> <C>
Non-interest bearing note payable to Company
stockholder, who also is a former employee and
board member of the Company, payable in monthly
installments of $1,000 through September 2001,
with $5,000 payments on July 1, September 1, and
November 1, 1996 (less unamortized discount of
$17,227, using an effective rate of 12%), unsecured .. $ 57,773
Note payable to a Company stockholder and board
member at 10.04%, payable in monthly installments
of $2,308 through November 1996, and a payment of
$26,249 in December 1996, unsecured .................. 36,434
------------
Total ................................................ 94,207
Less current portion ................................. 54,409
------------
Long term portion .................................... $ 39,798
============
</TABLE>
- 19-
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
5. NOTE PAYABLE TO RELATED PARTIES, continued
Following are maturities of notes payable to related parties for each of
the next five years ending June 30:
<TABLE>
<S> <C>
1997 ................................................. $ 54,409
1998 ................................................. 7,635
1999 ................................................. 8,604
2000 ................................................. 9,694
2001 ................................................. 10,924
</TABLE>
Management believes the fair values of its notes payable are not
materially different from their carrying values based on the terms and
characteristics of the notes.
6. OPERATING LEASE
The Company leases its facilities under a noncancellable operating lease
which expired July 31, 1996 and has been extended to December 31, 1996.
Rental expense under the operating lease for the years ended June 30,
1996 and 1995 was $88,000 and $89,000, respectively.
7. REDEEMABLE PREFERRED STOCK
On January 31, 1992, the Company filed petitions for relief under
Chapter 11 of the Federal bankruptcy laws in the United States
Bankruptcy Court for the District of Colorado. The Company emerged from
Chapter 11 under a Plan of Reorganization approved by the United States
Bankruptcy Court on May 5, 1993. In June 1993, as part of the Plan of
Reorganization, the Company issued 62,256 shares of redeemable preferred
stock as settlement for $622,560 of unsecured pre-petition debts. The
stock was issued at the rate of one share of stock per $10.00 of claim
allowed. Each share is entitled to one vote. Holders of redeemable
preferred stock are entitled to be paid, in full, prior to payment of
any dividends to holders of common stock. Additionally, holders of
redeemable preferred stock have the option of converting such stock to
common stock at the rate of five shares of common stock per one share of
redeemable preferred stock at any time after June 4, 1998.
Under mandatory redemption provisions, the Company is required to redeem
the preferred stock, based on earnings, during the period June 30, 1994
through June 30, 1998. The number of shares required to be redeemed in
any one year will be equal to 50% of the Company's net income after
taxes, less all debt service payments to prior senior classes of debt
holders, according to the Plan of Reorganization, divided by the
redemption price of $11. The Company accounts for the difference
between the carrying amount of the redeemable preferred stock and the
mandatory redemption amount under the interest method. A charge to
additional paid-in capital of $5,832 and $12,451 was recorded during the
years ended June 30, 1996 and 1995, respectively.
- 20 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
7. REDEEMABLE PREFERRED STOCK, continued
In 1996, the Company offered stockholders of its redeemable preferred
stock the opportunity to convert each share of redeemable preferred
stock into ten shares of common stock. Pursuant to this offer, in
November 1995, 49,643 shares of preferred stock were converted to
496,430 shares of common stock.
Due to the mandatory redemption requirements of the redeemable preferred
stock being outside the control of the Company, the redeemable preferred
stock is not reported as stockholders' equity.
8. STOCKHOLDERS' EQUITY
During the year ended June 30, 1996, the Company issued 250,000 shares
of restricted common stock to a director of the Company in exchange for
the director assuming $67,500 of accounts payable. The director then
exchanged 170,000 unrestricted shares of the Company's common stock
previously held to settle the accounts payable assumed. In addition,
the Company issued 20,000 shares of its common stock to a credit service
company as part of the accounts payable settlement.
During the year ended June 30, 1996, the Company issued 250,000 shares
of common stock to its former president in connection with his
termination agreement (see Note 12). The estimated value of the stock
of $337,500 was charged to operations during the year ended June 30,
1996.
The Company also issued, during 1996, 50,000 shares of its common stock
in exchange for financial consulting services. The estimated value of
the services provided of $12,500 was changed to operations.
During the year ended June 30, 1996, the Company issued warrants to
purchase 351,950 shares of the Company's common stock as settlement for
$73,959 of accounts payable (see Note 9).
During the year ended June 30, 1996, the Company issued 52,000 shares of
10% Series B convertible preferred stock. Net proceeds to the Company,
after deduction of associated offering expenses, were $250,554.
Each share of Series B preferred stock is (1) entitled to a liquidation
preference of $5.00 per share, plus accrued and unpaid dividends; (2)
entitled to earn dividends at a rate of 10% per annum due and payable
prior to any distributions to holders of common stock, payable on
September 30 in cash legally available for payment of dividends, or if
cash is not available in any year, the Board of Directors has the
discretion of providing for payment of dividends in common stock in lieu
of cash; (3) not entitled to vote, except as required under laws of the
State of Colorado; and (4) entitled to convert into 10 shares of common
stock, subject to adjustment for any stock dividend, stock split or
other reclassification affecting common stock. Dividends in arrears at
June 30, 1996 were $3,334. During the year, 32,000 shares of the
Series B convertible preferred stock was converted to 320,000 shares of
the Company's common stock. Dividends were automatically waived on the
shares converted. The Company, at its option, upon 30 days written
notice, may call all Series B preferred stock for redemption after
September 30, 1996 at a price of $5.00 per share in cash plus accrued
and unpaid dividends. In connection with the issuance of the Series B
preferred stock, the Company, in exchange for assistance with the
offering, issued stock purchase warrants to acquire 10,000 shares of
common stock at a purchase price of $.25 (see Note 9). The estimated
value of the warrants was charged against the net proceeds of the
offering.
- 21 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
8. STOCKHOLDERS' EQUITY, continued
On May 15, 1996, the Company signed a definitive agreement to merge with
3SI, Inc. (3SI) of Englewood, Colorado, subject to due diligence and
available financing. To meet the Company's working capital requirements
provided by the agreement, the Company issued 275,900 shares of its
common stock. Net proceeds to the Company were $570,945. The 3SI
merger agreement was terminated and accordingly, subsequent to June 30,
1996, the Company's Board of Directors agreed to revalue the purchase
price of the offering from $2.50 to $.75 per share. As a result, the
number of shares issued under the offering were increased by 643,767 to
919,667 shares. The financial statements reflect the increased number of
shares.
9. WARRANTS
The Company issued to certain officers and directors stock purchase
warrants to purchase up to 3,000,000 shares of common stock at an
exercise price of $.25 per share. These warrants expire in September
2000. The Company also issued to the holder of a note payable described
in Note 5, stock purchase warrants to purchase up to 1,000,000 shares of
common stock at an exercise price of $.10 per share. These warrants
expire in September 2000. The exercise price of these warrants was
equal to or exceeded the market value of the shares and, accordingly, no
amounts were charged to operations.
During the year ended June 30, 1996, warrants were exercised to purchase
59,600 shares of the Company's common stock at $.01 per share.
The following stock purchase warrants are outstanding at June 30, 1996:
<TABLE>
<CAPTION>
Number of Exercise Price Expiration
Warrants Per Share Date
----------- -------------- -----------
<S> <C> <C>
292,350 $.01 2000
1,000,000 $.10 2000
3,010,000 $.25 2000 - 2001
</TABLE>
10. SPECIAL CHARGES
In the fourth quarter of the year ended June 30. 1996, the Company
recorded special charges of $153,514 related to the write down of idle,
under performing, and obsolete assets to estimated net realizable
values. The provision was based on review of assets to determine
whether there had been a permanent decline in the value of any assets
due to manufacturing productivity improvements, refinements in strategic
direction or declines in market values. In the third quarter of the
year ended June 30, 1996, the Company recorded special charges of
$400,273 related to the settlement agreement with the Company's former
president (see Note 12). These special charges represent unusual,
generally nonrecurring expenses.
- 22 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
11. EXTRAORDINARY ITEMS
During the year ended June 30, 1996, the Company arranged to pay a
creditor $127,921 in full settlement of a note payable with a remaining
balance of $417,497. In addition, the Company paid a supplier $25,000
in full settlement of an account with a balance of $49,575.
Consequently, the Company recognized an extraordinary gain of $274,151
net of restructuring costs of $40,000.
12. RELATED PARTY TRANSACTION
On April 24, 1996, the Company reached a settlement agreement with the
Company's former president under which the former president agreed to
resign his employment and to resign as a director. In connection with
these resignations, the Company agreed to pay the former president: (1)
past due wages of $6,400, payable one-half on or before August 1, 1996
and one-half on or before September 1, 1996; (2) $62,773 note, of which
$5,000 was paid on May 1996 and the remaining balance is payable under
the terms disclosed in Note 5; (3) 250,000 shares of the Company common
stock; and (4) 5% of the proceeds realized by the Company from any
future equity financing, recapitalization or sale of equipment up to a
maximum payment of $200,000. The amount due in item 4 has been recorded
in full as a current liability because management of the Company
believes it is probable that future equity financing in excess of the
minimum amount necessary to require the maximum payment will be raised.
The amounts due under items 1 and 4 above are included in accrued
liabilities to related parties, and the amount due under item 2 is
included in notes payable to related parties.
The Company agreed to pay an affiliated company of its chief executive
officer $29,000 for their efforts to restructure debt obligations. This
amount is also recognized as an accrued liability to related parties at
June 30, 1996.
13. INCOME TAXES
The tax effects of temporary differences that give rise to a significant
portion of deferred taxes at June 30, 1996 are as follows:
Deferred tax asset:
<TABLE>
<S> <C>
Net operating loss carryforward ...................... $ 1,050,000
Less valuation allowance ............................. 1,050,000
------------
Total ................................................ $ --
============
</TABLE>
The Company has operating loss carryforwards of approximately
$3,100,000, which expire in 2005 through 2020. As of June 30,
1996 the Company has recorded a valuation allowance to reduce existing
deferred tax assets to an amount that is more likely than not to be
realized. The valuation allowance increased by $370,000 during the year
ended June 30, 1996.
- 23 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
14. CONCENTRATIONS OF CREDIT RISK
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist
primarily of temporary cash investments and accounts receivable.
Although the Company maintains cash deposits in excess of federal
insured limits, such deposits are placed with high quality financial
institutions. Concentrations of credit risk with respect to accounts
receivable are limited due to a diverse customer base.
15. SUBSEQUENT EVENTS
On August 27, 1996, the Company entered into an agreement to acquire
from First New Hampshire Bank all the assets and equipment of Softwise
Services, Inc. as a result of Softwise Services' defaulting on a
promissory note. The Company paid $102,000 and agreed to assume a
$200,000 note payable bearing interest at 6% at the time of closing to
be repaid over eleven years. The Company operated Softwise Services'
assets until First New Hampshire Bank requested that the Company cease
use of the equipment. In connection with this transaction, First New
Hampshire Bank could not warranty to the Company that First New
Hampshire Bank had legal title to the assets. As a result, the Company
is of the opinion that First New Hampshire Bank has breached the
agreements, and has requested a return of the $102,000 and release from
the $200,000 note payable plus expenses and damages. The Company's
legal counsel is currently attempting to negotiate a settlement, but if
a settlement cannot be reached, the Company plans to bring legal action
against the bank for return of $102,000 and release from the $200,000
note payable plus expenses and damages. However, the Company's legal
counsel has advised management that at this preliminary stage the
outcome of any legal action is indeterminable. The Company believes
that it will prevail in this matter and no accrual for possible loss has
been made.
On September 27, 1996 the Company agreed to exchange 250,000 shares of
its common stock for the surrender of 1,000,000 warrants with an
exercise price of $0.25 per share.
- 24 -
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Positions
-------------------------- --- -----------------------------------
<S> <C> <C>
Ronald H. Cole 28 Director; Chairman of the Board,
President, Treasurer,
Chief Executive Officer and
Chief Financial Officer
Daryl M. Silversparre 34 Director and Secretary
David J. Lopes 40 Director
Harry K. McCreery 51 Director
</TABLE>
RONALD H. COLE has served as Chief Executive Officer and Chairman of the
Board of Directors of the Company since September 1995 and as its President,
Treasurer and Chief Financial Officer since February 13, 1996. From January
1995 until September 1995, Mr. Cole was employed as a securities broker by
Gruntal and Company, a New York Stock Exchange member broker-dealer firm.
Prior to his employment with Gruntal & Co., from 1990 through 1994 he was
employed as a securities broker with Montano Securities Corporation and served
as Branch Manager for its locations in Cincinnati and San Francisco and as
Ohio Regional Director and Northern California Regional Director. Mr. Cole
devotes his full business time to the Company.
DARYL M. SILVERSPARRE has served as a director of the Company since
September 7, 1995 and as its corporate Secretary since February 13, 1996. Mr.
Silversparre has been primarily employed since 1995 as President and Chief
Executive Officer of Capital Investments Solution, Inc., a company registered
as an investment adviser with the Securities and Exchange Commission based in
Los Angeles, specializing in capital management and consulting. From 1978 to
1995, Mr. Silversparre was involved in the petroleum industry in a management
capacity with Dave Silversparre Union Service Inc., a dealer for Union Oil
Company.
DAVID J. LOPES has served as a director of the Company since September
1995. Since May 1995, Mr. Lopes has been primarily employed as a management
and business consultant to Glasswerks, Irvine, California, a glass quartz
semiconductor manufacturing company. For more than five years prior to May
10, 1995, when he resigned, Mr. Lopes was the President of California Quartz,
Inc., a supplier of materials to the semiconductor industry until that
business was sold in 1994 and which also operated a computer training business
started in 1994 through a wholly-owned subsidiary, The Focus Institute, Inc.
After his resignation from California Quartz, Inc., The Focus Institute, Inc.
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on May 18, 1995, U.S. Bankruptcy Court for the Central
District of California case number LA95-22592SB.
- 25 -
<PAGE>
HARRY K. McCREERY was first elected a director of the Company in
September 1988. Mr. McCreery has been primarily employed as the Chief
Financial Officer of Software AG, Reston, Virginia since April 1989. Mr.
McCreery was formerly Vice-President of Finance for the Company on a part time
basis from 1988 through 1990. Prior to 1989, he served in financial roles
with several companies including AB Dick Company, SyQuest Technology and
Automated Microbiology, Inc. Mr. McCreery is a Certified Public Accountant.
There is no family relationship between any of the Company's directors
and executive officers. All directors hold office until the next annual
meeting of stockholders and until their successors are elected. Officers
serve at the discretion of the Board of Directors and their salaries are
subject to review and adjustment from time to time by the Board.
During the fiscal year ended June 30, 1996 the Board of Directors held
six meetings and took certain actions by unanimous written consent of the
Board. No incumbent director attended fewer than 75% of all meetings of the
Board of Directors, except that Mr. McCreery attended three of six meetings
and Mr. Lopes attended three of five meetings. There are currently no
committees of the Board of Directors.
There are no arrangements or understandings between any director and any
other person pursuant to which any person was elected or nominated as a
director. Mr. Cole holds irrevocable proxies until September 7, 1996 to vote
1,363,900 shares of voting Common Stock granted by certain stockholders. See
Items 11 and 12 of this Report.
Directors received cash compensation for services as a director during
the fiscal year ended June 30, 1996 in the total amount of $18,000, of which
$6,000 was paid to the Company's Chief Executive Officer, Ronald H. Cole.
Although the Company has no current compensation plan for directors, the
Company's By-Laws permits compensation of directors and the Board reserves the
right of changing compensation policies for directors from time to time.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company's securities are not registered under Section 12(b) or 12(g)
of the Securities Exchange Act of 1934 ("Exchange Act"). Accordingly the
Company's executive officers and directors, and persons who beneficially own
more than 10% of the Company's stock are not subject to the provisions of
16(a) of the Exchange Act and are not obligated to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission.
ITEM 10. EXECUTIVE COMPENSATION
The Company currently does not have any compensation plans involving
stock options, stock appreciation rights or long-term incentive or deferred
pension or profit-sharing plans for its executive officers.
Prior to September 1995, directors had not been compensated in cash for
their services on the Company's Board of Directors and officers of the Company
receive no additional compensation for their services as directors. Directors
of the Company currently receive no cash compensation for their attendance at
Board meetings except reimbursement for travel expenses.
In September 1995, four newly elected directors of the Company were
awarded Class A common stock purchase warrants covering an aggregate of
3,000,000 shares of the Company's Common Stock exercisable at $0.25 per share
in consideration of their agreement to become directors of Brown Disc and to
assist the Company in obtaining additional financing and negotiating debt
restructuring arrangements. On September 7, 1995, the date these warrants
were issued, the last reported bid and asked prices for the Company's Common
Stock quoted in the over-the-counter market were $0.06 bid and $0.25 asked.
See Item 12 of this Report.
- 26 -
<PAGE>
Although no other compensation is currently contemplated for directors
of the Company, the Company's Bylaws permit compensation of directors. The
Board reserves the right to change its policy as to compensation of directors
from time to time based upon the financial condition of the Company, future
performance and other relevant factors.
SUMMARY EXECUTIVE COMPENSATION
The following Summary Compensation Table indicates the cash compensation
paid by the Company as well as certain other compensation, paid or accrued for
its fiscal years ended June 30, 1996, 1995 and 1994 to its Chief Executive
Officer. No other executive officers received salary and bonus exceeding
$60,000 per annum for such periods.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------- -------------------------------
Awards Payouts
Other ---------------------- -------
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Name and Fiscal Salary Bonus sation Awards Options/ Payouts Compen-
Principal Position Year(1) ($) ($) ($)(2) ($) SARs(#) ($) sation($)
- ------------------ ------- --------- --------- -------- --------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald H. Cole 1996 $63,130 -- $6,000(5) -- 1,000,000(6) -- --
Chairman of the
Board and Chief
Executive
Officer (3)
R. Eugene Rider, 1996 $49,118 -- $6,400(7) $337,500(8) -- -- $200,000(9)
President & Chief 1995 $72,000 -- -- -- -- -- --
Executive Officer 1994 $72,000 -- -- -- -- -- --
(4)
</TABLE>
________________________________________
(1) Information set forth in the table represents data for the fiscal years
ended June 30, 1996 ("1996"), June 30, 1995 ("1995") and June 30, 1994
("1994").
(2) Total perquisites did not exceed the lesser of $50,000 or 10% of the
executive's annual salary, bonus and other compensation.
(3) Mr. Cole was elected Chairman and Chief Executive Officer of the
Company on September 7, 1995 and also was elected President on February
13, 1996.
(4) Mr. Rider resigned as the Company's Chief Executive Officer on September
7, 1995 and retired as President effective as of February 12, 1996.
(5) Payment for services as a director and Chairman of the Board.
(6) Class A Warrants issued at an exercise price of $0.25 per shares
expiring September 7, 2000. See "Executive Compensation" above and
"September 1995 Change in Control Transactions" in Item 12 of this
Report.
(7) Represents cash payments and installment payment obligations under a
settlement agreement relating to the termination of employment. See
"Settlement with Former Executive Officer; Changes in Executive Officers
and Directors" in Item 12 of this Report.
(8) Represents the value of 250,000 shares of Common Stock issued to a
trustee for the benefit of R. Eugene Rider and his spouse under a
settlement agreement relating to the termination of employment. See
"Settlement with Former Executive Officer; Changes in Executive Officers
and Directors" in Item 12 of this Report.
(9) Represents a maximum contingent payment of $200,000 payable at the rate
of 5% from proceeds of financings obtained by the Company after April
24, 1996, of which $34,488 was paid in June 1996.
- 27 -
<PAGE>
STOCK OPTIONS
The Company did not grant any stock options for the fiscal year ended
June 30, 1995 except for common stock warrants issued to new members of
management, and there were no outstanding stock options granted during prior
periods. The following tables summarize stock option activity during the
fiscal year ended June 30, 1996 for each of the named officers shown in the
table "Summary Executive Compensation":
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year Ended June 30, 1996
----------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation
Underlying Granted to Exercise or for Option Term
Options/SARs Employees in Base Price Expiration ------------------------
Name Granted (#) Fiscal Year ($/sh) Date 5%($) (2) 10%($) (2)
- --------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ronald H. Cole 1,000,000 (1) 33.3% $0.25 9/7/00 $ 69,070 $ 152,628
R. Eugene Rider -0- -- -- -- -- --
</TABLE>
_________________________________________________
(1) Warrants exercisable at $0.25 exercise price equal to the fair market
value on date of grant. Does not include warrants issued to a general
partnership in which Mr. Cole was a general partner insofar as the
partnership held the warrants for the benefit of an unaffiliated third
party.
(3) The dollar amounts under these columns are the result of calculations at
5% and 10% appreciation rates compounded annually as required by rules
of the Securities and Exchange Commission, and are not intended to
forecast possible future appreciation, if any, of the stock price.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
-----------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
at Fiscal Year-End (#) at Fiscal Year-End ($)(A)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------------- --------------- ------------ ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald H. Cole -0- n/a 1,000,000 / -0- $3,875,000/ -0-
R. Eugene Rider -0- n/a -0- -0- -0- -0-
</TABLE>
________________________________________________________________
(A) The value of unexercised in-the-money Class A Warrants is based upon an
estimated fair market value for the common stock on June 30, 1996 of
$4.125 per share, representing the mean between the last reported
closing bid and asked prices for the common stock as of such date, less
the warrant exercise price of $0.25 per share. At November 19, 1996,
the value of such unexercised in-the-money Class A Warrants would have
been $655,000, based upon an estimated fair market value for the common
stock on November 19, 1996 of $0.905 per share, representing the mean
between the last reported closing bid and asked prices for the common
stock as of such date, less the warrant exercise price of $0.25 per
share.
The Company does not have any compensation plans involving stock
appreciation rights or long-term incentive or deferred pension or
profit-sharing plans. There are no retirement, annuity, savings or
similar benefit plan which provide compensation to executive officers or
directors except for group health and life insurance plans for employees.
- 28 -
<PAGE>
1996 STOCK COMPENSATION PLAN
On September 20, 1996, the Company's Board of Directors adopted a 1996
Stock Compensation Plan (the "Stock Plan") subject to approval of the Stock
Plan within one year thereafter by stockholders of the Company. The purpose
of the Stock Plan is to permit the Board or a Committee of the Board the
flexibility of issuing shares of the Company's common stock in lieu of cash to
compensate officers, directors, employees and other individuals acting as
professionals, consultants and/or advisers to the Company for services
rendered to the Company or any subsidiaries. A "subsidiary" of the
Corporation for purposes of the Stock Plan is any corporation in which the
Company at the time of a compensation award owns or controls, directly or
indirectly, at least 50% or more of the outstanding voting capital stock.
Shares may be issued under the Stock Plan solely in payment for the
value of services actually rendered to the Company. In no event may shares be
issued as compensation under the Stock Plan: (i) for services which are either
directly or indirectly related to the offer or sale of securities in a
capital-raising transaction by the Company or its affiliates; or (ii) for the
sale of goods, merchandise, products or other tangible assets. Common stock
issued as compensation under the Stock Plan will be valued at their fair
market value on the date such shares are authorized to be issued to a plan
participant for designated services rendered in a specified dollar amount. In
determining the fair market value of any such payment, the Board or a
Committee of the Board will take into consideration the quoted prices in the
public market for common stock on the date shares are authorized for issuance
and, if deemed applicable by the Board or the Committee to its determination
of fair market value, a reasonable discount to quoted market prices not
exceeding 25% of the low bid price on the date of such authorization if such
discount is deemed appropriate to allow for price volatility and/or possible
lack of liquidity based on reported prices and trading volume in the public
market for the common stock when compared to the number of shares authorized
for issuance as compensation and any applicable forfeiture or restrictive
provisions relating to the award.
Shares of common stock authorized by the Stock Plan may be issued as
compensation only upon the execution of an agreement by the recipient to
accept the same in lieu of all or a designated portion of cash compensation
otherwise payable for his or her services. If the award of shares is subject
to contractual restrictions or performance conditions that may result in a
forfeiture, the recipient's interest in the shares may not be sold, assigned,
transferred, pledged or otherwise encumbered prior to the date on which any
applicable restriction or performance condition and period shall lapse without
the requirement of forfeiture.
The Stock Plan will be administered by the Board or by a Committee of
not less than two directors. No member of the Committee will be eligible to
participate in the Stock Plan while serving on the Committee. The Committee
has the authority to (i) select the participants to whom common stock
compensation may be granted; (ii) determine the number of shares and the fair
market value thereof for each payment of common stock compensation; (iii)
determine any other terms and conditions of common stock compensation
payments, including but not limited to any restrictions or forfeiture
conditions relating to the performance of services by the participant; (iv)
determine whether, to what extent and under what circumstances a common stock
payment of compensation under the Stock Plan may be deferred either
automatically or at the election of the participant under a written agreement;
and (v) approve any agreement executed by participants under the Stock Plan.
Subject to approval of the Stock Plan by the Company's stockholders, up
to 500,000 shares of common stock will be available for payment of
compensation under the Stock Plan. If any shares are issued under the Stock
Plan and subsequently cease to be outstanding as a result of any forfeiture or
failure to satisfy restrictive conditions, such shares will again be available
for compensation payments under the Stock Plan. No compensation awards under
the Stock Plan have been made as of October 31, 1996.
- 29 -
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information (except as otherwise
indicated by footnote) as of October 31, 1996 as to the Company's common stock
owned by (i) each person known by management to beneficially own more than 5%
of the Company's outstanding Common Stock, (ii) each of the Company's
directors, and (iii) all executive officers and directors as a group:
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------------------------
Shares Beneficially Owned,
Disregarding Irrevocable Proxies
Granted to the Company's
Chief Executive Officer (1) Voting Rights (2)
--------------------------------- -----------------------------
Name or Group (3) No. of Shares % of Class No. of Shares % of Class
- ------------------------------- -------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Directors:
Ronald H. Cole (4) .............. 1,000,000 14.9% 2,363,900 35.1%
David J. Lopes (5) .............. 500,000 8.0% 500,000 8.0%
Harry K. McCreery (6) ........... 62,000 1.1% -0- --
Daryl M. Silversparre (7) ....... 1,500,000 20.7% 1,500,000 20.7%
All officers and directors
as a group [4 persons] (8) ... 3,062,000 35.1% 4,363,900 49.9%
Other 5% Shareholders:
R. Eugene Rider and Eva
Forsberg-Rider, husband
and wife (9) ................. 1,301,900 22.7% -0- --
</TABLE>
<TABLE>
<S> <C>
- -------------------------------
(1) The amounts and percentages of shares beneficially owned are based on
5,729,837 shares of Common Stock outstanding at October 31, 1996, and
includes Common Stock beneficially owned plus, where applicable, common
stock issuable upon exercise of outstanding warrants held only by the
person or group indicated that are fully exercisable or exercisable
within 60 days after October 31, 1996. No person listed in the table
owns shares of Series A or Series B preferred stock. Shares
beneficially owned does not include shares any such person or group may
be entitled to vote by proxy which are not otherwise owned by such
person or group. See Notes 4, 6 and 9.
(2) The amounts and percentages of voting rights are based on 7,742,450
shares entitled to vote as of October 31, 1996 (representing all
outstanding shares of Common Stock and Series A preferred stock at one
vote per share) plus, where applicable, common stock issuable upon
exercise of outstanding warrants or conversion of Series B preferred
stock held only by the person or group indicated that are fully
exercisable or exercisable within 60 days after October 31, 1996. Does
not include shares, however, beneficially owned by a person or group
that such person or group are not entitled to vote as a result of
irrevocable proxies granted to others. See Notes 4, 6 and 9. Holders
of Series B preferred shares have no voting rights except as required by
law. No person listed in the table owns shares of Series A or Series B
preferred stock.
(3) To the best knowledge of the Company's management, the persons named in
the table have sole voting and investment power with respect to all
shares shown to be beneficially owned by them, subject to the
information contained in the footnotes to the table and, where
applicable, community property laws.
- 30 -
<PAGE>
(4) Includes (i) as to shares beneficially owned, Class A warrants covering
1,000,000 shares fully exercisable at $0.25 per share held directly by
Mr. Cole; and (ii) as to voting shares, all of the foregoing plus the
following shares that are subject to irrevocable proxies expiring on
September 7, 1997 granted to Mr. Cole: 1,051,900 shares beneficially
owned by R. Eugene Rider and Eva Forsberg-Rider, 250,000 shares owned by
Gregory Timm as trustee for the benefit of R. Eugene Rider and Eva
Forsberg-Rider and 62,000 shares owned by Harry K. McCreery. See Notes
6 and 9. The business address for Mr. Cole is 1120-B Elkton Drive,
Colorado Springs, Colorado 80907.
(5) Includes Class A warrants covering 500,000 shares fully exercisable at
$0.25 per share held directly by Mr. Lopes. The business address for
Mr. Lopes is 19421 Sierra Luna, Irvine, California 92715.
(6) Includes 62,000 shares of Common Stock owned directly by Mr. McCreery.
Such shares are excluded from voting rights insofar as all shares owned
by Mr. McCreery are subject until September 7, 1997 to an irrevocable
proxy granted by him to Ronald H. Cole. See Note 4. The business
address for Mr. McCreery is 11190 Sunrise Valley Drive, Reston, Virginia
22091.
(7) Includes 500,000 common shares issuable on exercise of Class A warrants
that are fully exercisable at $0.25 per share, and 1,000,000 common
shares issuable on exercise of Class B warrants that are fully
exercisable at $0.10 per share held directly by Mr. Silversparre. The
business address for Mr. Silversparre is 3649 El Caminito Street, La
Crescenta, California 91214.
(8) Includes shares and voting rights, as applicable, described in Notes 4
through 7 above.
(9) Includes (i) 1,051,900 shares directly owned by Mrs. and Mrs. Rider,
plus (ii) 250,000 shares held by Gregory Timm as trustee for the benefit
of Mr. and Mrs. Rider until such shares are to be released to Mr. and
Mrs. Rider on May 5, 1998. All shares shown in the table as directly or
indirectly beneficially owned by Mr. and Mrs. Rider are subject until
September 7, 1997 to irrevocable proxies granted by the registered
owners to Ronald H. Cole. See Note 4. The business address for Mr. and
Mrs. Rider is 1170 Becky Drive, Colorado Springs, Colorado 80921.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INTRODUCTION
The Company was originally organized and commenced operations in
September 1987 by purchasing certain assets of a predecessor disc
manufacturing business originally founded in 1981.
An initial public offering of 600,000 shares of the Company's Common
Stock was completed in December 1989 for net proceeds of $408,414. A reverse
stock split of 1-for-100 shares was effected as to the Common Stock in April
1991. The Company did not operate profitably and efforts to obtain additional
equity financing in 1990 and 1991 were unsuccessful.
1993 BANKRUPTCY PLAN
As a result of foreclosure actions by its secured bank lender, on
January 31, 1992 the Company voluntarily filed for creditor protection under
Chapter 11 of the United States Bankruptcy Act with the United States
Bankruptcy Court for the District of Colorado, Case No. 92-11150-DEC. The
- 31 -
<PAGE>
Company continued to operate as a debtor-in-possession during the pendency of
these proceedings. A Third Amended Plan of Reorganization (the "1993
Bankruptcy Plan") was confirmed by creditors with court approval on May 5,
1993. After providing for expenses of administration, the 1993 Bankruptcy
Plan generally provided for: (i) payment in full of unsecured creditors with
claims of $600 or less; (ii) the issuance to other unsecured creditors of
62,256 shares of the Company's Series A Redeemable Preferred Stock as
settlement for $622,560 of pre-petition debts, issued at the rate of one share
per $10.00 of allowed unsecured claims; and (iii) payment in full to secured
creditors renegotiated to provide for payment in installments over periods
ranging from five to seven years.
SEPTEMBER 1995 CHANGE IN CONTROL TRANSACTIONS
On September 7, 1995, the Company received an unsecured loan of $50,000
from Daryl M. Silversparre, concurrently elected a director, to support the
Company's immediate working capital requirements. This loan bears interest at
10.04% per annum. Interest only was payable monthly until December 7, 1995,
at which time principal and interest are payable in twelve equal monthly
installments of $2,308.17 each from December 7, 1995 through November 7, 1996.
In consideration of this loan, the Company issued Mr. Silversparre Class B
common stock purchase warrants covering 1,000,000 shares of the Company's
Common Stock at an exercise price of $0.10 per share.
Concurrent with the above loan, and as conditions to this financing, the
Company elected Ronald H. Cole as the Company's Chairman of the Board and new
Chief Executive Officer. The Board of Directors was expanded from three to
seven members, and Messrs. Ronald H. Cole, Mark R. Lane, David J. Lopes and
Daryl M. Silversparre were elected directors of the Company on September 5,
1995. Mr. Ronald H. Cole also received irrevocable proxies from R. Eugene
Rider, Eva Forsberg-Rider, Angenette Rider and Harry K. McCreery then covering
a total of 1,449,410 shares of the Company's Common Stock (approximately 51.5%
of the total outstanding shares of Common and Series A preferred stock then
entitled to vote) which granted Mr. Cole the right to vote such shares until
September 7, 1997 on all matters submitted to a vote or consent of
stockholders. The proxies provide that until September 7, 1997, these shares
will not be sold or transferred by the stockholders who granted the proxies
without the prior written consent of Mr. Cole, which consent may not be
unreasonably withheld if the transferee acknowledges the validity of the proxy
covering the shares. As a result of these transactions, there was a change in
control of the Company effective on September 7, 1995. (Since September 1995,
40,000 shares held by Angenette Rider and 295,000 shares held by Mr. & Mrs.
Rider have been released from the proxy restrictions, and similar proxy
restrictions have been imposed upon 250,000 shares issued on April 24, 1996 in
trust for Mr. & Mrs. Rider in connection a settlement discussed below. See
"Principal Shareholders".)
In consideration of the agreements of Messrs. Cole, Lane, Lopes and
Silversparre to be elected directors of the Company, and for their assistance
in seeking additional capital for the Company and participating in pending
negotiations to compromise and restructure the Company's secured debt
obligations, on September 7, 1995 the Company issued Class A common stock
purchase warrants covering a total of 3,000,000 shares of the Company's Common
Stock at an exercise price of $0.25 per share to these new directors or their
designees. See "Principal Shareholders" and "Description of Securities --
Common Stock Purchase Warrants".
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<PAGE>
DEBTS RENEGOTIATED, COMPROMISED OR SETTLED
At June 30, 1995, unpaid secured debts remaining from the 1993
Bankruptcy Plan included: (i) $417,431 to a commercial bank; (ii) $293,520
to the Small Business Administration, collateralized by equipment; and (iii)
$40,791 to a regional development corporation, collateralized by equipment.
During December 1995, the Company settled and compromised approximately
$417,497 in past-due obligations on the secured commercial bank debt for a
cash payment of $127,921 paid in January 1996.
In addition, the Company settled and compromised $220,534 of trade debt
with four creditors in exchange for cash payments of $54,500 and the issuance
of 270,000 shares of common stock, 351,950 Class C common stock purchase
warrants exercisable at $0.01 per share and 10,000 Class A common stock
purchase warrants exercisable at $0.25 per share. Subsequent to March 31,
1996, a total of 239,600 Class C common stock purchase warrants were exercised
by the holders of those warrants.
As a result of the above transactions, the Company's debt obligations
were reduced by approximately $613,000 during the quarter ended December 31,
1995. The Company recorded $67,500 for the value of 270,000 restricted shares
of common stock, or $0.25 per share, and $73,959 for the value of 351,950
Class C warrants, or $0.21 per warrant, as costs of issuing securities in
compromise of trade debt obligations. For the quarter ended December 31,
1995, the Company recognized a net non-recurring gain of approximately
$274,000 for debt forgiveness relating to the above debt compromise
transactions.
As of June 7, 1996, the Small Business Administration agreed to modify
the Company's $313,000 in past due obligations under its secured loan to defer
until a final maturity date of July 7, 2006 all past due installments of
principal and interest and future interest. Payment of principal only will be
required at the rate of $1,600 per month for three years, thereafter at $2,000
per month for three years, thereafter at $2,500 per month for two years, and
thereafter at $2,700 per month for two years until final maturity of all
unpaid principal and accrued interest on July 7, 2006. An additional monthly
payment of $200 per month is also required for 100 months commencing July 7,
1996.
CONVERSION OF SERIES A REDEEMABLE PREFERRED SHARES INTO COMMON STOCK
There were 62,256 shares of Series A Redeemable Preferred Stock ("Series
A preferred") outstanding at the beginning of the last fiscal year on July 1,
1995. During the quarter ended December 31, 1995, the Company offered to
exchange ten shares of Common Stock for each outstanding share of Series A
Preferred. The primary purpose of the exchange offer was to recapitalize the
Company's balance sheet by substituting Common Stock for redeemable Series A
Preferred shares and to relieve the Company of certain constraints requiring
redemption of Series A preferred should the Company become profitable in the
future. During the quarter ended December 31, 1995, the holders of 49,643
shares of Series A Preferred elected to accept the Company's exchange offer
and converted the same into 496,430 shares of the Company's common stock, thus
leaving a balance of 12,613 Series A preferred shares outstanding at December
31, 1995. Since more than 50% of the outstanding Series A preferred was
retired as a result of these conversions, the conversion ratio for Series A
preferred shares has reduced under the terms of the 1993 Bankruptcy Plan to
five shares of Common Stock for each share of Series A preferred outstanding
after completion of the exchange offer.
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<PAGE>
Terms of the Series A Preferred not redeemed from net income of the
Company provide that Series A preferred shares may be converted after June 30,
1998 into Common Stock. Conversion rights after June 30, 1998 are subject to
the condition that all (but not less than all) of the Series A preferred then
outstanding elect to convert into Common Stock. The Company, at its option,
may waive the condition that all holders elect to convert into Common Stock if
any of them desire to do so after June 30, 1998, but the Company is not
required to waive that condition. Management's current policy is to permit
the conversion of any Series A Preferred shares even prior to June 30, 1998 at
the conversion rate of five shares of Common Stock for each share of Series A
preferred, the exchange rate provided by the 1993 Bankruptcy Plan.
At June 30, 1996, there were still 12,613 shares of Series A preferred
outstanding. All of these Series A preferred shares were issued as of May 5,
1993 in exchange for unsecured debt of the Company at a rate of one share of
Series A Preferred for $10 of allowed pre-petition unsecured creditor claims.
The Company has a mandatory obligation in each of the fiscal years from 1994
through June 30, 1998 to redeem Series A preferred from 50% of the Company's
net income after taxes and debt service at a redemption price of $11.00 per
share and without any interest or dividends. Since the Company incurred net
losses from operations in the fiscal years ended June 30, 1994, 1995 and 1996,
no mandatory redemption payments on Series A Preferred have been paid. The
liquidation preference for Series A Preferred shares is $11.00 per share.
SALE OF 52,000 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK
FOR $254,554 NET PROCEEDS
From January through May 1996 the Company completed a private placement
offering of 52,000 shares of a new series of Series B convertible preferred
stock ("Series B preferred") at $5.00 per share. A portion of proceeds from
the sale of Series B preferred was applied to payment and compromise of debt
settlements discussed above and the balance was applied for working capital
purposes to sustain the Company's operations in the first six months of
calendar 1996.
Series B Preferred shares are entitled to a 10% annual cumulative
dividend payable in cash or in Common Stock, are convertible into Common Stock
at $0.50 per share (ten shares of Common Stock for each share of Series B
preferred) and are entitled to a preference in liquidation of $5.00 per share
plus accrued and unpaid dividends. Accrued and unpaid dividends are waived in
the event of conversion into Common Stock. As of June 30, 1996, a total of
32,000 shares of Series B preferred had been converted into 320,000 shares of
Common Stock. Preferred dividends in arrears totaled $4,334 for the Series B
preferred stock at June 30, 1996, of which $3,020 have been waived by
subsequent conversion of an additional 14,000 shares of Series B preferred
into 140,000 shares of Common Stock.
SETTLEMENT WITH FORMER EXECUTIVE OFFICERS; CHANGES IN EXECUTIVE
OFFICERS AND DIRECTORS
The Company was a party to an employment agreement with R. Eugene Rider,
its former President, for a term expiring on June 30, 1999. Under a
Settlement Agreement and General Release dated and consummated as of April 24,
1996 (the "Settlement Agreement"), the Company negotiated a settlement of all
employment and other claims of Mr. Rider and his spouse, Eva Forsberg-Rider,
the Company's former Secretary-Treasurer. The Settlement Agreement required,
among other things, issuance of 250,000 shares of the Company's Common Stock
on April 24, 1996 to a trust for the benefit of Mr. and Mrs. Rider, payment of
$60,000 at the rate of $1,000 per month (the unpaid portion of which may be
paid in Common Stock at the Company's option in the event of a subsequent
merger of the Company with another entity), 5% of any proceeds realized by the
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<PAGE>
Company from any future equity financing, recapitalization, sale of equipment,
merger or acquisition transaction up to a maximum payment to Mr. Rider of
$200,000, and payment in installments of $6,400 in wages and $20,000 for
repayment of an unsecured note obligation.
Under the Settlement Agreement, Mr. Rider and Mrs. Rider resigned as
officers and directors of the Company effective as of February 12, 1996
pursuant to their retirement. The expense of the Settlement Agreement,
including all of the maximum $200,000 represented by 5% contingent payment
obligations (of which $34,488 was paid in July 1996), has been accrued in the
Company's financial statements for the fiscal year ended June 30, 1996. The
Company has agreed to register the 250,000 shares issued under the Settlement
Agreement on Form S-8 under the Securities Act of 1933 not later than June 5,
1998, and the trustee for the 250,000 shares has granted an irrevocable proxy
to Ronald H. Cole to vote such shares until September 7, 1997. The
Settlement Agreement includes a mutual exchange of releases among the parties
as to all claims except for obligations to be performed under the Settlement
Agreement. The Company paid Mr. Rider $34,487.50 as a portion of the 5%
contingent payment obligations based on the Company's sale of Common Stock in
June and July 1996 for gross proceeds of $689,750 described below.
Effective February 13, 1996, Ronald H. Cole was elected President,
Treasurer and Chief Financial Officer of the Company in addition to his then
existing position and duties as the Company's Chairman of the Board and Chief
Executive Officer. Daryl M. Silversparre, a director, was elected corporate
Secretary effective February 13, 1996 to fill the vacancy created by Mrs.
Forsberg-Rider's resignation. Mr. Mark Lane resigned as a director of the
Company effective as of April 18, 1996. As a result of the above changes,
the Company currently operates with a board of four directors as described in
Item 9 of this Report.
SALE OF COMMON STOCK FOR $609,750 ($570,945 NET PROCEEDS
RECEIVED IN FISCAL 1996)
During June and July 1996, the Company issued and sold 919,666 shares of
its Common Stock in a private placement for $689,750 in cash ($0.75 per share)
to 19 investors, of which 873,000 shares were sold in the fiscal year ended
June 30, 1996 for net proceeds of $570,945. The purpose of the financing was
to obtain additional working capital required to sustain the Company's
operations, reduce past due debt obligations and to finance certain expenses
incurred in connection with a proposed merger and private placement offering
required to finance the merger. See "Abandonment of Proposed Merger with
KSI;3SI" below. Investors in this offering were granted certain rights for
the registration of their shares under the Securities Act of 1933, including
"piggy-back" rights to participate in one registration if the Company files a
registration statement after September 30, 1996, and a mandatory registration
right exercisable in June 1997 if the investors have not been offered piggy-
back rights to participate in a registration statement prior to May 31, 1997.
ISSUANCE OF COMMON STOCK AND CLASS D WARRANTS FOR CONSULTING SERVICES
In June and July 1996, the Company authorized the issuance of 42,500
shares of Common Stock in partial payment of consulting services rendered by
independent third parties. These included 22,500 shares for services relating
to Internet and electronic software delivery consulting services and 20,000
shares for financial consulting services relating to the Company's capital-
raising activities. The Company also issued 10,000 Class D Warrants
exercisable until December 31, 2001 at $0.25 per share for consulting services
relating to the Company's capital-raising activities.
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<PAGE>
ABANDONMENT OF PROPOSED MERGER WITH KSI;3SI
On May 15, 1996, the Company announced it had entered into an Agreement
and Plan of Reorganization (the "Reorganization Agreement") with Kimbrough
Computer Sales Inc. 3SI, Inc. ("KSI;3SI"), three stockholders and executive
officers of KSI;3SI and Ronald H. Cole, the Company's Chief Executive Officer.
On September 16, 1996, the Company announced that the Reorganization
Agreement expired on September 15, 1996 without a closing of the proposed
merger between KSI;3SI and the Company.
The Reorganization Agreement, as amended on August 2, 1996, contemplated
a proposed merger of KSI;3SI with a subsidiary of the Company such that
KSI;3SI would become a wholly-owned subsidiary of the Company. The
consideration to be received by KSI;3SI Shareholders upon completion of the
merger and closing of the Reorganization Agreement was required to include
$1,200,000 in cash to be paid by the Company and 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 would also have been obligated at closing to pay approximately
$1,014,000 of 3SI indebtedness incurred by the KSI;3SI shareholders incurred
in connection with financing their August 1993 acquisition of KSI;3SI. At
closing, current management would have resigned and Mr. Cole and the Company
had 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 held by certain members of the Company's Board and their affiliates
to be cancelled.
Closing of the Reorganization Agreement was subject to completion or
waiver of various conditions precedent including, among others, additional
common stock equity financing in an amount of approximately $4.4 million,
satisfactory completion of due diligence investigations and completion of
KSI;3SI audited financial statements. On September 16, 1996, the Company
determined that these conditions had not all been met and negotiations with
prospective investors to obtain $4.4 million in additional equity financing
had not been successful. Discussions with KSI;3SI led the Company's
management to conclude that KSI;3SI and the Company could not agree to terms
that would have permitted the proposed merger to be restructured or for the
Reorganization Agreement to be extended on mutually acceptable terms. With
the expiration of the Reorganization Agreement, the Company was required to
surrender its interest in KSI;3SI's Diamond Shield system developed for
Internet security solutions so that KSI;3SI may continue to pursue development
of that project with financing from other sources. As a result of abandoning
the proposed merger with KSI;3SI, the Company estimates that approximately
$40,000 of costs incurred in connection with the proposed merger and related
financing efforts will be written off in the first quarter of Fiscal 1997.
EXCHANGE OF 1,000,000 CLASS A WARRANTS FOR 250,000 SHARES OF COMMON STOCK
On September 27, 1996, the Company received the tender of an offer by
RCML Partners (the "Exchange Agreement") as the registered holder of 1,000,000
Class A common stock purchase warrants, to tender all such 1,000,000 Class A
Warrants in payment and exchange for the exercise price payable for the
issuance of 250,000 shares of the Company's common stock pursuant to the Class
A warrants. Ronald H. Cole, President and a director of the Company, is one
of the general partners of RCML Partners. The Exchange Agreement provided for
the 250,000 shares of common stock to be issued to one individual investor
residing in England, as the beneficiary of the Class A common stock purchase
warrants registered in the name of RCML Partners. The Exchange Agreement was
accepted by the Company on September 28, 1996, at which date 250,000 shares of
Common Stock were issued in exchange for surrender and cancellation of the
1,000,000 Class A warrants.
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<PAGE>
The exercise price for the Class A warrants was $0.25 per share and the
closing price for the Company's Common Stock in the over-the-counter market on
the date of the Exchange Agreement of September 27, 1996 was $1.625 per share.
The tendering Class A warrant holder agreed in the Exchange Agreement to
discount the value of the 1,000,000 Class A Warrants in making the exchange
offer to reflect a lack of liquidity for the Class A Warrants and the
underlying shares of Common Stock as a result of the size of the block and
restrictions as to resale under applicable securities laws. Before taking
into account discounts in value attributable to limitations on the liquidity
of the Class A warrants and shares of the underlying Common Stock due to
applicable securities law restrictions and a limited public market for the
Common Stock, the 1,000,000 Class A warrants tendered as payment would have
had a value as of September 27, 1996 of $1,375,000 (based upon the difference
between the quoted market value of $1.625 per share of Common Stock underlying
the Class A warrants less the exercise price of $0.25 per warrant) and the
market value of 250,000 shares of Common Stock issued in exchange was
$406,250. As such, the Company's Board of Directors determined that the
cancellation of 1,000,000 Class A Warrants represented fair and adequate
consideration for the 250,000 shares of Common Stock issued under the Exchange
Agreement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed with this Report or are
incorporated by reference herein:
# Indicates exhibits filed with this Report; all other exhibits are
incorporated by reference to prior filings.
(M) Denotes management contract or compensation plan or arrangement.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -------------------------------------------------------
<S> <C> <C>
# 3.1 Amended and Fully Restated Articles of Incorporation of the
Registrant, as filed with the Secretary of State of Colorado on June
23, 1989.
# 3.2 Articles of Amendment to Registrant's Articles of Incorporation, as
filed with the Secretary of State of Colorado on April 22, 1991.
# 3.3 Certificate of Designation as to Registrant's Redeemable Series A
Convertible Preferred Stock filed with the Secretary of State of
Nevada on June 29, 1993.
# 3.4 Certificate of Designation as to Registrant's 10% Series B Convertible
Preferred Stock filed with the Secretary of State of Nevada on July 3,
1996.
# 3.5.1 By-Laws of the Registrant.
# 3.5.2 Amendment to Section 3.3 of the Registrant's By-Laws adopted on
September 5, 1990.
10.1 Employment Agreement dated July 1, 1989 between the Registrant and R.
Eugene Rider, as amended by resolutions adopted on May 23, 1994 by the
Registrant's Board of Directors, incorporated by reference to Exhibit
10.1 filed with Registrant's Annual Report on From 10-KSB for the
fiscal year ended June 30, 1995.
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<PAGE>
10.2.1 Office Warehouse Lease dated June 23, 1989 between Paragon Phase II,
Inc., as landlord, and the Registrant, as tenant, for premises at
Elton Drive, Colorado Springs, Colorado, incorporated by reference to
Exhibit 10.2.1 filed with Registrant's Annual Report on From 10-KSB
for the fiscal year ended June 30, 1995.
10.2.2 Lease Amendment dated May 16, 1994 to Office Warehouse Lease between
Elkton-Park L.L.C., successor to Paragon Phase II, Inc., as landlord,
and the Registrant, as tenant, for premises at Elton Drive, Colorado
Springs, Colorado, incorporated by reference to Exhibit 10.2.1 filed
with Registrant's Annual Report on From 10-KSB for the fiscal year
ended June 30, 1995.
10.3.1 Notice of Third Amended Plan of Reorganization of the Registrant dated
March 29, 1993 pursuant to U.S. Bankruptcy Court Proceedings, Case No.
92-11150-DEC, incorporated by reference to Exhibit 10.3.1 filed with
Registrant's Annual Report on From 10-KSB for the fiscal year ended
June 30, 1995.
10.3.2 Second Amended Disclosure Statement for Second Amended Plan of
Reorganization of the Registrant dated October 8, 1992 pursuant to
U.S. Bankruptcy Court Proceedings, Case No. 92-11150-DEC, incorporated
by reference to Exhibit 10.3.2 filed with Registrant's Annual Report
on From 10-KSB for the fiscal year ended June 30, 1995.
10.4.1 Irrevocable Proxy dated as of September 7, 1995, by R. Eugene Rider
and Eva Forsberg-Rider in favor of Ronald H. Cole as to 1,347,410
shares of Registrant's common stock, incorporated by reference to
Exhibit 10.4.1 filed with Registrant's Annual Report on From 10-KSB
for the fiscal year ended June 30, 1995.
10.4.2 Irrevocable Proxy dated as of September 7, 1995, by Harry K. McCreery
in favor of Ronald H. Cole as to 62,000 shares of Registrant's common
stock, incorporated by reference to Exhibit 10.4.3 filed with
Registrant's Annual Report on From 10-KSB for the fiscal year ended
June 30, 1995.
# 10.4.3 Release dated November 8, 1995 of Irrevocable Proxy as to 45,000
shares held by R. Eugene Rider and Eva Forsberg-Rider executed by
Ronald H. Cole.
# 10.4.4 Release dated April 24, 1996 of Irrevocable Proxy as to 40,000 shares
held by Angenette N. Rider executed by Ronald H. Cole.
# 10.4.5 Release dated April 24, 1996 of Irrevocable Proxy as to 250,000 shares
held by R. Eugene Rider and Eva Forsberg-Rider executed by Ronald H.
Cole.
# 10.4.6 Irrevocable Proxy dated as of April 24, 1996, by Gregory Timm, Trustee
for the benefit of R. Eugene Rider and Eva Forsberg-Rider in favor of
Ronald H. Cole as to 250,000 shares of Registrant's common stock.
(M) 10.5.1 Class A Common Stock Purchase Warrant covering 500,000 shares of
common stock at an exercise price of $0.25 per share expiring on
September 7, 2000 granted by Registrant to Daryl M.Silversparre,
incorporated by reference to Exhibit 10.5.1 filed with Registrant's
Annual Report on From 10-KSB for the fiscal year ended June 30, 1995.
(M) 10.5.2 Class A Common Stock Purchase Warrant covering 1,000,000 shares of
common stock at an exercise price of $0.25 per share expiring on
September 7, 2000 granted by Registrant to Ronald H. Cole,
incorporated by reference to Exhibit 10.5.2 filed with Registrant's
Annual Report on From 10-KSB for the fiscal year ended June 30, 1995.
(M) 10.5.3 Class A Common Stock Purchase Warrant covering 1,000,000 shares of
common stock at an exercise price of $0.25 per share expiring on
September 7, 2000 granted by Registrant to RCML Partners, incorporated
by reference to Exhibit 10.5.3 filed with Registrant's Annual Report
on From 10-KSB for the fiscal year ended June 30, 1995.
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<PAGE>
(M) 10.5.4 Class A Common Stock Purchase Warrant covering 500,000 shares of
common stock at an exercise price of $0.25 per share expiring on
September 7, 2000 granted by Registrant to David J. Lopes,
incorporated by reference to Exhibit 10.5.4 filed with Registrant's
Annual Report on From 10-KSB for the fiscal year ended June 30, 1995.
(M) 10.6 Class B Common Stock Purchase Warrant covering 1,000,000 shares of
common stock at an exercise price of $0.10 per share expiring on
September 7, 2000 granted by Registrant to Daryl M. Silversparre,
incorporated by reference to Exhibit 10.6 filed with Registrant's
Annual Report on From 10-KSB for the fiscal year ended June 30, 1995.
10.7 10.04% Promissory Note for $50,000 due in installments to December 7,
1996 issued by Registrant to Daryl M. Silversparre, incorporated by
reference to Exhibit 10.7 filed with Registrant's Annual Report on
From 10-KSB for the fiscal year ended June 30, 1995.
10.8.1 Settlement Agreement dated October 23, 1995 between the Registrant and
El Mar Plastics, Inc., incorporated by reference to Exhibit 10.8.1
filed with Registrant's Quarterly Report on From 10-QSB for the period
ended December 31, 1995.
10.8.2 Class C Common Stock Purchase Warrants covering 112,350 shares of
common stock at an exercise price of $0.01 per share expiring on
December 15, 2000 granted by Registrant to El Mar Plastics, Inc.,
incorporated by reference to Exhibit 10.8.2 filed with Registrant's
Quarterly Report on From 10-QSB for the period ended December 31,
1995.
10.9.1 Settlement Agreement dated October 23, 1995 between the Registrant and
Creative Data Products, Inc., incorporated by reference to Exhibit
10.9.1 filed with Registrant's Quarterly Report on From 10-QSB for the
period ended December 31, 1995.
10.9.2 Class C Common Stock Purchase Warrants covering 180,000 shares of
common stock at an exercise price of $0.01 per share expiring on
December 15, 2000 granted by Registrant to Creative Data Products,
Inc., incorporated by reference to Exhibit 10.9.2 filed with
Registrant's Quarterly Report on From 10-QSB for the period ended
December 31, 1995.
10.10 Settlement Agreement dated October 12, 1995 between the Registrant and
SV International, Inc., incorporated by reference to Exhibit 10.10
filed with Registrant's Quarterly Report on From 10-QSB for the period
ended December 31, 1995.
10.11.1 Settlement Agreement dated December 15, 1995 between the Registrant
and Robert J. Punko Marketing, Inc., incorporated by reference to
Exhibit 10.11.1 filed with Registrant's Quarterly Report on From 10-
QSB for the period ended December 31, 1995.
10.11.2 Class C Common Stock Purchase Warrants covering 59,600 shares of
common stock at an exercise price of $0.01 per share expiring on
January 15, 2001 granted by Registrant to Robert J. Punko Marketing,
Inc., incorporated by reference to Exhibit 10.11.2 filed with
Registrant's Quarterly Report on From 10-QSB for the period ended
December 31, 1995.
10.12 Form of Subscription Agreement for the private placement of
Registrant's 10% Series B convertible preferred stock, incorporated by
reference to Exhibit 10.12 filed with Registrant's Quarterly Report on
From 10-QSB for the period ended December 31, 1995.
10.13.1 Settlement Agreement and General Release dated as of April 24, 1996
among the Registrant, Ronald H. Cole, R. Eugene Rider and Eva
Forsberg-Rider, incorporated by reference to Exhibit 10.13 filed with
Registrant's Quarterly Report on From 10-QSB for the period ended
March 31, 1996.
# 10.13.2 Settlement Trust Agreement dated April 24, 1996 among the Registrant,
Ronald H. Cole and Gregory Timm as trustee for the benefit of R.
Eugene Rider and Eva Forsberg-Rider.
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<PAGE>
# 10.14 Modification of Promissory Note between the Registrant and Small
Business Administration dated June 7, 1996.
# 10.15.1 Form of Subscription Agreement for the private placement of
Registrant's common stock in June 1996.
# 10.15.2 Amendment to Subscription Agreement for the private placement of
Registrant's common stock in June 1996.
# 10.15.3 Registration Rights Agreement between Registrant and investors
purchasing common stock sold in June 1996.
# 10.16 Class D Common Stock Purchase Warrants covering 10,000 shares of
common stock at an exercise price of $0.25 per share expiring on
December 31, 2001 granted by Registrant to International Capital.
# 10.17 Consulting Agreement dated June 25, 1996, among the Registrant,
Transpac Holdings, Inc. and Precise Precision Products.
# 10.18 Sale of Services Agreement dated July 19, 1996 between the Registrant
and Horizon Interactive, Inc.
# 10.19 Registrant's 1996 Stock Compensation Plan.
# 10.20 Agreement to Tender 1,000,000 Class A Common Stock Purchase Warrants
in exchange for 250,000 shares of Common Stock dated September 27,
1996 between the Registrant and RCML Partners.
# 27 Financial Data Schedule at June 30, 1996.
</TABLE>
(b) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K dated as of May 15, 1996,
amended as of August 16, 1996 and as of September 17, 1996, concerning 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, relating to a proposed merger of 3SI and the Company.
On September 16, 1996, the Company announced that the Reorganization Agreement
expired on September 15, 1996 without a closing of the proposed merger.
Reference is made to the caption "Abandonment of Proposed Merger with KSI;3SI"
in Item 12 of this Report.
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<PAGE>
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.
Dated: December 10, 1996
-----------------
BROWN DISC PRODUCTS COMPANY, INC.
(Registrant)
By: /s/ Ronald H. Cole
---------------------------------
Ronald H. Cole, President and Treasurer
(principal executive officer; principal financial officer;
principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- ------------------------- --------- ----------------
<S> <C> <C>
/s/ Ronald H. Cole Director December 10, 1996
- -------------------------
Ronald H. Cole
/s/ David J. Lopes Director December 10, 1996
- -------------------------
David J. Lopes
Director
- -------------------------
Harry K. McCreery
/s/ Daryl M. Silversparre Director December 10, 1996
- -------------------------
Daryl M. Silversparre
- 41 -
</TABLE>
<PAGE>
FILED
JUN 23 1989
STATE OF COLORADO AMENDED AND RESTATED
DEPARTMENT OF STATE DP871752660
AMENDED AND FULLY RESTATED
ARTICLES OF INCORPORATION
OF
BROWN DISC PRODUCTS COMPANY, INC.
Pursuant to the provisions of the Colorado Corporation Code, the
undersigned Corporation hereby adopts the following Amended and Fully Restated
Articles of Incorporation.
FIRST: The name of the Corporation is Brown Disc Products Company,
Inc.
SECOND: The following amendment was adopted by vote of the
shareholders of the Corporation in the manner prescribed by the Colorado
Corporation Code on June 15, 1989. The number of shares voted for the
amendment was sufficient for approval.
The Articles of Incorporation of the Corporation shall be amended in
their entirety and restated. These Amended and Fully Restated Articles of
Incorporation shall supersede the original Articles of Incorporation and shall
be as set forth below:
- 1 -
<PAGE>
ARTICLES OF INCORPORATION
OF
BROWN DISC PRODUCTS COMPANY, INC.
ARTICLE I
NAME
The name of the corporation shall be: BROWN DISC PRODUCTS COMPANY, INC.
ARTICLE II
PERIOD OF DURATION
The corporation shall exist in perpetuity, from and after the date of
filing these Articles of Incorporation with the Secretary of State of the
State of Colorado unless dissolved according to law.
ARTICLE III
PURPOSES AND POWERS
1. PURPOSES. Except as restricted by these Articles of
Incorporation, the corporation is organized for the purpose of transacting all
lawful business for which corporations may be incorporated pursuant to the
Colorado Corporation Code.
2. GENERAL POWERS. Except as restricted by these Articles of
Incorporation, the corporation shall have and may exercise all powers and
rights which a corporation may exercise legally pursuant to the Colorado
Corporation Code.
- 2 -
<PAGE>
ARTICLE IV
CAPITAL STOCK
1. CAPITAL STOCK. The aggregate number of shares which this
corporation shall have authority to issue is Five Hundred Million
(500,000,000) shares of a no par value which shares shall be designated
"Common Stock" and Fifty Million (50,000,000) shares of a no par value which
shares shall be designated "Preferred Stock". Both the Common Stock and the
Preferred Stock may be subdivided and issued in series pursuant to resolutions
of the board of directors containing such designations, limitations, rights
and preferences which the board of directors, in its sole discretion, may
determine to be appropriate.
2. DIVIDENDS. Dividends in cash, property or shares of the
corporation may be paid upon the Common Stock as and when declared by the
board of directors in conformance with the resolutions of the board of
directors authorizing the issuance of the stock, to the extent and in the
manner permitted by law, provided, however, no Common Stock dividend shall be
paid for any year unless the holders of Preferred Stock, if any, shall have
received any Preferred Stock preferential dividends, if any, to which they are
entitled for such year.
3. DISTRIBUTION IN LIQUIDATION. Upon any liquidation, dissolution
or winding up of the corporation,
- 3 -
<PAGE>
and after paying or adequately providing for the payment of all its
obligations, the reminder of the assets of the corporation shall be
distributed, either in cash or in kind, in the order provided herein. Such
distributions shall be made first, to the holders of the Preferred Stock until
any amounts required to be distributed as a liquidation preference to the
holders of the Preferred Stock have been distributed. If the remainder of the
assets is insufficient to fully satisfy the liquidation preference(s) of the
Preferred Stock, then those assets shall be distributed pro rata to each
series of Preferred Stock beginning with the series having the most superior
liquidation preference and continuing according to the liquidation preference
priority of each series until the remaining assets have been fully
distributed. Second, the assets remaining after satisfaction of the
liquidation preference(s) of the Preferred Stock shall be distributed pro rata
to the holders of the Common Stock, unless otherwise provided in the
resolutions of the board of directors authorizing the issuance of the Common
Stock in series, in which case the priority for distribution in liquidation
established in those resolutions shall be followed.
4. VOTING RIGHTS; CUMULATIVE VOTING. Each outstanding share of
Common Stock shall be entitled to one
- 4 -
<PAGE>
vote and each fractional share of Common Stock shall be entitled to a
corresponding fractional vote on each matter submitted to a vote of
shareholders. A majority of the shares entitled to vote, represented in
person or by proxy, shall constitute a quorum at a meeting of shareholders.
Cumulative voting shall not be allowed in the election of directors of the
corporation. When, with respect to any action to be taken by shareholders of
this corporation, the laws of Colorado require the vote or concurrence of the
holders of two-thirds of the outstanding shares, of the shares entitled to
vote thereon, or of any class or series, such action may be taken by the vote
or concurrence of a majority of such shares or class or series thereof.
Except as otherwise provided by these Articles of Incorporation or the
Colorado Corporation Code, if a quorum is present, the affirmative vote of a
majority of the shares represented at the meeting and entitled to vote on the
subject matter shall be the act of the shareholders.
5. DENIAL OF PREEMPTIVE RIGHTS. No holder of any shares of the
corporation, whether now or hereafter authorized, shall have any preemptive or
preferential right to acquire any shares or securities of the corporation,
including shares or securities held in the treasury of the corporation.
- 5 -
<PAGE>
6. TRANSFER RESTRICTIONS. The corporation shall have the right to
impose restrictions upon the transfer of any of its authorized shares or any
interest therein. The board of directors is hereby authorized on behalf of
the corporation to exercise the corporation's right to so impose such
restrictions.
ARTICLE V
TRANSACTIONS WITH INTERESTED DIRECTORS
No contract or other transaction between the corporation and one or more
of its directors or any other corporation, partnership, firm, association, or
entity in which one or more of its directors or any other corporation,
partnership, firm, association, or entity in which one or more of its
directors are directors or officers or are financially interested shall be
either void or voidable solely because of such relationship or interest or
solely because such directors are present at or participate in the meeting of
the board of directors or a committee thereof which authorizes, approves, or
ratifies such contract or transaction or solely because their votes are
counted for such purpose if:
(a) The material facts of such relationship or interest and as
to the contract or transaction are disclosed or are known to the board
of directors or committee which in good faith authorizes, approves, or
ratifies the contract or transaction by an affirmative vote of a
majority of the disinterested directors even
- 6 -
<PAGE>
though the disinterested directors are less than a quorum, or consent
sufficient for the purpose; or
(b) The material facts of such relationship or interest and as
to the contract or transaction are disclosed or are known to the
shareholders entitled to vote and the shareholders specifically
authorize, approve, or ratify in good faith such contract or transaction
by an affirmative vote or by written consent; or
(c) The contract or transaction was fair and reasonable to the
corporation.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or a committee
thereof which authorizes, approves, or ratifies such contract or transaction.
ARTICLE VI
CORPORATE OPPORTUNITY
The officers, directors and other members of management of this
corporation shall be subject to the doctrine of "corporate opportunities" only
insofar as it applies to business opportunities in which this corporation has
expressed an interest as determined from time to time by this corporation's
board of directors as evidenced by resolutions appearing in the corporation's
minutes. Once such areas of interest are delineated, all such business
- 7 -
<PAGE>
opportunities within such areas of interest which come to the attention of the
officers, directors, and other members of management of this corporation shall
be disclosed promptly to this corporation and made available to it. The board
of directors may reject any business opportunity presented to it and
thereafter any officer, director or other member of management may avail
himself of such opportunity. Until such time as this corporation, through its
board of directors, has designated an area of interest, the officers,
directors and other members of management of this corporation shall be free to
engage in such areas of interest on their own and this doctrine shall not
limit the rights of any officer, director or other member of management of
this corporation to continue a business existing prior to the time that such
area of interest is designated by the corporation. This provision shall not
be construed to release any employee of this corporation (other than an
officer, director or member of management) from any duties which he may have
to this corporation.
ARTICLE VII
INDEMNIFICATION AND LIMITATION OF LIABILITY
1. DEFINITIONS. The following definitions shall apply to the terms
as used in this Article:
A. "Corporation" includes this corporation, and, in addition,
for purposes of this Article, references to
- 8 -
<PAGE>
"the corporation" shall also include any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this Article with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if
its separate existence had continued.
B. "Director" means an individual who is or was a director of
the corporation and an individual who, while a director of the corporation, is
or was serving at the corporation's request as a director, officer, partner,
trustee, employee, or agent of any other foreign or domestic corporation or of
any partnership, joint venture, trust, other enterprise, or employee benefit
plan. A director shall be considered to be serving an employee benefit plan
at the corporation's request if his or her duties to the corporation also
impose duties on or
- 9 -
<PAGE>
otherwise involve services by him or her to the plan or to participants in or
beneficiaries of the plan. "Director" includes, unless the context otherwise
requires, the estate or personal representative of a director.
C. "Expenses" includes attorney fees.
D. "Liability" means the obligation to pay a judgment,
settlement, penalty, fine (including an excise tax assessed with respect to an
employee benefit plan), or reasonable expense incurred with respect to a
proceeding.
E. "Official capacity", when used with respect to a director,
means the office of director in the corporation, and, when used with respect
to a person other than a director, means the office in the corporation held by
the officer or the employment or agency relationship undertaken by the
employee or agent on behalf of the corporation. "Official capacity" does not
include service for any other foreign or domestic corporation or for any
partnership, joint venture, trust, other enterprise, or employee benefit plan.
F. "Party" includes an individual who was, is, or is threatened
to be made a named defendant or respondent in a proceeding.
G. "Proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil,
- 10 -
<PAGE>
criminal, administrative, or investigative and whether formal or informal.
2. PERMISSIVE INDEMNIFICATION FOR LIABILITY.
A. Except as provided in paragraph D of this Section 2, the
corporation may indemnify against liability incurred in any proceeding an
individual made a party to the proceeding because he or she is or was a
director if:
i. He or she conducted himself or herself in good faith;
ii. He or she reasonably believed:
a. In the case of conduct in his or her official
capacity with the corporation, that his or her
conduct was in the corporation's best interests;
or
b. In all other cases, that his or her conduct was
at least not opposed to the corporation's best
interests; and
iii. In the case of any criminal proceeding, he or she had
no reasonable cause to believe his or her conduct was
unlawful.
B. A director's conduct with respect to an employee benefit
plan for a purpose he or she reasonably believed to be in the interests of the
participants in or
- 11 -
<PAGE>
beneficiaries of the plan is conduct that satisfies the requirements of this
Section 2. A director's conduct with respect to an employee benefit plan for
a purpose that he or she did not reasonably believe to be in the interests of
the participants in or beneficiaries of the plan shall be deemed not to
satisfy the requirements of this Section 2.
C. The termination of any proceeding by judgment, order,
settlement, or conviction, or upon a plea of nolo contendere or its
equivalent, is not of itself determinative that the individual did not meet
the standard of conduct set forth in paragraph A of this Section 2.
D. The corporation may not indemnify a director under this
Section 2 either:
i. In connection with a proceeding by or in the right of
the corporation in which the director was adjudged
liable to the corporation; or
ii. In connection with any proceeding charging improper
personal benefit to the director, whether or not
involving action in his or her official capacity, in
which he or she was adjudged liable on the basis that
personal benefit was improperly received by him or
her.
- 12 -
<PAGE>
E. Indemnification permitted under this Section 2 in connection
with a proceeding by or in the right of the corporation is limited to
reasonable expenses incurred in connection with the proceeding.
3. MANDATORY INDEMNIFICATION.
A. Except as limited by these Articles of Incorporation, the
corporation shall be required to indemnify a director of the corporation who
was wholly successful, on the merits or otherwise, in defense of any
proceeding to which he or she was a party against reasonable expenses incurred
by him or her in connection with the proceeding.
B. Except as otherwise limited by these Articles of
Incorporation, a director who is or was a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction. On receipt of an application, the court, after giving
any notice the court considers necessary, may order indemnification in the
following manner:
i. If it determines the director is entitled to mandatory
indemnification under paragraph A of this Section 3,
the court shall order indemnification, in which case
the court shall also order the corporation to pay the
director's
- 13 -
<PAGE>
reasonable expenses incurred to obtain court-ordered
indemnification.
ii. If it determines that the director is fairly and
reasonably entitled to indemnification in view of all
the relevant circumstances, whether or not he or she
met the standard of conduct set forth in paragraph A
of Section 2 of this Article or was adjudged liable in
the circumstances described in paragraph D of Section
2 of this Article, the court may order such
indemnification as the court deems proper; except that
the indemnification with respect to any proceeding in
which liability shall have been adjudged in the
circumstances described in paragraph D of Section 2 of
this Article is limited to reasonable expenses
incurred.
4. LIMITATION ON INDEMNIFICATION.
A. The corporation may not indemnify a director under Section 2
of this Article unless authorized in the specific case after a determination
has been made that indemnification of the director is permissible in the
- 14 -
<PAGE>
circumstances because he or she has met the standard of conduct set forth in
paragraph A of Section 2 of this Article.
B. The determination required to be made by paragraph A of this
Section 4 shall be made:
i. By the board of directors by a majority vote of a
quorum, which quorum shall consist of directors not
parties to the proceeding; or
ii. If a quorum cannot be obtained, by a majority vote of
a committee of the board designated by the board,
which committee shall consist of two or more directors
not parties to the proceeding; except that directors
who are parties to the proceeding may participate in
the designation of directors for the committee.
C. If the quorum cannot be obtained or the committee cannot be
established under paragraph B of this Section 4, or even if a quorum is
obtained or a committee designated if such quorum or committee so directs, the
determination required to be made by paragraph A of this Section 4 shall be
made:
- 15 -
<PAGE>
i. By independent legal counsel selected by vote of the
board of directors or the committee in the manner
specified in subparagraph (i) or (ii) of paragraph B
of this Section 4 or, if a quorum of the full board
cannot be obtained and a committee cannot be
established, by independent legal counsel selected by
a majority vote of the full board; or
ii. By the shareholders.
D. Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is permissible; except that, if the
determination that indemnification is permissible is made by independent legal
counsel, authorization of indemnification and evaluation as to reasonableness
of expenses shall be made by the body that selected said counsel.
5. ADVANCE PAYMENT OF EXPENSES.
A. The corporation may pay for or reimburse the reasonable
expenses incurred by a director who is a party to a proceeding in advance of
the final disposition of the proceeding if:
- 16 -
<PAGE>
i. The director furnishes the corporation with a written
affirmation of his or her good-faith belief that he or
she has met the standard of conduct described in
subparagraph (i) of paragraph A of Section 2 of this
Article;
ii. The director furnishes the corporation with a written
undertaking, executed personally or on his or her
behalf, to repay the advance if it is determined that
he or she did not meet such standard of conduct; and
iii. A determination is made that the facts then known to
those making the determination would not preclude
indemnification under this Section 5.
B. The undertaking required by subparagraph (ii) of paragraph A
of this Section 5 shall be an unlimited general obligation of the director but
need not be secured and may be accepted without reference to financial ability
to make repayment.
C. Determinations and authorizations of payments under this
Section 5 shall be made in the manner specified in Section 4 of this Article.
- 17 -
<PAGE>
6. REIMBURSEMENT OF WITNESS EXPENSES. The corporation shall pay or
reimburse expenses incurred by a director in connection with his or her
appearance as a witness in a proceeding at a time when he or she has not been
made a named defendant or respondent in the proceeding.
7. INSURANCE FOR INDEMNIFICATION. The corporation may purchase and
maintain insurance on behalf of a person who is or was a director, officer,
employee, fiduciary, or agent of the corporation or who, while a director,
officer, employee, fiduciary, or agent of the corporation, is or was serving
at the request of the corporation as a director, officer, partner, trustee,
employee, fiduciary, or agent of any other foreign or domestic corporation or
of any partnership, joint venture, trust, other enterprise, or employee
benefit plan against any liability asserted against or incurred by him or her
in any such capacity or arising out of his or her status as such, whether or
not the corporation would have the power to indemnify him or her against such
liability under the provisions of this Article. Any such insurance may be
procured from any insurance company designated by the board of directors of
the corporation, whether such insurance company is formed under the laws of
this state or any other jurisdiction of the United States or elsewhere,
including any insurance
- 18 -
<PAGE>
company in which the corporation has equity or any other interest, through
stock ownership or otherwise.
8. NOTICE OF INDEMNIFICATION. Any indemnification of or advance of
expenses to a director in accordance with this Article, if arising out of a
proceeding by or on behalf of the corporation, shall be reported in writing to
the shareholders with or before the notice of the next shareholders' meeting.
9. INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS OF THE
CORPORATION. The board of directors shall indemnify and advance expenses to
an officer, employee or agent of the corporation who is not a director of the
corporation to the same or greater extent as to a director as provided for in
these Articles of Incorporation, the Bylaws, by resolution of the shareholders
or directors, or by contract, in a manner consistent with the Colorado
Corporation Code.
10. INDEMNIFICATION OF HEIRS, EXECUTORS AND ADMINISTRATORS. The
indemnification provided by this Article, shall continue as to a person who
has ceased to be a director, officer, employee or agent, and shall inure to
the benefit of the heirs, executors and administrators of such a person.
11. LIMITATION OF LIABILITY. No director shall be personally liable
for any injury to person or property
- 19 -
<PAGE>
arising out of a tort committed by an employee unless such director was
personally involved in the situation giving rise to the litigation or unless
such director committed a criminal offense. No director shall be personally
liable to the corporation or to its shareholders for monetary damages for
breach of fiduciary duty as a director, excluding (i) any breach of the
director's duty of loyalty to the corporation or to its shareholders; (ii)
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law; (iii) acts in violation of Section 114, Article V
of the Colorado Corporate Code; or (iv) any transaction from which the
director derived an improper personal benefit.
ARTICLE VIII
AMENDMENTS
The corporation reserves the right to amend its Articles of
Incorporation from time to time in accordance with the Colorado Corporation
Code.
ARTICLE IX
ADOPTION AND AMENDMENT OF BYLAWS
The initial Bylaws of the corporation shall be adopted by its board of
directors. The power to alter or amend or repeal the Bylaws or adopt new
Bylaws shall be vested in the board of directors; provided, however, that the
shareholders, upon approval of a majority in interest of
- 20 -
<PAGE>
the outstanding shares entitled to vote, may amend or repeal the Bylaws even
though the Bylaws may also be amended or repealed by the board of directors.
The Bylaws may contain any provisions for the regulation and management of the
affairs of the corporation not inconsistent with law or these Articles of
Incorporation.
ARTICLE X
REGISTERED OFFICE AND REGISTERED AGENT
The address of the initial registered office of the corporation is 1170
Becky Drive, Colorado Springs, CO 80921, and the name of the initial
registered office or the registered agent at such address is R. Eugene Rider.
Either the registered office or the registered agent may be changed in the
manner provided by law.
ARTICLE XI
INITIAL BOARD OF DIRECTORS
The number of directors of the corporation shall be fixed by the Bylaws
of the corporation. So long as the number of directors shall be less than
three, no shares of this corporation may be issued and held of record by more
shareholders than there are directors.
THIRD: The manner, if not set forth in such amendment, in which any
exchange, reclassification or cancellation of issued shares provided for in
the amendment shall be
- 21 -
<PAGE>
effected is as follows: Stock certificates reflecting the original par value
of the Corporation's Common Stock shall be replaced by stock certificates
reflecting a no par value.
FOURTH: The manner in which such amendment effects a change in the
amount of stated capital, and the amount of stated capital as changed by such
amendment, are as follows: No change.
The undersigned officers verify that these Amended and fully Restated
Articles of Incorporation have been properly adopted by the shareholders of
the Corporation.
BROWN DISC PRODUCTS COMPANY, INC.
By: /s/ R. E. Rider
----------------------------
R.E. Rider, President
and: /s/ Eva Forsberg-Rider
----------------------------
Eva Forsberg-Rider, Secretary
- 22 -
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF EL PASO )
Before me, AMY S. MARSTERS, a Notary Public in and for the said County
and State, personally appeared R.E. Rider who acknowledged before me that he
is the President of BROWN DISC PRODUCTS COMPANY, INC., a Colorado corporation,
and that he signed the foregoing Amended and Fully Restated Articles of
Incorporation as his free and voluntary act and deed for the uses and purposes
therein set forth, and that the facts contained therein are true.
In witness whereof I have hereunto set my hand and seal this 21st day of
June A.D. 1989.
My commission expires: 3/26/93
/s/ Amy S. Marsters
--------------------------
Notary Public
Address: 1561 BRAIRGATE BLVD.
COLO. SPGS, CO 80920
(NOTARIAL SEAL)
- 23 -
<PAGE>
RECEIVED FILED
APR 22 10:01 AM '91 APR 22 1991
DEPARTMENT OF STATE STATE OF COLORADO
STATE OF COLORADO DEPARTMENT OF STATE
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
BROWN DISC PRODUCTS COMPANY, INC.
Pursuant to the provisions of the Colorado Corporation Code, the
undersigned Corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the Corporation is Brown Disc Products Company,
Inc.
SECOND: The following amendment was adopted by the board of
directors and shareholders of the Corporation in the manner prescribed by the
Colorado Corporation Code on April 20, 1991.
The Articles of Incorporation shall be amended by striking the existing
Article IV and inserting in lieu thereof the following new Article IV:
"ARTICLE IV
CAPITAL STOCK
1. CAPITAL STOCK. The aggregate number of shares which
this corporation shall have authority to issue is Fifty Million
(50,000,000) shares of no par value which shall be designated
"Common Stock" and Fifty Million (50,000,000) shares of a no par
value which shares shall be designated "Preferred Stock". Both
the Common Stock and the Preferred Stock may be subdivided and
issued in series pursuant to resolutions of the board of directors
containing such designations, limitations, rights and
<PAGE>
preferences which the board of directors, in its sole discretion,
may determine to be appropriate.
2. DIVIDENDS. Dividends in cash, property or shares
of the corporation may be paid upon the Common Stock as and when
declared by the board of directors in conformance with the
resolutions of the board of directors authorizing the issuance of
the stock, to the extent and in the manner permitted by law,
provided, however, no Common Stock dividend shall be paid for any
year unless the holders of Preferred Stock, if any, shall have
received any Preferred Stock preferential dividends, if any, to
which they are entitled for such year.
3. DISTRIBUTION IN LIQUIDATION. Upon any liquidation,
dissolution or winding up of the corporation, and after paying or
adequately providing for the payment of all its obligations, the
remainder of the assets of the corporation shall be distributed,
either in cash or in kind, in the order provided herein. Such
distributions shall be made first, to the holders of the Preferred
Stock until any amounts required to be distributed as a
liquidation preference to the holders of the Preferred Stock have
been distributed. If the remainder of the assets is insufficient
to fully satisfy the liquidation preferences(s) of the Preferred
Stock, then those assets shall be distributed pro rata to each
series of Preferred Stock beginning with the series having the
-2-
<PAGE>
most superior liquidation preference priority and each series
until the remaining assets have been fully distributed. Second,
the assets remaining after satisfaction of the liquidation
preference(s) of the Preferred Stock shall be distributed pro rata
to the holders of the Common Stock, unless otherwise provided in
the resolutions of the board of directors authorizing the issuance
of the Common Stock in series, in which case the priority for
distribution in liquidation established in those resolutions shall
be followed.
4. VOTING RIGHTS; CUMULATIVE VOTING. Each outstanding
share of Common Stock shall be entitled to one vote and each
fractional share of Common Stock shall be entitled to a
corresponding fractional vote on each matter submitted to a vote
of shareholders. A majority of the shares entitled to vote,
represented in person or by proxy, shall constitute a quorum at a
meeting of shareholders. Cumulative voting shall not be allowed
in the election of directors of the corporation. When, with
respect to any action to be taken by shareholders of this
corporation, the laws of Colorado require the vote or concurrence
of the holders of two-thirds of the outstanding shares, of the
shares entitled to vote thereon, or of any class or series, such
action may be taken by the vote or concurrence of a majority of
such shares or class or series thereof. Except as otherwise
provided by these
-3-
<PAGE>
Articles of Incorporation or the Colorado Corporation Code, if a
quorum is present, the affirmative vote of a majority of the
shares represented at the meeting and entitled to vote on the
subject matter shall be the act of the shareholders.
5. DENIAL OF PREEMPTIVE RIGHTS. No holder of any shares
of the corporation, whether now or hereafter authorized, shall
have any preemptive or preferential right to acquire any shares or
securities of the corporation, including shares or securities
held in the treasury of the corporation.
6. TRANSFER RESTRICTIONS. The corporation shall have
the right to impose restrictions upon the transfer of any of its
authorized shares or any interest therein. The board of directors
is hereby authorized on behalf of the corporation to exercise the
corporation's right to so impose such restrictions."
THIRD: The number of shares voted for the amendment was sufficient
for approval.
FOURTH: Upon the effectiveness of this amendment, each 100
outstanding shares of Common Stock, no par value, shall be combined into one
share of Common Stock. No fractional shares or scrip certificates therefore
shall be issued to the holders of the presently outstanding Common Stock by
reason of the foregoing, but the Corporation shall issue to each holder
entitled to a fraction of a share one full share in lieu thereof.
-4-
<PAGE>
FIFTH: The amendment does not effect a change in the amount of
stated capital of the Corporation.
DATED: April 22, 1991.
BROWN DISC PRODUCTS COMPANY, INC.
By: /s/ R. E. Rider
----------------------------
R.E. Rider, President
ATTEST:
/s/ Eva Forsberg-Rider
- ----------------------------
Eva Forsberg-Rider, Secretary
-5-
<PAGE>
931067112 $25.00
SOS 06-29-93 09.57
STATEMENT CONCERNING ESTABLISHMENT
OF SERIES A PREFERRED STOCK
BROWN DISC PRODUCTS COMPANY, INC.
DP871752660
The Undersigned, by and on behalf of Brown Disc Products Company, Inc.,
and pursuant to the requirements of 7-4-102(5). Colorado Revised Statutes, do
hereby state the following this 28th day of June, 1993.
I. The name of the Corporation is Brown Disc Products Company,
Inc.
II. A copy of the resolution establishing and designating the series
and fixing and determining the relative rights and preferences thereof is
attached hereto as Exhibit A and incorporated herein by this reference.
III. The date of adoption of said resolution was June 4, 1993.
IV. Said resolution was duly adopted by the Board of Directors of
Brown Disc Products Company, Inc.
BROWN DISC PRODUCTS COMPANY, INC.
By: /s/ R. E. Rider
-----------------------------
R. E. Rider
President
By: /s/ Eva Forsberg-Rider
-----------------------------
Eva Forsberg-Rider
Secretary
(V E R I F I C A T I O N)
I, R. E. Rider, being first duly sworn upon oath, depose and say:
That I have read the above and foregoing State of Brown Disc Products
Company, Inc. and that I verify the facts contained therein as true and
correct.
/s/ R. E. Rider
-----------------------------
R. E. Rider
President
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STATE OF COLORADO )
) ss.
CITY & COUNTY OF DENVER )
I, the undersigned, a Notary Public, hereby certify that on 28 June,
1993, R. E. Rider, President, and Eva Forsberg-Rider, Secretary, of Brown Disc
Products Company, Inc. personally appeared before me, and being by me first
duly sworn, declared that they are the persons who signed the foregoing
document and that the statements therein contained are true.
WITNESS my hand official seal.
My commission expires: 11/12/94
/s/ Jan M. Taylor
----------------------------
Notary Public
3624 Citadel Dr. N. #313
----------------------------
(Address)
Colorado Springs, CO 80909
----------------------------
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EXHIBIT A
RESOLVED, that sixty three thousand (63,000) shares of the Company's
Preferred Stock, no par value, shall be designated as follows: Series A
Preferred Stock (the "Series A Preferred Stock" or the "Shares"), each of
which shall have the relative participant, optional or other special rights
and the qualifications, limitations and restrictions set forth on the
Statement Concerning Establishment of Series A Preferred Stock of Brown Disc
Products Company, Inc. attached and made a part of this Resolution.
1. DIVIDENDS. When and as declared by the board of directors of
Brown Disc Products Company, Inc. (the "Company") the Company will pay
preferential dividends to the holders of Series A Preferred Stock.
Notwithstanding any provision hereof to the contrary, the Company through
acts of its Board of Directors shall have no obligation to declare or pay
dividends on the Series A Preferred Stock.
2. LIQUIDATION. Upon any liquidation, dissolution or winding up of
the Company, the holders of Series A Preferred Stock will be entitled to be
paid, before any distribution or payment is made upon any other equity
securities of the Company, an amount in cash equal to eleven dollars ($11)
per share ("Liquidation Value"), plus any accrued and unpaid dividends. If
upon any such liquidation, dissolution or winding up, the assets of the
Company to be distributed among the holders of the Series A Preferred Stock
are insufficient to permit payment to such holders of the aggregate amount
which they are entitled to be paid, then the entire assets to be distributed
will be distributed ratably among such holders. The Company will mail written
notices of such liquidation, dissolution or winding up, not less than 60 days
prior to the payment date stated therein, to each record holder of Series A
Preferred Stock. Neither the consolidation nor merger of the Company into or
with any other corporation or corporations, nor the sale or transfer by the
Company of all or any part of its assets, or the reduction of the capital
stock of the Company, will be deemed to be a liquidation, dissolution or
winding up of the Company within the meaning of this paragraph 2.
3. COMPANY REDEMPTIONS.
3.A. REDEMPTION PRICE. For each Share which is to be redeemed,
the Company will be obligated to pay to the holder thereof an amount (the
"Redemption Price") equal to the Liquidation Value, plus any accrued and
unpaid dividends.
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3.B. OPTIONAL REDEMPTION. The Company may, at any time within
five years of the date of issuance, redeem all or any portion of the Series A
Preferred Stock then outstanding, at a price per Share equal to the
Liquidation Value plus any accrued and unpaid dividends. No redemption
pursuant to this paragraph may be made for less than 1,000 Shares (or such
lesser number of Shares then outstanding). In addition, the Company, at any
time after June 4, 1994, may invite from holders of the Series A Preferred
Stock offers to sell to the Company all or a portion of the Shares at less
than the Liquidation Value, and when such offers are invited, the Board of
Directors on behalf of the Company shall then be required to buy at the lowest
price of prices offered, up to the amount to be purchased.
3.C. DETERMINATION OF THE NUMBER OF EACH HOLDER'S SHARES TO BE
REDEEMED. The number of shares of Series A Preferred Stock to be redeemed
from each holder thereof in an Optional Redemption will be the number of
Shares determined by multiplying the number of Shares to be redeemed in such
redemption times a fraction, the numerator of which will be the total number
of Shares then held by such holder and the denominator of which will be the
total number of Shares then outstanding.
3.D. NOTICE OF REDEMPTION; PAYMENT OF REDEMPTION PRICE,
(i) The Company will mail written notice (the "Notice of
Redemption") of an Optional Redemption to each record holder of Shares (a
"Record Holder") not more than 60 nor less than 45 days prior to the date on
which such redemption is to be made. Upon mailing any Notice of Redemption
which relates to an Optional Redemption, the Company will be obligated to (a)
redeem from each shareholder the number of Shares required to be redeemed from
such shareholder pursuant to paragraphs 2 and 3.C above at the time of
redemption specified therein, and (B) to send each Record Holder a cashier's
or certified check in an amount equal to the Redemption Price of such number
of Shares within 10 business days after receipt by the Company of the
certificate(s) representing such number of Shares specified for redemption in
the notice. In case fewer than the total number of Shares represented by
any certificate are redeemed, a new certificate representing the number of
unredeemed Shares will be issued to the Record Holder thereof in such holder's
or such holder's nominee's name without cost to such holder.
(ii) If the funds of the Company legally available for
redemption of Shares on any Redemption Date are insufficient to redeem the
total number of Shares to be redeemed on such date, those funds which are
legally available will be used to redeem the maximum possible number of
Shares ratably among the holders of the Shares to be redeemed based upon the
aggregate Liquidation Value of such Shares held by each such holder. Any time
thereafter when additional funds of the Company are legally available for the
redemption of Shares, such funds will immediately be used to redeem the
balance of the Shares
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which the Company has become obligated to redeem on the date specified in the
notice of redemption but which it has not redeemed.
3.E. MANDATORY REDEMPTION. Within 120 days after the end of
each fiscal year, commencing at the end of the fiscal year ending June 30,
1994, until June 30, 1998, the Company shall be required to redeem a certain
percentage of the Shares (as calculated pursuant to the next succeeding
sentence) then outstanding, at a price per share equal to the Redemption
Price. The number of Shares required to be redeemed in any one year will be
equal to 50% of the Company's "net income" after deducting all taxes and
Senior Debt payments (as defined by the Company's Plan of Reorganization)
divided by the Redemption Price.
3.F. MANDATORY REDEMPTION PRIOR TO COMMON STOCK DIVIDENDS.
The Company shall be required to redeem all of the Shares outstanding at a
price per share equal to the Redemption Price prior to any dividend payments
to the holders of the Company's common stock.
3.G. NOTICE OF MANDATORY REDEMPTION; PAYMENT OF REDEMPTION PRICE.
(i) The Company will mail written notice (the "Notice of
Mandatory Redemption") of each Mandatory Redemption to the Record Holder not
more than 20 nor less than 10 days prior to the date on which such redemption
is to be made. Upon mailing of any Notice of Mandatory Redemption, the
Company will be obligated (A) to redeem from the Record Holder the number of
Shares required to be redeemed pursuant to paragraphs 3.E. and 3.F. above and
(B) to send such Record Holder a cashier's or certified check in an amount
equal to the Redemption Price of such number of Shares on the date specified
for redemption in the notice. Upon receipt of such check, the Record Holder
of the Shares to be redeemed will become obligated to surrender the
certificate(s) representing such number of Shares within 10 days after the
date specified for redemption in the notice. In case fewer than the total
number of Shares represented by any certificate are redeemed, a new
certificate representing the number of unredeemed Shares will be issued to the
Record Holder thereof in such holder's or such holder's nominee's name,
without cost to such holder.
ii. If the funds of the Company legally available for
redemption of Shares on any Redemption Date are insufficient to redeem the
total number of Shares to be redeemed on such date, those funds which are
legally available will be used to redeem the maximum possible number of
Shares, and the Company shall redeem the remaining Shares as soon thereafter
as funds of the Company are available for such payment.
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3.H. REPURCHASE OPTION. If during the fiscal year ending June
30, 1994, Brown Disc earns in excess of $500,000 net profit before taxes, then
the Company shall offer to redeem all of the Series A Preferred Stock at $3.00
per share in cash. Record Holders need not accept such offer but Record
Holders must accept the offer for all of their individual shares or none of
such shares. No partial acceptances will be accepted.
3.I. REDEEMED OR OTHERWISE ACQUIRED SHARES. Any Shares which
are redeemed or otherwise acquired by the Company will be canceled and will
not be reissued, sold or transferred.
4. CONVERSION.
4.A. Record Holder(s) of Series A Preferred Stock may, at any
time after June 4, 1998, convert not less than all Shares held by such Record
Holder(s) into shares of common stock. The number of shares of common stock
which shall be received by such holder, upon conversion, will be equal to five
(5) shares for each share of Series A Preferred Stock converted.
Notwithstanding the above, if prior to October 28, 1998, the Company has not
redeemed at least 50% of the Series A Preferred Stock pursuant to Article 3
herein then the number of shares of common stock which shall be received by
such holder upon conversion will be equal to seven and one half (7.5) shares
for each share of Series A Preferred Stock converted.
4.B. The conversion of Series A Preferred Stock will be deemed to
have been effected as of the close of business on the date on which the
certificate or certificates representing the Shares to be converted have been
surrendered at the principal office of the Company (the "Conversion Date").
At the time such conversion has been effected, the rights of the Record
Holder(s) Series A Preferred Stock will cease and the person(s) in whose
name(s) any certificate or certificates for shares of common stock are to be
issued upon such conversion will be deemed to have become the holders of
record of the shares of common stock represented thereby.
4.C. As soon as possible after a conversion has been effected,
the Company will deliver to the converting Record Holder(s) a certificate or
certificates representing the number of shares of common stock issuable by
reason of such conversion in such name(s) and such denomination(s) as the
converting Record Holder(s) has specified;
4.D. The issuance of certificates for shares of common stock upon
conversion of Shares will be made without charge to the Record Holder(s) of
such Shares for any issuance tax in respect thereof or other cost incurred by
the Company in connection with such conversion and the related issuance of
shares of common stock.
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4.E. No fractional shares of common stock shall be issued upon
conversion of the Series A Preferred Stock. In lieu of any fractional shares
to which the Record Holder(s) would otherwise be entitled, the Company shall
pay cash equal to the product of such fraction multiplied by the Market Value
of the common stock as of the conversion date.
5. DEFINITIONS.
"Liquidation Value" of any Share on any particular date will be equal to
the sum of eleven dollars ($11).
"Person" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization or government or any
department or any agency thereof.
"Market Value" means the average of the closing prices of the Company's
common stock on all securities exchanges on which such security may at the
time be listed, or if there have been no sales on any such change on any day,
the average of the highest and lowest bid prices on all such exchanges at the
end of such day, or, if on any day such security is not so listed, the average
of the representative bid quoted in the NASDAQ System as of 4:00 p.m., New
York time, or, if on any day such security is not quoted in the NASDAQ System,
the average of the high and low bid prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case
averaged over a period of 31 days consisting of the day as of which "Market
Value" is being determined and the 30 consecutive business days prior to such
day.
"Redemption Date" as to any Share means the date specified in the notice
of any redemption provided that no such date will be a Redemption Date unless
the applicable Redemption Price is actually paid in full on or before such
date, and if not so paid in full, the Redemption Date will be the date on
which such Redemption Price is fully paid. If, however, the full Redemption
Price is not paid on the scheduled redemption date solely because a holder has
not surrendered its certificate(s) at the Company's principal office as
provided in paragraph 3.D(I) hereof, then as to such holder the date specified
herein for the scheduled redemption shall be the Redemption Date.
6. MISCELLANEOUS.
6.A. REGISTRATION OF TRANSFER. The Company will keep at its
principal office or at the office of its transfer agent a register of the
registration of Series A Preferred Stock. Upon the surrender of any
certificate representing Series A Preferred Stock at such place, the Company
will, at the request of the Record Holder of such new certificate, execute
and deliver (at the Company's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares
represented by the surrendered certificate. Subject to
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applicable Securities Law, each such new certificate will be registered in
such name and will represent such number of Shares as is required by the
holder of the surrendered certificate and will be substantially identical in
form to the surrendered certificate.
6.B. REPLACEMENT. Upon receipt of evidence and an agreement to
indemnify reasonably satisfactory to the Company (an affidavit of the
registered holder, without bond, may be satisfactory, or if required by the
Company, an adequate bond) of the ownership and the loss, theft, destruction
or mutilation of any certificate evidencing one or more Shares, the Company
will (at holder(s) expense) execute and deliver in lieu of such certificate a
new certificate representing the number of Shares represented by such lost,
stolen, destroyed or mutilated certificate.
6.C. AMENDMENT AND WAIVER. Amendments, modifications or
waivers or any of the terms hereof will be binding an effective if the prior
written consent of Holder(s) of 100% of the Series A Preferred Stock
outstanding at the time such action is taken is obtained, and provided that no
such change in the terms hereof may be accomplished by merger or consolidation
of the Company with another corporation unless the Company has obtained the
prior written consent of the Holder(s) of the applicable percentage of the
Series A Preferred Stock.
6.D. NOTICE. All notice referred to herein, except otherwise
expressly provided, will be hand delivered or made by registered or certified
mail, return receipt requested, postage prepaid, and will be deemed to have
been given when so hand delivered or mailed.
7. VOTING RIGHTS.
7.A. GENERAL MATTERS. Holders of Shares will be entitled to
vote on and receive notice of matters submitted to a vote of shareholders when
voting as a class is required under the laws of Colorado regarding matters
which affect the rights of the class.
7.B. COMMON SHARE VOTING RIGHTS. In addition, the Holders of
the Shares will be entitled to one vote per share on all matters that come
before the common shareholders.
7.C. BOARD OF DIRECTORS. In addition to the voting rights
described above, upon a material default by the Company of the mandatory
redemption provisions included herein, the Record Holder(s) shall have the
right to elect one director to the Board.
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RECEIVED
1996 JUL -3 PM 2:21
SECRETARY OF STATE
STATE OF COLORADO
CERTIFICATE OF DESIGNATION
ESTABLISHING THE RIGHTS AND PREFERENCES OF
10% SERIES B PREFERRED STOCK
BROWN DISC PRODUCTS COMPANY, INC.
a Colorado corporation
RONALD H. COLE and DARYL M. SILVERSPARRE hereby certify that:
(1) They are the President and Secretary, respectively, of BROWN DISC
PRODUCTS COMPANY, INC., a Colorado corporation (the "Corporation").
(2) Pursuant to the authority granted under the Corporation's Articles
of Incorporation, the Board of Directors of said Corporation has duly adopted
the following recitals and resolutions:
"WHEREAS, this Corporation is authorized by its Articles of
Incorporation to issue 50,000,000 shares of preferred stock, no par
value (the "Preferred Stock"); and
"WHEREAS, this Corporation has previously designated 63,000 shares
of its Preferred Stock as a series designated as Series A Redeemable
Preferred Stock; and
"WHEREAS, the Board of Directors of this Corporation is
authorized, as to the Preferred Stock, within the limitations and
restrictions stated in the Articles of Incorporation, to fix by
resolution or resolutions the designation of each series of Preferred
Stock and the powers, preferences and relative participating, optional
or other special rights and qualifications, limitations or restrictions
thereof, including, without limitation, such provisions as may be
desired concerning dividends, redemption, voting, dissolution or the
distribution of assets, conversion or exchange, and such other subjects
or matters as may be fixed by resolution or resolutions of the Board of
Directors; and
"WHEREAS, the Board of Directors of this Corporation desires,
pursuant to its authority granted under the Articles of Incorporation,
to determine and fix the rights, preferences, privileges and
restrictions relating to a second series of said Preferred Stock, and to
fix the number of shares constituting and the designation of such
series;
"NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized a
series of Preferred Stock on the terms and with the provisions herein
set forth:
B-1
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Certificate of Designation
Series B Convertible Preferred Stock
SECTION 1. DESIGNATION, NUMBER AND RESTRICTIONS ON ISSUANCE.
The designation of the series of Preferred Stock authorized by these
resolutions shall be "10% Series B Convertible Preferred Stock" (the
"Series B Preferred Stock"). The authorized number of shares
constituting the Series B Preferred Stock shall be Two Hundred Thousand
(200,000) shares. The Board of Directors is further authorized, within
the limitations and restrictions set forth in the Articles of
Incorporation or stated in any resolution or resolutions of the Board of
Directors, to increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares of Series B
Preferred Stock subsequent to the issuance of shares of such series. In
case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status which they had
prior to the adoption of these or any subsequent resolutions originally
fixing the number of shares of such series.
SECTION 2. CONVERSION RIGHTS.
2.1. As used herein, the term "Common Stock" shall mean and
include the Corporation's Common Stock, no par value, as constituted on
September 30, 1995, and as the same shall be constituted thereafter
including adjustments required for any capital reorganization or
reclassification thereof subsequent to September 30, 1995. At any time
hereafter and up to the close of business on the day immediately
preceding a date fixed for redemption of Series B Preferred Stock in
accordance with Section 7 below, at the election of the respective
holders of Series B Preferred Stock and subject to the terms and
conditions set forth herein, issued and outstanding shares of the Series
B Preferred Stock may be converted into fully paid and nonassessable
shares of Common Stock of the Corporation at the conversion ratio of Ten
(10) shares of Common Stock for each share of Series B Preferred Stock,
subject to adjustment from time to time as provided in Section 2.4 below
(herein called the "Conversion Ratio").
2.2. In order to exercise the conversion privilege, a holder of
outstanding shares of Series B Preferred Stock shall surrender
certificates for the Series B Preferred Stock to be converted and
exchanged at the principal office of the Corporation in the State of
Colorado, and shall give written notice to the Corporation at said
office that the holder elects to convert such Series B Preferred Stock
into shares of the Corporation's Common Stock. Such notice shall also
state the name or names (with addresses) in which certificates for
shares of Common Stock issuable on such conversion shall be issued,
subject to compliance with applicable securities laws.
2.3. No certificates for fractional shares of Common Stock shall
be issued upon conversion of Series B Preferred Stock, and in lieu
thereof the number of shares of Common Stock issuable upon conversion
shall be rounded up to the next whole share. So long as there is
outstanding any Series B Preferred Stock, there shall be reserved
unissued, out of the authorized but unissued shares of Common Stock, a
number of shares sufficient to
B-2
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Certificate of Designation
Series B Convertible Preferred Stock
provide for conversion of Series B Preferred Stock in accordance with
the provisions of this Section 2.
2.4. The Conversion Ratio shall be subject to adjustment from
time to time hereafter as follows:
(A) In case the Corporation at any time after September
30, 1995 shall issue a stock dividend on its outstanding shares of
Common Stock or shall subdivide or combine the outstanding shares
of Common Stock issuable upon conversion of the Series B Preferred
Stock, the Conversion Ratio and number of shares issuable upon
conversion of the Series B Preferred Stock shall be
proportionately and equitably adjusted as if the holder of record
of Series B Preferred Stock had converted shares of Series B
Preferred Stock into Common Stock immediately prior to such event.
Any such adjustment shall become effective at the close of
business on the date that such stock dividend, subdivision or
combination relating to the Common Stock shall become effective.
For the purposes of such adjustment, the Conversion Ratio in
effect immediately prior to such stock dividend, subdivision or
combination shall forthwith be changed to a Conversion Ratio
determined by:
(i) dividing the total number of shares of Common
Stock outstanding immediately after the stock dividend,
subdivision or combination, by an amount equal to the total
number of shares of Common Stock outstanding immediately
prior to such stock dividend, subdivision or combination;
and
(ii) multiplying the result of clause (i) above by
the actual Conversion Ratio in effect immediately prior to
such stock dividend, subdivision or combination.
and the total of shares of Common Stock thereafter issuable and
deliverable on conversion of the Series B Preferred Stock shall be
the number of shares obtained by applying the Conversion Ratio as
so adjusted.
(B) In case of any capital reorganization or any
reclassification of the shares of Common Stock of the Corporation
(other than as a result of a stock dividend, subdivision or
combination, as aforesaid), or in case of any consolidation with
or merger of the Corporation into or with another corporation, or
the sale, lease or other disposition of the properties of the
Corporation as an entirety or substantially as an entirety, then
as a part of such reorganization, reclassification, consolidation,
merger, sale, lease or other disposition, as the case may be,
lawful provision shall be made so that the holders of record of
the Series B Preferred Stock shall have the right thereafter to
receive upon conversion thereof the kind and amount of shares of
stock or other securities or property which such holders would
have been entitled to receive if, immediately prior to such
reorganization, reclassification, consolidation, merger, sale,
B-3
<PAGE>
Certificate of Designation
Series B Convertible Preferred Stock
lease or other disposition, such holders had held the number of
shares of Common Stock which were then issuable upon the
conversion of the Series B Preferred Stock then held by them. In
any such case, appropriate adjustment shall be made in the
application of the provisions set forth herein with respect to the
rights and interests thereafter of the holders of record of the
Series B Preferred Stock, to the end that the provisions set forth
herein (including provisions with respect to adjustments of the
Conversion Ratio) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of such Series
B Preferred Stock.
SECTION 3. VOTING RIGHTS. The holders of Series B Preferred
Stock shall not be entitled to any voting rights except as required by
law.
SECTION 4. RANK AND PREFERENCE. Shares of Series B Preferred
Stock shall, with respect to dividend rights, rights on redemption and
rights on liquidation, winding up and dissolution, have preference over
and rank prior to all classes of Common Stock and shall rank pari passu
with all other series of Preferred Stock. In case the stated dividends
and the amounts payable on liquidation, distribution or sale of assets,
dissolution or winding up of the Corporation are not paid in full, the
shareholders of all series of Preferred Stock shall share ratably in the
payment of dividends, including accumulations, if any, in accordance
with the sums which would be payable on such shares if all dividends
were declared and paid in full and in any distribution of assets other
than by way of dividends, in accordance with the sums which would be
payable on such distribution if all sums payable were discharged and
paid in full.
SECTION 5. DIVIDENDS AND RESTRICTIONS ON CERTAIN REPURCHASES.
5.1. The holders of the shares of Series B Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available for the payment of dividends,
cumulative dividends at the annual rate of 10% per annum ($0.50 per
share), subject to adjustment as provided by Section 5.2. Each of such
annual dividends shall be fully cumulative and shall accrue (whether or
not declared or permitted to be paid), from the first day such shares
were first issued.
5.2. Dividends on Series B Preferred Stock shall be payable in
annual payments commencing on September 30, 1996 and on each anniversary
thereafter (each of which is herein called a "Dividend Payment Date");
in the event any shares of Series B Preferred Stock shall be outstanding
for less than a year, the amount of the dividend shall be prorated for
such year. Such dividends shall be paid to the holders of record at the
close of business on the date specified by the Board of Directors of the
Corporation at the time the dividend is declared; provided, however,
that such record date shall be not more than 20 days nor less than 10
days prior to the respective Dividend Payment Date.
B-4
<PAGE>
Certificate of Designation
Series B Convertible Preferred Stock
5.3. In the event there shall be any shares of Series A
Redeemable Preferred Stock issued and outstanding on any Dividend
Payment Date, the Corporation, at the election of its Board of Directors
made on or before any Dividend Payment Date, may elect to pay the annual
dividend otherwise due and payable for all (but not less than all) of
the Series B Preferred Stock outstanding on such Dividend Payment Date
in shares of Common Stock of the Corporation in lieu of cash. In such
event, the Corporation shall advise each holder of record of Series B
Preferred Stock in writing, not later than the tenth business day after
such Dividend Payment Date, of the Corporation's election to make such
dividend payment in Common Stock.
5.4. For any dividend payment to be made in Common Stock as
herein provided, the number of shares of Common Stock issuable for such
dividend payment shall be determined by dividing the dividend payment
due on said Dividend Payment Date by the Common Stock Value. "Common
Stock Value" shall mean 100% of the Fair Market Value of the Common
Stock determined as of the applicable Dividend Payment Date. For this
purpose "Fair Market Value" as of any specific date shall be determined
by reference to the average closing sale prices for the Common Stock
during the ten days on which such shares are actually traded in the
over-the-counter market or on a recognized securities exchange
immediately prior to the date upon which Fair Market Value is to be
determined. (If for any reason closing sale prices are not quoted for
any such day, then the closing market price for such day shall be deemed
the closing bid price for such day as reported by the National Quotation
Bureau.)
5.5. All dividends paid with respect to shares of the Series B
Preferred Stock shall be paid pro rata to the holders entitled thereto.
5.6. No dividends, other than dividends payable solely in Common
Stock, shall be declared by the Board of Directors on any class or
series of equity securities of the Corporation unless and until such
time as all accrued and unpaid dividends on the Series B Preferred Stock
have been paid in full or unless the Series B Preferred Stock has been
redeemed in accordance with its terms or are fully converted into Common
Stock of the Corporation or are otherwise reacquired and retired in full
by the Corporation. The Corporation may not pay or set apart for
payment, other than dividends or other distributions or payments payable
solely in Common Stock, any other distributions on any shares of the
Corporation's Common Stock, and may not purchase or otherwise redeem for
cash or other tangible property, other than shares of Common Stock, any
shares of the Corporation's Common Stock or any warrants, rights or
options exercisable for or convertible into any shares of Common Stock
unless and until such time as the Series B Preferred Stock has been
redeemed in accordance with its terms or are fully converted into Common
Stock of the Corporation or are otherwise reacquired and retired in full
by the Corporation.
B-5
<PAGE>
Certificate of Designation
Series B Convertible Preferred Stock
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING-UP.
6.1. In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of
Series B Preferred Stock then outstanding shall be entitled to receive
ratably, prior and in preference to any distribution of any of the
assets of the Corporation to the holders of any other equity securities
of the Corporation other than Preferred Stock, by reason of their
ownership thereof, the sum of FIVE DOLLARS ($5.00) per share outstanding
plus all accrued and unpaid dividends thereon, each payable in cash
(which may be payable from either capital or surplus) or, if cash is not
then available, in property of the Corporation. In the event it is
necessary or advisable for the Corporation to determine the value of
property for any purpose hereunder, the value of such property so
received by holders of Series B Preferred Stock will be deemed to be its
fair market value as determined in good faith by the Board of Directors
of the Corporation unless a majority in interest of the holders of
issued and outstanding Series B Preferred Stock shall demand an
independent appraisal of such property. If, upon the occurrence of any
such event, the assets thus distributed among the holders of the Series
B Preferred Stock shall be insufficient to permit the payment to such
holders of the full preferential amount due to them hereunder, then the
entire assets of this Corporation legally available for distribution
shall be distributed ratably among the holders of all series of the
Preferred Stock. Except as provided above, holders of the Series B
Preferred Stock shall not be entitled to any distribution in the event
of liquidation, dissolution or winding up of the affairs of the
Corporation.
6.2. For the purposes of this Section 6, a sale of all or
substantially all of the assets of this Corporation or a merger of the
Corporation with or into any other corporation or corporations where the
Corporation is not the surviving entity, shall not be deemed to be a
liquidation, dissolution or winding-up of the Corporation within the
meaning of Section 6.1 unless no provision has been made for the
exchange of securities for Series B Preferred Stock in connection with
the consummation of any such sale of assets or merger.
6.3. The liquidation payment with respect to each outstanding
fractional share of Series B Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each
outstanding share of Series B Preferred Stock.
SECTION 7. REDEMPTION.
7.1. MANDATORY REDEMPTION. The Corporation shall have no
mandatory obligation to redeem shares of Series B Preferred Stock;
provided, however, in the event of any liquidation, dissolution or
winding-up of the Corporation, either voluntary or involuntary, or in
the event or sale of all or substantially all of the assets of this
Corporation or a merger of the Corporation with or into any other
corporation or corporations where the Corporation is not the surviving
entity and in which no provision has been made for the exchange of
B-6
<PAGE>
Certificate of Designation
Series B Convertible Preferred Stock
securities for Series B Preferred Stock, each share of Series B
Preferred Stock then outstanding shall be entitled to receive the
consideration specified in Section 6.1 above.
7.2. OPTIONAL REDEMPTION. At any time after September 30, 1996,
the Corporation at its option may redeem all, but not less than all, of
the Series B Preferred Stock then outstanding at a redemption price of
FIVE DOLLARS ($5.00) per share plus the payment of all accrued and
unpaid dividends on the shares so redeemed.
7.3. Upon any redemption of Series B Preferred Stock, written
notice shall be given to the holders of the Series B Preferred Stock for
shares to be purchased or redeemed at least thirty (30) days prior to
the date fixed for redemption. The notice shall be addressed to each
such shareholder at the address of such holder appearing on the books of
the Corporation or given by such holder to the Corporation for the
purpose of notice, or, if no such address appears or is so given, at the
last known address of such shareholder. Such notice shall specify the
date fixed for redemption, shall state that all shares of Series B
Preferred Stock outstanding are to be redeemed and the number of shares
of Series B Preferred Stock to be so redeemed, and shall call upon such
holder to surrender to the Corporation on said date, at the place
designated in the notice, such holder's certificate or certificates
representing the shares to be redeemed on the date fixed for redemption
stated in such notice. Unless such person shall elect to convert the
same into Common Stock in accordance with Section 2 above, each holder
of shares of Series B Preferred Stock called for redemption shall
surrender the certificate or certificates evidencing such shares to the
Corporation at the place designated in such notice and shall thereupon
be entitled to receive payment of the redemption price on the date fixed
for redemption.
7.4. If, on or prior to any date fixed for redemption, the
Corporation deposits, with any bank or trust company in the State of
Colorado or in the State of New York, as a trust fund, a sum sufficient
to redeem all shares of Series B Preferred Stock called for redemption
which have not theretofore been surrendered for conversion, with
irrevocable instructions and authority to the bank or trust company to
pay, on or after the date fixed for redemption, the redemption price of
the shares to their respective holders upon the surrender of their share
certificates, then from and after the date of redemption the shares to
be redeemed shall be redeemed and dividends and other distributions on
those shares shall cease to accrue after the date such shares were
called for redemption. The deposit shall constitute full payment for
the shares of Series B Preferred Stock to their holders and from and
after the date of the deposit the shares of Series B Preferred Stock
shall no longer be outstanding, and the holders thereof shall cease to
be shareholders with respect to such shares, and shall have no rights
with respect thereto except the right to receive from the bank or trust
company payment of the redemption price of the shares without interest
upon surrender of their certificates therefor and the right to receive
from the Corporation any accrued dividends thereon through the date such
shares were called for redemption. Any interest accrued on any funds so
deposited shall be the property of, and paid to, the Corporation.
B-7
<PAGE>
Certificate of Designation
Series B Convertible Preferred Stock
7.5. Upon any redemption of Series B Preferred Stock in
accordance with the foregoing, all of such shares of Series B Preferred
Stock shall be cancelled and revert to the status of authorized and
unissued shares of Preferred Stock.
SECTION 8. REQUIRED NOTICES. In case at any time:
(a) the Corporation shall declare or pay any dividend payable in
stock or other consideration or make any distribution to the
holders of its Common Stock; or
(b) the Corporation shall offer to the holders of its Common
Stock any additional shares of stock of any class or other
rights;
(c) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or
any consolidation or merger of the Corporation with, or sale
of all or substantially all of its assets to, another
corporation; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation;
then, in any one or more of such cases, the Corporation shall cause to
be mailed to the holders of record of then outstanding shares of Series
B Preferred Stock (i) at least 30 days' prior written notice of the
date on which the books of the Corporation shall close or a record shall
be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation
or winding-up, and (ii) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation
or winding-up, at least 30 days' prior written notice of the date when
the same shall take place. Such notice in accordance with the foregoing
clause (i) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto, and such notice in accordance
with the foregoing clause (ii) shall also specify the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation
or winding-up, as the case may be.
SECTION 9. AMENDMENTS AND ADDITIONAL COVENANTS.
9.1. So long as any Series B Preferred Stock shall be
outstanding, this Corporation shall not, without the prior approval of
the holders of not less than a majority of the then issued and
outstanding shares of Series B Preferred Stock voting as a class, permit
the Corporation to amend or repeal any provision of, or add any
provision to, this Certificate or the Corporation's Articles of
Incorporation or bylaws, if such action would alter or change
B-8
<PAGE>
Certificate of Designation
Series B Convertible Preferred Stock
the preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, the Series B Preferred Stock.
9.2. So long as any Series B Preferred Stock shall be
outstanding, the Corporation shall:
9.2.1 maintain its books of account and financial statements and records
in accordance with generally accepted accounting principles, and
all determinations hereunder, if any, which are dependent upon a
calculation of the Corporation's financial condition shall be
determined in accordance with generally accepted accounting
principles;
9.2.2 promptly pay and discharge, or cause to be paid and discharged,
when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon the income, profits,
property, or business of the Corporation or any subsidiary, except
where the Corporation is contesting any of the foregoing in good
faith by appropriate proceedings; and
9.2.3 keep its properties in good repair, working order, and condition,
reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions, and
improvements thereto, and the Corporation shall at all times
comply with the provisions of all material leases to which it is a
party or under which it occupies property so as to prevent any
loss or forfeiture thereof or thereunder.
9.3. So long as any Series B Preferred Stock shall be
outstanding, the Corporation shall furnish to each holder of record of
the Series B Preferred Stock:
(a) prompt written notice of any material actions, suits, claims,
notices of violation, hearings, investigations or proceedings
pending (of which the Corporation has notice) or threatened in
writing against the Corporation with respect to the ownership,
use, maintenance or operation of any of material portion of its
property or proprietary rights;
(b) as soon as practicable, but in any event within 120 days after the
end of each fiscal year of the Corporation, an income statement,
statement of cash flow and statement of changes in stockholders'
equity for such fiscal year, and a balance sheet of the
Corporation as of the end of such year, such year-end financial
statements to be in reasonable detail, prepared in accordance with
generally accepted accounting principles, and audited and
certified by independent public accountants selected by the Board
of Directors of the Corporation; and
B-10
<PAGE>
Certificate of Designation
Series B Convertible Preferred Stock
(c) as soon as practicable, but in any event within forty-five (45)
days after the end of each of the first three (3) quarters of each
fiscal year of the Corporation, an unaudited income statement,
statement of cash flows and statement of changes in stockholders'
equity for such fiscal quarter and for the fiscal year to date,
and an unaudited balance sheet as of the end of such fiscal
quarter.
RESOLVED FURTHER, that the President or any Vice President of this
Corporation and the Secretary or any Assistant Secretary of the
Corporation are hereby authorized and directed to prepare, sign, and
file with the Secretary of the State of Colorado a Certificate of
Designation of Series B Preferred Stock of the Corporation in accordance
with the resolutions set forth herein."
(3) We further certify that the authorized number of shares of
Preferred Stock of this Corporation is 50,000,000 shares; that the number of
shares constituting the Series A Redeemable Preferred Stock is 63,000 shares,
of which 62,256 shares are issued and outstanding; and the number of shares
constituting the 10% Series B Convertible Preferred Stock established by the
foregoing resolutions, none of which have been issued, is 200,000 shares.
IN WITNESS WHEREOF, the undersigned have executed this Certificate at
Colorado Springs, State of Colorado, on this 30th day of MAY, 1996.
BROWN DISC PRODUCTS COMPANY, INC.
By: /s/ Ronald H. Cole
-------------------------------
Ronald H. Cole, President
ATTEST:
/s/ Daryl M. Silversparre
- ----------------------------------
Daryl M. Silversparre, Secretary
<PAGE>
ADOPTED OCTOBER 12, 1989
BYLAWS
OF
BROWN DISC PRODUCTS COMPANY, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE I - OFFICES ..................................................... 1
1.1 Business Office .............................................. 1
1.2 Registered Office ............................................ 1
ARTICLE II - SHARES AND TRANSFER THEREOF ................................ 1
2.1 Regulation ................................................... 1
2.2 Certificates for Shares ...................................... 2
2.3 Cancellation of Certificates ................................. 3
2.4 Lost, Stolen or Destroyed Certificates ....................... 3
2.5 Transfer of Shares ........................................... 4
2.6 Transfer Agent .............................................. 5
2.7 Close of Transfer Book and Record Date ....................... 6
2.8 Shares Without Certificates ................................. 7
ARTICLE III - SHAREHOLDERS AND MEETINGS THEREOF ........................ 8
3.1 Shareholders of Record ....................................... 8
3.2 Meetings ..................................................... 8
3.3 Annual Meeting ............................................... 8
3.4 Special Meetings ............................................. 9
3.5 Court Ordered Meeting ........................................ 9
3.6 Notice ....................................................... 10
3.7 Meeting of all Shareholders .................................. 11
3.8 Voting Record ................................................ 11
3.9 Quorum ....................................................... 12
3.10 Manner of Acting ............................................. 13
3.11 Proxies ...................................................... 13
3.12 Voting of Shares ............................................. 13
3.13 Voting of Shares by Certain Holders .......................... 14
3.14 Informal Action by Shareholders .............................. 16
3.15 Voting by Ballot ............................................. 17
3.16 Cumulative Voting ............................................ 17
3.17 Waiver of Notice ............................................. 17
ARTICLE IV - DIRECTORS, POWERS AND MEETINGS ............................. 18
4.1 Board of Directors ........................................... 18
4.2 General Powers ............................................... 19
4.3 Performance of Duties ........................................ 19
4.4 Regular Meetings ............................................. 21
<PAGE>
TABLE OF CONTENTS (continued)
4.5 Special Meetings ............................................. 21
4.6 Notice ....................................................... 21
4.7 Participation by Electronic Means ............................ 22
4.8 Quorum and Manner of Acting .................................. 23
4.9 Organization ................................................. 23
4.10 Presumption of Assent ........................................ 23
4.11 Informal Action by Directors ................................. 24
4.12 Vacancies .................................................... 25
4.13 Compensation ................................................. 25
4.14 Removal of Directors ......................................... 26
4.15 Resignations ................................................. 26
ARTICLE V - OFFICERS .................................................... 26
5.1 Number ....................................................... 26
5.2 Election and Term of Office .................................. 27
5.3 Removal ...................................................... 27
5.4 Vacancies .................................................... 27
5.5 Powers ....................................................... 28
5.6 Compensation ................................................. 31
5.7 Bonds ........................................................ 32
ARTICLE VI - DIVIDENDS .................................................. 32
ARTICLE VII - FINANCE ................................................... 32
7.1 Reserve Funds ................................................ 32
7.2 Banking ...................................................... 33
ARTICLE VIII - CONTRACTS, LOANS AND CHECKS .............................. 33
8.1 Execution of Contracts ....................................... 33
8.2 Loans ........................................................ 34
8.3 Checks ....................................................... 34
8.4 Deposits ..................................................... 34
ARTICLE IX - FISCAL YEAR ................................................ 35
ARTICLE X - CORPORATE SEAL .............................................. 35
ARTICLE XI - AMENDMENTS ................................................. 35
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<PAGE>
TABLE OF CONTENTS
(continued)
ARTICLE XII - EXECUTIVE COMMITTEE ....................................... 36
12.1 Appointment .................................................. 36
12.2 Authority .................................................... 36
12.3 Tenure and Qualifications .................................... 37
12.4 Meetings ..................................................... 37
12.5 Quorum ....................................................... 38
12.6 Informal Action by Executive Committee ....................... 38
12.7 Vacancies .................................................... 38
12.8 Resignations and Removal ..................................... 38
12.9 Procedure .................................................... 39
ARTICLE XIII - EMERGENCY BYLAWS ......................................... 39
CERTIFICATE ............................................................. 42
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<PAGE>
ARTICLE I
OFFICES
1.1 BUSINESS OFFICE. The principal office and place of business of
the corporation in the State of Colorado shall be at 1120 B Elkton Drive,
Colorado Springs, Colorado 80907. Other offices and places of business may be
established from time to time by resolution of the Board of Directors or as
the business of the corporation may require.
1.2 REGISTERED OFFICE. The registered office of the corporation,
required by the Colorado Corporation Code to be maintained in the State of
Colorado, may be, but need not be, identical with the principal office in the
State of Colorado, and the address of the registered office may be changed
from time to time by the Board of Directors.
ARTICLE II
SHARES AND TRANSFER THEREOF
2.1 REGULATION. The Board of Directors may make such rules and
regulations as it may deem appropriate concerning the issuance, transfer and
registration of certificates for shares of the corporation, including the
appointment of transfer agents and registrars.
<PAGE>
2.2 CERTIFICATES FOR SHARES. The shares of the corporation may, but
need not be represented by certificates. Unless the Colorado Corporation
Code or another law expressly provides otherwise, the fact that the shares are
not represented by certificates shall have no effect on the rights and
obligations of shareholders.
Certificates representing shares of the corporation shall be
respectively numbered serially for each class of shares, or series thereof, as
they are issued, shall be impressed with the corporate seal or a facsimile
thereof, and shall be signed by the Chairman or Vice Chairman of the Board of
Directors or by the President or a Vice President and by the Treasurer or an
Assistant Treasurer or by the Secretary or an Assistant Secretary, provided
that such signatures may be a facsimile if the certificate is countersigned by
a transfer agent, or registered by a registrar, both of which may be the
corporation itself or its employee. Each certificate shall state the name of
the corporation, the fact that the corporation is organized or incorporated
under the laws of the State of Colorado, the name of the person to whom
issued, the date of issue, the class (or series of any class), the number of
shares represented thereby and the par value of the shares represented thereby
or a statement that such shares are without par value. A statement of the
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<PAGE>
designations, preferences, qualifications, limitations, restrictions and
special or relative rights of the shares of each class shall be set forth in
full or summarized on the face or back of the certificates which the
corporation shall issue, or in lieu thereof, the certificate may set forth
that such a statement or summary will be furnished to any shareholder upon
request without charge. Each certificate shall be otherwise in such form as
may be prescribed by the Board of Directors and as shall conform to the rules
of any stock exchange on which the shares may be listed.
The corporation may issue certificates representing fractional shares
and may make transfers creating a fractional interest in a share of stock.
The corporation may issue scrip in lieu of any fractional shares, such scrip
to have terms and conditions specified by the Board of Directors.
2.3 CANCELLATION OF CERTIFICATES. All certificates surrendered to
the corporation for transfer shall be cancelled and no new certificates shall
be issued in lieu thereof until the former certificate for a like number of
shares shall have been surrendered and cancelled, except as herein provided
with respect to lost, stolen or destroyed certificates.
2.4 LOST, STOLEN OR DESTROYED CERTIFICATES. Any shareholder claiming
that his certificate for shares is lost,
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<PAGE>
stolen or destroyed may make an affidavit or affirmation of the fact and lodge
the same with the Secretary of the corporation, accompanied by a signed
application for a new certificate. Thereupon, and upon the giving of a
satisfactory bond of indemnity to the corporation not exceeding an amount
double the value of the shares as represented by such certificate (the
necessity for such bond and the amount required to be determined by the
President and Treasurer of the corporation), a new certificate may be issued
of the same tenor and representing the same number, class and series of shares
as were represented by the certificate alleged to be lost, stolen or
destroyed.
2.5 TRANSFER OF SHARES. Subject to the terms of any shareholder
agreement relating to the transfer of shares or other transfer restrictions
contained in the Articles of Incorporation or authorized therein, shares of
the corporation shall be transferable on the books of the corporation by the
holder thereof in person or by his duly authorized attorney, upon the
surrender and cancellation of a certificate or certificates for a like number
of shares. Upon presentation and surrender of a certificate for shares
properly endorsed and payment of all taxes therefor, the transferee shall be
entitled to a new certificate or certificates in lieu thereof. As against
the corporation, a
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<PAGE>
transfer of shares can be made only on the books of the corporation and in the
manner hereinabove provided, and the corporation shall be entitled to treat
the holder of record of any share as the owner thereof and shall not be bound
to recognize any equitable or other claim to or interest in such share on the
part of any other person, whether or not it shall have express or other notice
thereof, save as expressly provided by the statutes of the State of Colorado.
2.6 TRANSFER AGENT. Unless otherwise specified by the Board of
Directors by resolution, the Secretary of the corporation shall act as
transfer agent of the certificates representing the shares of stock of the
corporation. He shall maintain a stock transfer book, the stubs in which
shall set forth among other things, the names and addresses of the holders of
all issued shares of the corporation, the number of shares held by each, the
certificate numbers representing such shares, the date of issue of the
certificates representing such shares, and whether or not such shares
originate from original issue or from transfer. Subject to Section 3.8, the
names and addresses of the shareholders as they appear on the stubs of the
stock transfer book shall be conclusive evidence as to who are the
shareholders of record and as such entitled to receive notice of the meetings
of shareholders; to vote at such meetings; to
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<PAGE>
examine the list of the shareholders entitled to vote at meetings; to receive
dividends; and to own, enjoy and exercise any other property or rights
deriving from such shares against the corporation. Each shareholder shall be
responsible for notifying the Secretary in writing of any change in his name
or address and failure so to do will relieve the corporation, its directors,
officers and agents, from liability for failure to direct notices or other
documents, or pay over or transfer dividends or other property or rights, to a
name or address other than the name and address appearing on the stub of the
stock transfer book.
2.7 CLOSE OF TRANSFER BOOK AND RECORD DATE. For the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders, or any adjournment thereof, or shareholders entitled to receive
payment of any dividend, or in order to make a determination of shareholders
for any other proper purpose, the Board of Directors may provide that the
stock transfer books shall be closed for a stated period, but not to exceed,
in any case, fifty days. If the stock transfer books shall be closed for the
purpose of determining shareholders entitled to notice of, or to vote at a
meeting of shareholders, such books shall be closed for at least ten days
immediately preceding such meeting. In lieu of closing the stock transfer
books, the Board of
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<PAGE>
Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than fifty
days and, in case of a meeting of shareholders, not less than ten days prior
to the date on which the particular action requiring such determination of
shareholders is to be taken. If the stock transfer books are not closed and
no record date is fixed for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders, or shareholders entitled to
receive payment of a dividend, the date on which notice of the meeting is
mailed or the date on which the resolution of the Board of Directors declaring
such dividend is adopted, as the case may be, shall be the record date for
such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided in
this section, such determination shall apply to any adjournment thereof.
2.8 SHARES WITHOUT CERTIFICATES.
(A) Unless provided otherwise in these bylaws or in the
corporation's Articles of Incorporation, the Board of Directors may authorize
the issuance of any of the corporation's classes or series of shares without
certificates. Such authorization shall not affect shares already represented
by certificates until they are surrendered to the corporation.
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<PAGE>
(B) Within a reasonable time following the issue or transfer of
shares without certificates, the corporation shall send the shareholder a
complete written statement of the information required by Section 2.2 hereof
to be on certificates.
ARTICLE III
SHAREHOLDERS AND MEETINGS THEREOF
3.1 SHAREHOLDERS OF RECORD. Only shareholders of record on the books
of the corporation shall be entitled to be treated by the corporation as
holders in fact of the shares standing in their respective names, and the
corporation shall not be bound to recognize any equitable or other claim to,
or interest in, any shares on the part of any other person, firm or
corporation, whether or not it shall have express or other notice thereof,
except as expressly provided by the laws of Colorado.
3.2 MEETINGS. Meetings of shareholders shall be held at the
principal office of the corporation, or at such other place, either within or
without the State of Colorado, as specified from time to time by the Board of
Directors. If the Board of Directors shall specify another location such
change in location shall be recorded on the notice calling such meeting.
-8-
<PAGE>
3.3 ANNUAL MEETING. In the absence of a resolution of the Board of
Directors providing otherwise, the annual meeting of shareholders of the
corporation for the election of directors, and for the transaction of such
other business as may properly come before the meeting, shall be held on the
20th day of June at 10:00 o'clock a.m. in each fiscal year, if the same be
not a legal holiday, and if a legal holiday in the State of Colorado, then on
the next succeeding business day. If the election of Directors shall not be
held on the day designated herein for any annual meeting of the shareholders,
the Board of Directors shall cause the election to be held at a special
meeting of the shareholders as soon thereafter as may be convenient. Failure
to hold the annual meeting at the designated time shall not work a forfeiture
or dissolution of the corporation.
3.4 SPECIAL MEETINGS. Special meetings of shareholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called by
the President, the Board of Directors, or the holders of not less than
one-tenth of all the shares entitled to vote at the meeting.
3.5 COURT ORDERED MEETING.
(A) Any court of competent jurisdiction in the State of Colorado
may summarily order a meeting to be held:
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<PAGE>
(1) On application of any shareholder of the corporation
if an annual meeting was not held within six months after the end of the
corporation's fiscal year or fifteen months after its last annual meeting,
whichever is earlier; or
(2) On application of a shareholder who participated in a
proper call for a special meeting if (i) notice of the special meeting was not
given within thirty days after the date the demand was delivered to the
corporation's Secretary; or (ii) the special meeting was not held in
accordance with the notice.
(B) The court may fix the time and place of the meeting, specify
a record date for determining shareholders entitled to notice of and to vote
at the meeting, prescribe the form and content of the meeting notice, fix the
quorum required for the meeting or direct that the votes represented at the
meeting constitute a quorum for the meeting, and enter other orders necessary
to permit the meeting to be held.
3.6 NOTICE.
(A) Written notice stating the place, day and hour of the
meeting of shareholders and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered unless otherwise
prescribed by statute not less than ten days nor more than fifty days
-10-
<PAGE>
before the date of the meeting, either personally or by mail, by or at the
direction of the President, the Secretary, or the officer or person calling
the meeting to each shareholder of record entitled to vote at such meeting;
except that, if the authorized shares are to be increased, at least thirty
days' notice shall be given, and if the sale of all or substantially all of
the corporation's assets is to be voted upon, at least twenty days' notice
shall be given.
(B) Notice to shareholders of record, if mailed, shall be
deemed delivered as to any shareholder of record, when deposited in the United
States mail, addressed to the shareholder at his address as it appears on the
stock transfer books of the corporation, with postage thereon prepaid. If
three successive letters mailed to the last-known address of any shareholder
of record are returned as undeliverable, no further notices to such
shareholder shall be necessary until another address for such shareholder is
made known to the corporation.
(C) When a meeting is adjourned to another time or place, notice
need not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is
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<PAGE>
for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each shareholder of record entitled to vote at the meeting.
3.7 MEETING OF ALL SHAREHOLDERS. If all of the shareholders shall
meet at any time and place, either within or without the State of Colorado,
and consent to the holding of a meeting at such time and place, such meeting
shall be valid without call or notice, and at such meeting any corporate
action may be taken.
3.8 VOTING RECORD. The officer or agent having charge of the stock
transfer books for shares of the corporation shall make, at least ten days
before such meeting of shareholders, a complete record of the shareholders
entitled to vote at each meeting of shareholders or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each. The record, for a period of ten days prior to such meeting,
shall be kept on file at the principal office of the corporation, whether
within or without the State of Colorado, and shall be subject to inspection by
any shareholder for any purpose germane to the meeting at any time during
usual business hours. Such record shall be produced and kept open at the
time and place of the meeting and shall be subject to the inspection of any
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<PAGE>
shareholder during the whole time of the meeting for the purposes thereof.
The original stock transfer books shall be the prima facie evidence as
to who are the shareholders entitled to examine the record or transfer books
or to vote at any meeting of shareholders.
3.9 QUORUM. One-third of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at any meeting of shareholders, except as otherwise provided by the Colorado
Corporation Code and the Articles of Incorporation. In the absence of a
quorum at any such meeting, a majority of the shares so represented may
adjourn the meeting from time to time for a period not to exceed sixty days
without further notice. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. The shareholders present at
a duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
3.10 MANNER OF ACTING. If a quorum is present, the affirmative vote
of the majority of the shares represented at the meeting and entitled to vote
on the subject matter shall
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be the act of the shareholders, unless the vote of a greater proportion or
number or voting by classes is otherwise required by statute or by the
Articles of Incorporation or these Bylaws.
3.11 PROXIES. At all meetings of shareholders a shareholder may vote
in person or by proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. Such proxy shall be filed with the Secretary of
the corporation before or at the time of the meeting. No proxy shall be
valid after eleven months from the date of its execution, unless otherwise
provided in the proxy.
3.12 VOTING OF SHARES. Unless otherwise provided by these Bylaws or
the Articles of Incorporation, each outstanding share entitled to vote shall
be entitled to one vote upon each matter submitted to a vote at a meeting of
shareholders, and each fractional share shall be entitled to a corresponding
fractional vote on each such matter.
3.13 VOTING OF SHARES BY CERTAIN HOLDERS.
(A) If shares or other securities having voting power stand of
record in the names of two or more persons, whether fiduciaries, members of a
partnership, joint tenants, tenants in common, tenants by the entirety, or
otherwise, or if two or more persons have the same fiduciary relationship
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respecting the same shares, voting with respect to the shares shall have the
following effect:
(1) If only one person votes, his act binds all,
(2) If two or more persons vote, the act of the majority
so voting binds all;
(3) If two or more persons vote, but the vote is evenly
split on any particular matter, each faction may vote the securities in
question proportionately, or any person voting the shares of a beneficiary,
if any, may apply to any court of competent jurisdiction in the State of
Colorado to appoint an additional person to act with the persons so voting the
shares. The shares shall then be voted as determined by a majority of such
persons and the person appointed by the court. If a tenancy is held in
unequal interests, a majority or even split for the purpose of this
subparagraph (3) shall be a majority or even split in interest.
The effects of voting stated in paragraph (A) of this Section 3.13 shall
not be applicable if the Secretary of the corporation is given written notice
of alternate voting provisions and is furnished with a copy of the instrument
or order wherein the alternate voting provisions are stated.
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(B) Shares standing in the name of another corporation may be
voted by such officer, agent or proxy as the bylaws of such corporation may
prescribe, or, in the absence of such provision, as the board of directors of
such other corporation may determine.
(C) Shares standing in the name of a deceased person, a minor
ward or an incompetent person, may be voted by his administrator, executor,
court appointed guardian or conservator, either in person or by proxy without
a transfer of such shares into the name of such administrator, executor, court
appointed guardian or conservator. Shares standing in the name of a trustee
may be voted by him, either in person or by proxy, but no trustee shall be
entitled to vote shares held by him without a transfer of such shares into his
name.
(D) Shares standing in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver may be
voted by such receiver without the transfer thereof into his name if authority
so to do be contained in an appropriate order of the court by which such
receiver was appointed.
(E) A shareholder whose shares are pledged shall be entitled to
vote such shares until the shares have been transferred into the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the shares so
transferred.
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(F) Neither shares of its own stock belonging to this
corporation, nor shares of its own stock held by it in a fiduciary capacity,
nor shares of its own stock held by another corporation if the majority of
shares entitled to vote for the election of directors of such corporation is
held by this corporation may be voted, directly or indirectly, at any meeting
and shall not be counted in determining the total number of outstanding shares
at any given time.
(G) Redeemable shares which have been called for redemption
shall not be entitled to vote on any matter and shall not be deemed
outstanding shares on and after the date on which written notice of redemption
has been mailed to shareholders and a sum sufficient to redeem such shares has
been deposited with a bank or trust company with irrevocable instruction and
authority to pay the redemption price to the holders of the shares upon
surrender of certificates therefor.
3.14 INFORMAL ACTION BY SHAREHOLDERS.
(A) Any action required or permitted to be taken at a meeting of
the shareholders may be taken without a meeting if the action is evidenced by
one or more written consents describing the action taken, signed by each
shareholder entitled to vote and delivered to the Secretary of the corporation
for inclusion in the minutes or for filing
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with the corporate records. Action taken under this subsection (A) is
effective when all shareholders entitled to vote have signed the consent,
unless the consent specifies a different effective date.
(B) Written consent of the shareholders entitled to vote has the
same force and effect as an unanimous vote of such shareholders and may be
stated as such in any document.
(C) The record date for determining shareholders entitled to
take action without a meeting is the date the first shareholder signs the
consent under subsection (A) of this section.
3.15 VOTING BY BALLOT. Voting on any question or in any election may
be by voice vote unless the presiding officer shall order or any shareholder
shall demand that voting be by ballot.
3.16 CUMULATIVE VOTING. No shareholder shall be permitted to cumulate
his votes.
3.17 WAIVER OF NOTICE.
(A) When any notice is required to be given to any shareholder of
the corporation under the provisions of the Colorado Corporation Code or under
the provisions of the Articles of Incorporation or Bylaws of the corporation,
a waiver thereof in writing signed by the person entitled to such notice,
whether before, at, or after the time stated herein, shall be equivalent to
the giving of such notice.
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(B) By attending a meeting, a shareholder:
(1) Waives objection to lack of notice or defective notice
of such meeting unless the shareholder, at the beginning of the meeting
objects to the holding of the meeting or the transacting of business at the
meeting;
(2) Waives objection to consideration at such meeting of a
particular matter not within the purpose or purposes described in the meeting
notice unless the shareholder objects to considering the matter when it is
presented.
ARTICLE IV
DIRECTORS, POWERS AND MEETINGS
4.1 BOARD OF DIRECTORS. The business and affairs of the corporation
shall be managed by a board of not fewer than three (3) nor more than nine (9)
directors who shall be natural persons of at least 18 years of age but who
need not be shareholders of the corporation or residents of the State of
Colorado and who shall be elected at the annual meeting of shareholders or
some adjournment thereof. Directors shall hold office until the next
succeeding annual meeting of shareholders and until their successors shall
have been elected and shall qualify. The Board of Directors may
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increase or decrease, to not less than three, the number of directors by
resolution; except that there need only be as many directors as there are
shareholders in the event that the outstanding shares are held of record by
fewer than three shareholders.
4.2 GENERAL POWERS. The business and affairs of the corporation
shall be managed by the Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by
statute or by the Articles of Incorporation or by these Bylaws directed or
required to be exercised or done by the shareholders. The directors shall
pass upon any and all bills or claims of officers for salaries or other
compensation and, if deemed advisable, shall contract with officers,
employees, directors, attorneys, accountants, and other persons to render
services to the corporation.
4.3 PERFORMANCE OF DUTIES. A director of the corporation shall
perform his duties as a director, including his duties as a member of any
committee of the board upon which he may serve, in good faith, in a manner he
reasonably believes to be in the best interests of the corporation, and with
such care as an ordinarily prudent person in a like position would use under
similar circumstances. In performing his duties, a director shall be
entitled to rely
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on information, opinions, reports, or statements, including financial
statements and other financial data, in each case prepared or presented by
persons and groups listed in paragraphs (A), (B), and (C) of this Section 4.3;
but he shall not be considered to be acting in good faith if he has knowledge
concerning the matter in question that would cause such reliance to be
unwarranted. A person who so performs his duties shall not have any liability
by reason of being or having been a director of the corporation. Those
persons and groups on whose information, opinions, reports, and statements a
director is entitled to rely upon are:
(A) One or more officers or employees of the corporation whom
the director reasonably believes to be reliable and competent in the matters
presented;
(B) Counsel, public accountants, or other persons as to matters
which the director reasonably believes to be within such persons' professional
or expert competence; or
(C) A committee of the board upon which he does not serve, duly
designated in accordance with the provisions of the Articles of Incorporation
or the Bylaws, as to matters within its designated authority, which committee
the director reasonably believes to merit confidence.
4.4 REGULAR MEETINGS. A regular, annual meeting of the Board of
Directors shall be held at the same place as, and
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immediately after, the annual meeting of shareholders, and no notice shall be
required in connection therewith. The annual meeting of the Board of
Directors shall be for the purpose of electing officers and the transaction of
such other business as may come before the meeting. The Board of Directors
may provide, by resolution, the time and place, either within or without the
State of Colorado, for the holding of additional regular meetings without
other notice than such resolution.
4.5 SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by or at the request of the President or any two directors. The
person or persons authorized to call special meetings of the Board of
Directors may fix any place, either within or without the State of Colorado,
as the place for holding any special meeting of the Board of Directors called
by them.
4.6 NOTICE. Written notice of any special meeting of directors shall
be given as follows:
(A) By mail to each director at his business address at least
three days prior to the meeting. If mailed, such notice shall be deemed to
be delivered when deposited in the United States mail, so addressed, with
postage thereon prepaid; or
(B) By personal delivery or telegram at least twenty-four hours
prior to the meeting to the business
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address of each director, or in the event such notice is given on a Saturday,
Sunday or holiday, to the residence address of each director. If notice be
given by telegram, such notice shall be deemed to be delivered when the
telegram is delivered to the telegraph company.
When any notice is required to be given to any director pursuant to
these Bylaws, the Articles of Incorporation or law, a waiver thereof in
writing signed by the persons entitled to such notice, whether before, at or
after the time stated therein, shall be equivalent to the giving of such
notice. By attending or participating in a regular or special meeting, a
director waives any required notice of such meeting unless the director, at
the beginning of the meeting, objects to the holding of the meeting or the
transacting of business thereat.
Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
4.7 PARTICIPATION BY ELECTRONIC MEANS. Except as may be otherwise
provided by the Articles of Incorporation or Bylaws, members of the Board of
Directors or any committee designated by such Board may participate in a
meeting of the Board or committee by means of conference telephone or
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similar communications equipment by which all persons participating in the
meeting can hear each other at the same time. Such participation shall
constitute presence in person at the meeting.
4.8 QUORUM AND MANNER OF ACTING. A quorum at all meetings of the
Board of Directors shall consist of a majority of the number of directors then
holding office, but a smaller number may adjourn from time to time without
further notice, until a quorum is secured. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act
of the Board of Directors, unless the act of a greater number is required by
the laws of the State of Colorado or by the Articles of Incorporation or these
Bylaws.
4.9 ORGANIZATION. The Board of Directors shall elect a chairman from
among the directors to preside at each meeting of the Board of Directors and
at all meetings of the stockholders. The Board of Directors shall elect a
Secretary to record the discussions and resolutions of each meeting.
4.10 PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the Board of Directors or a committee of the Board of
Directors when corporate action is taken is deemed to have assented to the
action taken unless:
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(A) He objects at the beginning of such meeting to the holding
of the meeting or the transacting of business at the meeting;
(B) He contemporaneously requests that his dissent from the
action taken be entered in the minutes of such meeting; or
(C) He gives written notice of his dissent to the presiding
officer of such meeting before its adjournment or to the Secretary of the
corporation immediately after adjournment of such meeting.
The right of dissent as to a specific action taken in a meeting of the
Board of Directors or a committee of the Board of Directors is not available
to a director who votes in favor of such action.
4.11 INFORMAL ACTION BY DIRECTORS. Any action required or permitted to
be taken at a meeting of the Board of Directors or any committee designated by
said Board of Directors may be taken without a meeting if the action is
evidenced by one or more written consents describing the action taken, signed
by each director or committee member, and delivered to the Secretary for
inclusion in the minutes or for filing with the corporate records. Action
taken under this section is effective when all directors or committee members
have signed the consent, unless the consent specifies
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a different effective date. Such consent has the same force and effect as an
unanimous vote of the directors or committee members and may be stated as such
in any document.
4.12 VACANCIES. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of a majority of the remaining directors
though less than a quorum of the Board of Directors. A director elected to
fill a vacancy shall be elected for the unexpired term of his predecessor in
office, and shall hold such office until his successor is duly elected and
shall qualify. Any directorship to be filled by reason of an increase in the
number of directors shall be filled by the affirmative vote of a majority of
the directors then in office or by an election at an annual meeting, or at a
special meeting of shareholders called for that purpose. A director chosen
to fill a position resulting from an increase in the number of directors shall
hold office only until the next election of directors by the shareholders.
4.13 COMPENSATION. By resolution of the Board of Directors and
irrespective of any personal interest of any of the members, each director may
be paid his expenses, if any, of attendance at each meeting of the Board of
Directors, and may be paid a stated salary as director or a fixed sum for
attendance at each meeting of the Board of Directors or both. No such
payment shall preclude any director from
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serving the corporation in any other capacity and receiving compensation
therefor.
4.14 REMOVAL OF DIRECTORS. Any director or directors of the
corporation may be removed at any time, with or without cause, in the manner
provided in the Colorado Corporation Code.
4.15 RESIGNATIONS. A director of the corporation may resign at any
time by giving written notice to the Board of Directors, President or
Secretary of the corporation. The resignation shall take effect upon the
date of receipt of such notice, or at such later time specified therein. The
acceptance of such resignation shall not be necessary to make it effective,
unless the resignation requires such acceptance to be effective.
ARTICLE V
OFFICERS
5.1 NUMBER. The officers of the corporation shall be a President, a
Secretary, and a Treasurer, each of whom shall be natural persons of the age
of eighteen years or older and who shall be elected by the Board of Directors.
Such other officers and assistant officers as may be deemed necessary may be
elected or appointed by the Board of Directors. Any
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two or more offices may be held by the same person, except the offices of
President and Secretary.
5.2 ELECTION AND TERM OF OFFICE. The officers of the corporation to
be elected by the Board of Directors shall be elected annually by the Board of
Directors at the first meeting of the Board of Directors held after the annual
meeting of the shareholders. If the election of officers shall not be held
at such meeting, such election shall be held as soon thereafter as
practicable. Each officer shall hold office until his successor shall have
been duly elected and shall have qualified or until his death or until he
shall resign or shall have been removed in the manner hereinafter provided.
5.3 REMOVAL. Any officer or agent may be removed by the Board of
Directors with or without cause whenever in its judgment the best interests of
the corporation will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Election
or appointment of an officer or agent shall not of itself create contract
rights.
5.4 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the
Board of Directors for the unexpired portion of the term. In the event of
absence or inability of
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any officer to act, the Board of Directors may delegate the powers or duties
of such officer to any other officer, director or person whom it may select.
5.5 POWERS. The officers of the corporation shall exercise and
perform the respective powers, duties and functions as are stated below, and
as may be assigned to them by the Board of Directors.
(A) PRESIDENT. The President shall be the chief executive
officer of the corporation and, subject to the control of the Board of
Directors, shall have general supervision, direction and control over all of
the business and affairs of the corporation. The President shall, when
present, and in the absence of a Chairman of the Board, preside at all
meetings of the shareholders and of the Board of Directors. The President
may sign, with the Secretary or any other proper officer of the corporation
authorized by the Board of Directors, certificates for shares of the
corporation and deeds, mortgages, bonds, contracts, or other instruments which
the Board of Directors has authorized to be executed, except in cases where
the signing and execution thereof shall be expressly delegated by the Board of
Directors or by these Bylaws to some other officer or agent of the
corporation, or shall be required by law to be otherwise signed or executed;
and in general shall perform
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all duties incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
(B) VICE PRESIDENT. If elected or appointed by the Board of
Directors, the Vice President (or in the event there is more than one Vice
President, the Vice Presidents in the order designated by the Board of
Directors, or in the absence of any designation, then in the order of their
election) shall, in the absence of the President or in the event of his death,
inability or refusal to act, perform all duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions
upon the President. Any Vice President may sign, with the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, certificates
for shares of the corporation; and shall perform such other duties as from
time to time may be assigned to him by the President or by the Board of
Directors.
(C) SECRETARY. The Secretary shall: keep the minutes of the
proceedings of the shareholders and of the Board of Directors in one or more
books provided for that purpose; see that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law; be
custodian of the corporate records and of the seal of the corporation and see
that the seal of the corporation is
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affixed to all documents the execution of which on behalf of the corporation
under its seal is duly authorized; keep a register of the post office address
of each shareholder which shall be furnished to the Secretary by such
shareholder; sign with the Chairman or Vice Chairman of the Board of
Directors, or the President, or a Vice President, certificates for shares of
the corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors; have general charge of the stock
transfer books of the corporation; and in general perform all duties incident
to the office of Secretary and such other duties as from time to time may be
assigned to him by the President or by the Board of Directors.
(D) ASSISTANT SECRETARY. The Assistant Secretary, when
authorized by the Board of Directors, may sign with the Chairman or Vice
Chairman of the Board of Directors or the President or a Vice President
certificates for shares of the corporation the issuance of which shall have
been authorized by a resolution of the Board of Directors. An Assistant
Secretary, at the request of the Secretary, or in the absence or disability of
the Secretary, also may perform all of the duties of the Secretary. An
Assistant Secretary shall perform such other duties as may be assigned to him
by the President or by the Secretary.
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(E) TREASURER. The Treasurer shall: have charge and custody
of and be responsible for all funds and securities of the corporation; receive
and give receipts for monies due and payable to the corporation from any
source whatsoever, and deposit all such monies in the name of the corporation
in such banks, trust companies or other depositories as shall be selected in
accordance with the provisions of these Bylaws; and keep accurate books of
accounts of the corporation's transactions, which shall be the property of the
corporation, and shall render financial reports and statements of condition of
the corporation when so requested by the Board of Directors or President.
The Treasurer shall perform all duties commonly incident to his office and
such other duties as may from time to time be assigned to him by the President
or the Board of Directors. In the absence or disability of the President and
Vice President or Vice Presidents, the Treasurer shall perform the duties of
the President.
(F) ASSISTANT TREASURER. An Assistant Treasurer may, at the
request of the Treasurer, or in the absence or disability of the Treasurer,
perform all of the duties of the Treasurer. He shall perform such other
duties as may be assigned to him by the President or by the Treasurer.
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5.6 COMPENSATION. All officers of the corporation may receive
salaries or other compensation if so ordered and fixed by the Board of
Directors. The Board shall have authority to fix salaries in advance for
stated periods or render the same retroactive as the Board may deem advisable.
No officer shall be prevented from receiving such salary by reason of the fact
that he is also a director of the corporation.
5.7 BONDS. If the Board of Directors by resolution shall so require,
any officer or agent of the corporation shall give bond to the corporation in
such amount and with such surety as the Board of Directors may deem
sufficient, conditioned upon the faithful performance of their respective
duties and offices.
ARTICLE VI
DIVIDENDS
The Board of Directors from time to time may declare and the corporation
may pay dividends on its outstanding shares upon the terms and conditions and
in the manner provided by law and the Articles of Incorporation.
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ARTICLE VII
FINANCE
7.1 RESERVE FUNDS. The Board of Directors, in its uncontrolled
discretion, may set aside from time to time, out of the net profits or earned
surplus of the corporation, such sum or sums as it deems expedient as a
reserve fund to meet contingencies, for equalizing dividends, for maintaining
any property of the corporation, and for any other purpose.
7.2 BANKING. The moneys of the corporation shall be deposited in the
name of the corporation in such bank or banks or trust company or trust
companies, as the Board of Directors shall designate, and may be drawn out
only on checks signed in the name of the corporation by such person or persons
as the Board of Directors, by appropriate resolution, may direct. Notes and
commercial paper, when authorized by the Board, shall be signed in the name of
the corporation by such officer or officers or agent or agents as shall be
authorized from time to time.
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ARTICLE VIII
CONTRACTS, LOANS AND CHECKS
8.1 EXECUTION OF CONTRACTS. Except as otherwise provided by statute
or by these Bylaws, the Board of Directors may authorize any officer or agent
of the corporation to enter into any contract, or execute and deliver any
instrument in the name of, and on behalf of the corporation. Such authority
may be general or confined to specific instances. Unless so authorized, no
officer, agent or employee shall have any power to bind the corporation for
any purpose, except as may be necessary to enable the corporation to carry on
its normal and ordinary course of business.
8.2 LOANS. No loans shall be contracted on behalf of the corporation
and no negotiable paper or otherwise evidence of indebtedness shall be issued
in its name unless authorized by the Board of Directors. When so authorized,
any officer or agent of the corporation may effect loans and advances at any
time for the corporation from any bank, trust company or institution, firm,
corporation or individual. An agent so authorized may make and deliver
promissory notes or other evidence of indebtedness of the corporation and may
mortgage, pledge, hypothecate or transfer any real or personal property
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held by the corporation as security for the payment of such loans. Such
authority, in the Board of Directors' discretion, may be general or confined
to specific instances.
8.3 CHECKS. Checks, notes, drafts and demands for money or other
evidence of indebtedness issued in the name of the corporation shall be signed
by such person or persons as designated by the Board of Directors and in the
manner the Board of Directors prescribes.
8.4 DEPOSITS. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositories as the Board of Directors may
select.
ARTICLE IX
FISCAL YEAR
The fiscal year of the corporation shall be the year adopted by
resolution of the Board of Directors.
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ARTICLE X
CORPORATE SEAL
The Board of Directors shall provide a corporate seal which shall be
circular in form and shall have inscribed thereon the name of the corporation
and the state of incorporation and the words "CORPORATE SEAL."
ARTICLE XI
AMENDMENTS
Any Article or provision of these Bylaws may be altered, amended or
repealed, and new Bylaws may be adopted by a majority of the directors present
at any meeting of the Board of Directors of the corporation at which a quorum
is present. Notwithstanding the foregoing, however, these Bylaws may be
altered, amended or repealed and new Bylaws adopted by a vote of a majority in
interest of the outstanding shares of the corporation entitled to vote at a
meeting duly called for that purpose.
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ARTICLE XII
EXECUTIVE COMMITTEE
12.1 APPOINTMENT. The Board of Directors by resolution adopted by a
majority of the full Board, may designate two or more of its members to
constitute an Executive Committee. The designation of such committee and the
delegation thereto of authority shall not operate to relieve the Board of
Directors, or any member thereof, of any responsibility imposed by law.
12.2 AUTHORITY. The Executive Committee, when the Board of Directors
is not in session shall have and may exercise all of the authority of the
Board of Directors except to the extent, if any, that such authority shall be
limited by the resolution appointing the Executive Committee and except also
that the Executive Committee shall not have the authority of the Board of
Directors in reference to declaring dividends and distributions, recommending
to the shareholders that the Articles of Incorporation be amended,
recommending to the shareholders the adoption of a plan of merger or
consolidation, filling vacancies on the Board of Directors or any committee
thereof, recommending to the shareholders the sale, lease or other disposition
of all or substantially all of the property and assets of the
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corporation otherwise than in the usual and regular course of its business,
recommending to the shareholders a voluntary dissolution of the corporation or
a revocation thereof, authorize or approve the issuance or reacquisition of
shares, or amending the Bylaws of the corporation.
12.3 TENURE AND QUALIFICATIONS. Each member of the Executive
Committee shall hold office until the next regular annual meeting of the Board
of Directors following the designation of such member and until his successor
is designated as a member of the Executive Committee and is elected and
qualified.
12.4 MEETINGS. Regular meetings of the Executive Committee may be
held without notice at such time and places as the Executive Committee may fix
from time to time by resolution. Special meetings of the Executive Committee
may be called by any member thereof upon not less than one day's notice
stating the place, date and hour of the meeting, which notice may be written
or oral, and if mailed, shall be deemed to be delivered when deposited in the
United States mail addressed to the member of the Executive Committee at his
business address. Any member of the Executive Committee may waive notice of
any meeting and no notice of any meeting need be given to any member thereof
who attends in person. The
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notice of a meeting of the Executive Committee need not state the business
proposed to be transacted at the meeting.
12.5 QUORUM. A majority of the members of the Executive Committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the Executive Committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
12.6 INFORMAL ACTION BY EXECUTIVE COMMITTEE. Any action required or
permitted to be taken by the Executive Committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the members of the Committee entitled to vote with
respect to the subject matter thereof.
12.7 VACANCIES. Any vacancy in the Executive Committee may be filled
by a resolution adopted by a majority of the full Board of Directors.
12.8 RESIGNATIONS AND REMOVAL. Any member of the Executive Committee
may be removed at any time with or without cause by resolution adopted by a
majority of the full Board of Directors. Any member of the Executive
Committee may resign from the Executive Committee at any time by giving
written notice to the President or Secretary of the
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<PAGE>
corporation, and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
12.9 PROCEDURE. The Executive Committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall
not be inconsistent with these Bylaws. It shall keep regular minutes of its
proceedings and report the same to the Board of Directors for its information
at the meeting thereof held next after the proceedings shall have been taken.
ARTICLE XIII
EMERGENCY BYLAWS
The Emergency Bylaws provided in this Article XIII shall be operative
during any emergency in the conduct of the business of the corporation
resulting from an attack on the United States or any nuclear or atomic
disaster, notwithstanding any different provision in the preceding articles of
the Bylaws or in the Articles of Incorporation of the corporation or in the
Colorado Corporation Code. To the extent not inconsistent with the
provisions of this Article, the Bylaws provided in the preceding articles
shall remain in effect during such emergency and upon its termination the
Emergency Bylaws shall cease to be operative.
-41-
<PAGE>
During any such emergency:
(A) A meeting of the Board of Directors may be called by any
officer or director of the corporation. Notice of the time and place of the
meeting shall be given by the person calling the meeting to such of the
directors as it may be feasible to reach by any available means of
communication. Such notice shall be given at such time in advance of the
meeting as circumstances permit in the judgment of the person calling the
meeting.
(B) At any such meeting of the Board of Directors, a quorum
shall consist of the number of directors in attendance at such meeting.
(C) The Board of Directors, either before or during any such
emergency, may, effective in the emergency, change the principal office or
designate several alternative principal offices or regional offices, or
authorize the officers so to do.
(D) The Board of Directors, either before or during any such
emergency, may provide, and from time to time modify, lines of succession in
the event that during such an emergency any or all officers or agents of the
corporation shall for any reason be rendered incapable of discharging their
duties.
-42-
<PAGE>
(E) No officer, director or employee acting in accordance with
these Emergency Bylaws shall be liable except for willful misconduct. No
officer, director, or employee shall be liable for any action taken by him in
good faith in such an emergency in furtherance of the ordinary business
affairs of the corporation even though not authorized by the Bylaws then in
effect.
(F) These Emergency Bylaws shall be subject to repeal or change
by further action of the Board of Directors or by action of the shareholders,
but no such repeal or change shall modify the provisions of the next preceding
paragraph with regard to action taken prior to the time of such repeal or
change. Any amendment of these Emergency Bylaws may make any further or
different provision that may be practical and necessary for the circumstances
of the emergency.
-43-
<PAGE>
CERTIFICATE
I hereby certify that the foregoing Bylaws, consisting of 45 pages,
including this page, constitute the Bylaws of BROWN DISC PRODUCTS COMPANY,
INC., adopted by the Board of Directors of the corporation as of October 12,
1989.
/s/ Eva Forsberg-Rider
---------------------------------
Eva Forsberg-Rider, Secretary
-44-
<PAGE>
BYLAWS of Brown Disc Products Company, Inc. amended on September 5,
1990, by action of the Board of Directors, as follows:
Section 3.3 of the ByLaws are amended in part to provide that:
The annual meeting of the shareholders of the
Corporation shall be held on the 24th day of September
at 10:00 a.m. in each year or on such other date and
at such other time as the Board of Directors may so
prescribe.
<PAGE>
RONALD H. COLE
1120-B Elkton Drive
Colorado Springs, Colorado 80907-3568
November 8. 1995
R. Eugene Rider end
Eva Forsberg-Rider
c/o Brown Disc Products Company
1120 B Elkton Drive
Colorado Springs. CO 80907-3568
Re: Release of 45,000 shares from Irrevocable Proxy
Dear Gene end Eva:
This will confirm my agreement with you to the effect that the 45,000
shares to be sold by you in Rule 144 transactions within the immediate future
are, upon the sale of such shares, to be released from the provisions of that
certain IRREVOCABLE PROXY dated as Of September 7, 1995 previously granted by
you to the undersigned.
Therefore, after such shares are sold, the Irrevocable Proxy will be
adjusted to cover the remaining 1,302,410 shares of common stock in BROWN DISC
PRODUCTS COMPANY, INC. owned by you.
Sincerely,
/s/ Ronald H. Cole
--------------------
Ronald H. Cole
Acknowledged:
/s/ R. E. Rider
- -----------------------
R. Eugene Rider
/s/ Eva Forsberg-Rider
- -----------------------
Eva Forsberg-Rider
<PAGE>
RELEASE OF IRREVOCABLE PROXY
(COUPLED WITH AN INTEREST)
KNOW ALL MEN BY THESE PRESENTS: that RONALD H. COLE ("Cole") for and
in consideration of good and valuable consideration the receipt of which is
hereby acknowledged by his signature, does hereby fully release, terminate,
cancel, acquit and forever discharge 40,000 shares of Brown Disc Products
Company, Inc. ("BD") stock from that certain Irrevocable Proxy (Coupled With
An Interest) dated September 7, 1995 (the "Proxy"), a copy of which is
attached hereto as Exhibit "A", for the benefit of Angenette N. Rider
("Rider"), which Release shall become effective immediately.
Cole shall cause the Secretary of BD to reissue to Rider on the dates
specified above, a certificate or certificates evidencing 40,000 shares which
shares will not contain any restrictive legend upon delivery to counsel
for BD of the certificate currently representing the shares.
The terms of this Release are contractual in nature and shall bind and
benefit Rider and Cole, and their respective heirs, personal representatives,
successors and assigns.
In the event of any dispute between Rider and Cole concerning this
Release, or in the event of any action to enforce this Release or to collect
damages on account of any breach of the obligation provided for herein, the
prevailing party shall be entitled to recover from the other party, all costs
and expenses, including reasonable attorney's fees, incurred in such
litigation as well as all additional costs of collecting any judgement
rendered in such action.
DATED this 24th day of April, 1996.
/s/ Ronald H. Cole
----------------------
RONALD H. COLE
<PAGE>
RELEASE OF IRREVOCABLE PROXY
(COUPLED WITH AN INTEREST)
KNOW ALL MEN BY THESE PRESENTS: that RONALD H. COLE ("Cole") for and
in consideration of good and valuable consideration the receipt of which is
hereby acknowledged by his signature, does hereby fully release, terminate,
cancel, acquit and forever discharge 250,000 shares of Brown Disc Products
Company, Inc. ("BD") stock from that certain Irrevocable Proxy (Coupled With
An Interest) dated September 7, 1995 (the "Proxy"), a copy of which is
attached hereto as Exhibit "A", for the benefit of R. Eugene Rider and Eva
Forsberg-Rider (the "Riders"), which Release shall become effective as set
forth below:
1. The release of 50,000 shares shall be effective on the date
hereof.
2. The release of 50,000 shares shall be effective on May 24, 1996.
3. The release of 50,000 shares shall be effective on June 24, 1996.
4. The release of 50,000 shares shall be effective on July 24, 1996.
5. The release of 50,000 shares shall be effective on August 24,
1996.
Cole shall cause the Secretary of BD to reissue to the Riders on the
dates specified above, a certificate or certificates evidencing 50,000 shares
which shares will not contain any restrictive legend upon delivery to counsel
for BD of the certificate currently representing the shares.
The terms of this Release are contractual in nature and shall bind and
benefit the Riders and Cole, and their respective heirs, personal
representatives, successors and assigns.
In the event of any dispute between the Riders and Cole concerning this
Release, or in the event of any action to enforce this Release or to collect
damages on account of any breach of the obligation provided for herein,
the prevailing party shall be entitled to recover from the other party, all
costs and expenses, including reasonable attorney's fees, incurred in such
litigation as well as all additional costs of collecting any judgement
rendered in such action.
DATED this 24th day of April, 1996.
/s/ Ronald H. Cole
----------------------
RONALD H. COLE
<PAGE>
IRREVOCABLE PROXY
(COUPLED WITH AN INTEREST)
This IRREVOCABLE PROXY (this "Proxy") is executed as of April 24, 1996,
by GREGORY TIMM, ESQ., Trustee for the benefit of R. EUGENE RIDER and EVA
FORSBERG-RIDER, husband and wife (the "BD Stockholders"), in favor of RONALD
H. COLE ("Cole"), and his successors and assigns, with respect to 250,000
shares of voting common stock in BROWN DISC PRODUCTS COMPANY, INC., a
Colorado corporation (the "Corporation"), which shares will be issued to and
owned of record and beneficially by the Trustee for the BD Stockholders, and
which will become subject to the terms of this Proxy, at the rate of 50,000
shares per month commencing on April 24, 9996, and continuing for a period of
four (4) months thereafter (all of such shares of voting common stock being
herein called the "Proxy Shares"). Any other voting capital stock of the
Corporation hereafter received by the BD Stockholders as stock dividends or
other distributions with respect to the Proxy Shares shall be subject to this
Proxy and included within the definition of Proxy Shares for the purposes
hereof.
This Proxy has been executed pursuant to a Settlement Agreement among
the BD Stockholders, the Corporation and Cole on the date hereof and shall
therefore be considered an instrument coupled with an interest for purposes of
applicable law.
NOW, THEREFORE, and in consideration of the premises and of the
covenants and agreements herein contained and the advance of funds to the
Company contemplated by the Loan, it is mutually agreed as follows:
Section 1. Grant of Proxy. The undersigned Trustee for the BD
Stockholders, HEREBY APPOINTS RONALD H. COLE, an individual with a place of
business at 1120 Elkton Dr., Colorado Springs, CO 80907, and his successors
and assigns, as the true and lawful attorneys-in-fact, agents and proxies of
the undersigned Trustee for the BD Stockholders, with full power of
substitution, to vote all of the Proxy Shares and any other shares of voting
capital stock of the Corporation which the undersigned Trustee for the BD
Stockholders may be entitled to vote at any meeting of shareholders of the
Corporation, or otherwise, and at any adjournment thereof, with all powers
which the undersigned Trustee for the BD Stockholders would possess if
personally present, including the right to vote, give consents and execute
waivers in respect to all matters, whether or not in the ordinary course of
business of the Corporation.
Section 2. Irrevocable Nature and Term of this Proxy. This proxy,
having been granted in consideration of the Shares described above, shall be
deemed a proxy coupled with an interest and shall be irrevocable until
September 7, 1997.
Section 3. Ownership of, and Restrictions Upon, Proxy
<PAGE>
Shares. The undersigned Trustee for the BD Stockholders hereby represent
and warrant that (a) the undersigned Trustee for the BD Stockholders presently
owns of record and beneficially 250,000 shares of the Corporation's voting
common stock constituting the Proxy Shares; (b) the undersigned has not
granted any proxy or other voting interest with respect to such Proxy Shares
to any other third party; and (c) so long as this Agreement remains in
effect, the Trustee for the BD Stockholders will not execute or deliver to
others proxy forms or consents relating to meetings or actions of stockholders
of the Corporation and will promptly provide Cole with copies of any
stockholder' communications received by any BD Stockholder and will not take
any other action inconsistent with this Proxy.
Section 4. Legend. The undersigned Trustee for the BD Stockholders
agree to cause the certificates evidencing the Proxy Shares, as they are
issued, to be promptly imprinted with a legend referring to the proxy imposed
by this Proxy and to furnish evidence thereof to Cole.
Section 5. Filing of Proxy. The undersigned Trustee for the BD
Stockholders authorize and direct the proxyholder, or any of his successors
and assigns, to substitute another person or persons as proxyholders and to
file a substitution instrument with the Secretary of the Corporation.
Section 6. Successors and Assigns. This proxy agreement shall be
binding upon each of the BD stockholders and their respective heirs, legal
representatives, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
/s/ Gregory D. Timm
- ---------------------------------------------------
GREGORY TIMM, ESQ., Trustee for the BD Stockholders
THE UNDERSIGNED CORPORATION HEREBY ACKNOWLEDGES RECEIPT OF A COPY OF THE ABOVE
IRREVOCABLE PROXY (COUPLED WITH AN INTEREST).
Corporation
BROWN DISC PRODUCTS COMPANY, INC.
BY: /s/ Ronald H. Cole
-----------------------------------------------
-2-
<PAGE>
LEGEND TO BE IMPRINTED ON THE PROXY SHARE CERTIFICATES AND ANY REISSUANCE(S)
THEREOF AND STOCK DIVIDENDS OR OTHER VOTING SECURITIES DISTRIBUTED WITH
RESPECT THERETO:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
IRREVOCABLE PROXY COUPLED WITH AN INTEREST AS SET FORTH IN A PROXY AGREEMENT
DATED APRIL 24, 1996 IN FAVOR OF RONALD H. COLE EXECUTED BY THE REGISTERED
HOLDER OF THIS CERTIFICATE. A COPY MAY BE OBTAINED FROM THE SECRETARY OF THE
CORPORATION AT ITS PRINCIPAL EXECUTIVE OFFICE IN COLORADO. SUCH IRREVOCABLE
PROXY EXPIRES ON SEPTEMBER 7, 1997.
-3-
<PAGE>
SETTLEMENT TRUST AGREEMENT
THIS SETTLEMENT TRUST AGREEMENT is made and entered into effective April
24, 1996, by and among BROWN DISC PRODUCTS, INC. and RONALD H. COLE
(collectively referred to as "Grantors") and GREGORY TIMM, ESQ., (hereafter
referred to as "Trustee").
ARTICLE 1.00 - PURPOSES
1.01 The purpose of this trust is to create a mechanism to implement
paragraph 3 of a Settlement Agreement and General Release entered into by the
Grantors and R. Eugene Rider and Eva Forsberg-Rider on the same day of this
Trust Agreement, a copy of which Settlement Agreement and General Release is
attached hereto as Exhibit A.
ARTICLE 2.00 - THE TRUST CORPUS
2.02 The Grantors assign, convey, transfer and deliver to the Trustee
250,000 shares of stock (in certificates of 50,000 shares each) in Brown Disc
Products, Inc., issued to R. Eugene Rider and Eva Forsberg-Rider (the
"Beneficiaries") as joint tenants with rights of survivorship. These shares
of stock shall constitute the trust corpus and shall be held and distributed
as provided for in this Settlement Trust Agreement.
ARTICLE 3.00 - ADMINISTRATION DURING TERM OF TRUST AND PROXY
3.01 During the term of this trust, the Trustee shall accept all
income, dividends, or additions, if any, attributable to the corpus and hold
the same for distribution upon termination of the trust. On the effective
date this Settlement Trust Agreement is established and the trust corpus
received and on the same day of each subsequent month thereafter, 50,000
shares per month shall become subject to the terms and conditions of the
irrevocable proxy attached hereto as Exhibit B so that at the end of 4 months
from the date of this Settlement Trust Agreement, all 250,000 shares held in
trust shall be subject to said proxy.
The voting rights of those shares not subject to the proxy shall be
exercised by the Trustee as he determines appropriate after consultation with
the Beneficiaries.
ARTICLE 4.00 - TERMINATION OF TRUST
4.01 Upon the agreement of the Grantors and the Beneficiaries or on May
5, 1998, which ever occurs first, the Trustee shall deliver the trusts corpus
and any other income, dividends, or additions, if any, to the Beneficiaries,
take proper receipt therefor and this trust shall terminate.
<PAGE>
ARTICLE 5.00 - TRUSTEE
5.01 The Trustee shall serve without surety on any bond otherwise
required of him. The Trustee shall receive a one time fee of $500.00 for all
services required under this Settlement Trust Agreement, payable at the time
this trust is established.
ARTICLE 6.00 - TRUST ADMINISTRATION, POWERS AND PROTECTIVE PROVISIONS
6.01 Subject to the rule of prudence, Grantors' Trustees shall have all
powers and authority otherwise granted fiduciaries under the Colorado
Fiduciaries' Powers Act as amended to the date of the death of the Grantors.
6.02 The validity, construction and administration of this trust shall
be determined by reference to the laws of the State of Colorado.
6.03 Any trust created by this instrument may be administered by
the Trustees free from the control of any court which may otherwise have
jurisdiction over Grantors' trust.
IN WITNESS WHEREOF, we have hereunto set our hands and seals the day and
year first above written.
Grantors:
BROWN DISC PRODUCTS, INC.
By: Chairman and CEO /s/ Ronald H. Cole
------------------------------------
/s/ Ronald H. Cole
-----------------------------------------
RONALD H. COLE
APPROVED AND ACCEPTED:
TRUSTEE:
/s/ Gregory D. Timm
- -----------------------------------------
Gregory Timm
<PAGE> 1
MODIFICATION OF PROMISSORY NOTE
WHEREAS, heretofore and under date of March 16, 1989, Brown Disc
Products Company, Inc. (hereinafter called "Borrower"), made, executed and
delivered to Central Bank Denver, National Association, a Promissory Note, in
the original principal amount of $750,000.00 payable in monthly installments
of $8929.00 each, with interest at the rate therein provided, final maturity
date of said Note being 7 years after date of Note; and
WHEREAS, it is mutually desirable, beneficial and agreeable to the
parties hereto that the repayment terms of said Note be modified as
hereinafter set out;
NOW, THEREFORE, in consideration of the mutual benefits inuring to each
other, it is understood and agreed, by and between the parties hereto, that
the terms and conditions of Borrower's Note, as above described, are hereby
modified as follow:
1. Payment of all past due installments of principal and interest is
deferred until final maturity of the Borrower's Note, as extended
herein.
2. Final maturity of the Borrower's Note is extended to July 7, 2006,
and, on such date all accrued interest and unpaid principal shall
be due and payable in full.
3. Principal-only monthly payments of $1600.00 are to be paid,
commencing with the July 7, 1996 payment, for three years;
principal-only monthly payments of $2,000.00, are to be paid for
the following three years; principal-only monthly payments of
$2500.00 are to be paid for the following two years; principal-
only monthly payments of $2700.00 are to be paid for the following
two years. The remaining balance of principal and interest shall
be payable July 7, 2006. An additional monthly payment of $200.00
shall be paid for 100 months commencing July 7, 1996.
It is further understood and agreed that all other terms, conditions and
covenants of the aforesaid Note, not otherwise modified hereby, shall be and
remain the same, and that this Agreement, when executed by the parties hereto,
shall be attached to and become a part of the original Note, and shall have
the same force and effect as if the terms and conditions hereof were
originally incorporated in the Note, prior to its execution thereof.
IN WITNESS WHEREOF, this Agreement is executed by the undersigned
parties as of the 7th day of June, 1996.
Brown Disc Products Company, Inc.
by:
-------------------------------
Ronald H. Cole
President
ACCEPTED BY: SMALL BUSINESS ADMINISTRATION
An Agency of the U.S. Government
by: /s/ Dan Rivas
-------------------------------
DAN RIVAS, Chief
Portfolio Management Division
<PAGE> 1
SUBSCRIPTION AGREEMENT
To the Board of Directors
Brown Disc Products Company, Inc.
1120-B Elkton Drive
Colorado Springs, Colorado 80907-3568
Fax Number (719) 590-7466
Re: Subscription to Restricted Shares of Common Stock
with Registration Rights
----------------------------------------------------------------------
Gentlemen:
1.1. This will acknowledge that the undersigned hereby agrees to
purchase from BROWN DISC PRODUCTS COMPANY, INC., a Colorado corporation (the
"Company"), the number of shares of the Company's Common Stock, no par value
(the "Common Stock") indicated on the signature page below AT A PRICE OF TWO
DOLLARS AND FIFTY CENTS ($2.50) PER SHARE pursuant to a private placement
offering of Common Stock for the account of the Company.
1.2. The Common Stock to be purchased by the undersigned is part of an
offering (the "Offering") by the Company of Common Stock directly by the
Company on a "best efforts" basis. The undersigned understands and agrees
that there is no minimum number of subscriptions required for the Company to
accept any subscription. The Offering will expire on June 20, 1996 unless
extended for a period not exceeding an additional twenty (20) days. The
Company reserves the right to terminate the Offering at any time.
1.3. The undersigned acknowledges that the securities he or she is
purchasing have not been registered under the Securities Act of 1933 (the
"Securities Act") or qualified under applicable state securities laws; and
accordingly, the transferability thereof is restricted by the registration
provisions of the Securities Act as well as applicable state law. Based upon
the representations and agreements made by the undersigned herein, the Common
Stock is being offered and sold pursuant to an exemption from such
registration provided by Sections 4(2) of the Securities Act and applicable
state securities law qualification exemptions. The undersigned agrees that
the certificates representing the Common Stock to be received by the
undersigned will bear a legend indicating that transfer of these securities is
restricted by reason of the fact that they have not been so registered or
qualified. The Company has executed a Registration Rights Agreement relating
to the right of the undersigned to participate in or demand registration of
the Common Stock under the Securities Act at a future date, a copy of which
has been received by the undersigned.
1.4. The undersigned represents that he or she is acquiring the Common
Stock for his or her own account, for investment purposes only, and not with a
view to resale or other distribution thereof, nor with the intention of
selling, transferring or otherwise disposing of all or any part of such
securities based upon any particular event or circumstance. The Company's
Common Stock is publicly quoted in the NASD over-the-counter Electronic
Bulletin Board, but there can be no assurance that an active public market for
the Common Stock will be sustained.. The undersigned is aware that an
investment in the securities of the Company covered by the Offering is a
speculative investment, is not liquid, and involves a high degree of risk of
loss.
1.5. The undersigned acknowledges that the Company has filed reports
with the Securities and Exchange Commission under Section 13 of the Securities
Exchange Act of 1934, as amended, including without limitation (i) the
Company's Report on Form 10-KSB for the fiscal year ended June 30, 1995, (ii)
<PAGE> 2
the Company's Reports on Form 10-QSB for the periods ended September 30, 1995,
December 31, 1995 and March 31, 1996, and (iii) the Company's Report on Form
8-K dated May 15, 1996 (collectively, the "SEC Reports"), and represents that
the undersigned has relied only on the information contained in such SEC
Reports or otherwise provided in writing by duly authorized officers of the
Company. THE UNDERSIGNED INVESTOR HAS CAREFULLY READ AND REVIEWED THIS
SUBSCRIPTION AGREEMENT AND ALL OF THE INFORMATION CONTAINED IN THE COMPANY'S
SEC REPORTS (INCLUDING, WITHOUT LIMITATION, THE SECTION ENTITLED "CAUTIONARY
STATEMENTS FOR PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995" IN THE COMPANY'S REPORT ON FORM 10-
QSB FOR THE PERIOD ENDED MARCH 31, 1996 AND INFORMATION CONCERNING THE
COMPANY'S AGREEMENT AND PLAN OF REORGANIZATION WITH KIMBROUGH COMPUTER SALES
INC. 3SI, INC. AND CERTAIN PARTIES AFFILIATED WITH 3SI OR THE COMPANY IN THE
FORM 8-K REPORT DATED AS OF MAY 15, 1996), AND HAS ASKED SUCH QUESTIONS OF
MANAGEMENT OF THE COMPANY AND RECEIVED SUCH ADDITIONAL INFORMATION AS HE OR
SHE DEEMS NECESSARY IN ORDER FOR THE UNDERSIGNED TO MAKE AN INFORMED DECISION
WITH RESPECT TO THE PURCHASE OF THE COMMON STOCK. The undersigned has
received complete and satisfactory answers to all such inquiries.
2. This Subscription Agreement shall be deemed to have been made and
executed, and all performance shall be deemed to take place, upon its
acceptance within the State of Colorado. This Subscription Agreement shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of Colorado. Any dispute arising out of or relating to this Agreement
and the transactions contemplated herein or the breach of this Agreement or
such transactions shall be resolved by arbitration pursuant to the Rules of
the American Arbitration Association then in effect. Any arbitration pursuant
to this Agreement shall take place in the City of Colorado Springs, State of
Colorado. Any litigation, including litigation arising out of or concerning
such arbitration, shall be conducted exclusively in the trials courts of
general jurisdiction for the State of Colorado. All parties hereby consent to
the jurisdiction of such court for all such litigation.
3. In connection with the subscription being made hereby the
undersigned represents and warrants:
(a) The undersigned has not received any general solicitation or advertising
regarding this Offering;
(b) The undersigned has sufficient knowledge and experience of financial and
business matters so that he or she is able to evaluate the merits and
risks of purchasing the shares offered hereby;
(c) The undersigned has the means to provide for his or her personal needs,
possesses the ability to bear the economic risk hereunder indefinitely,
and can afford a complete loss of his or her investment; the
undersigned's commitment in direct participation in investments in
restricted securities is reasonable in relation to his or her net worth;
the investment of the undersigned in the Common Stock will in no event
exceed 10% of the net worth of the undersigned;
(d) The undersigned has had substantial experience in previous private and
public purchases of speculative securities; and
(f) The undersigned has either (i) reviewed carefully the definition of
Accredited Investor set forth below and is an Accredited Investor within
that definition, or (ii) has furnished the Company with a true and
correct statement of the minimum net worth and annual income of the
undersigned and this investment will not exceed 10% of such net worth
and 10% of such annual income.
<PAGE> 3
Definition of Accredited Investor
The term "Accredited Investor" is defined in Rule 501(a) of Regulation D
promulgated under the Securities Act as follows:
(1) Certain banks, savings and loan institutions, broker-dealers, investment
companies and other entities including an employee benefit plan within
the meaning of Title I of the Employee Retirement Income Security Act of
1974 with total assets in excess of $5,000,000;
(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
Shares, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of the
securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
or, with that person's spouse a joint income in excess of $300,000, in
each of the two most recent years and who reasonably expects an income
in excess of $200,000 (or joint income with that person's spouse in
excess of $300,000) in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Section
230.506(b)(2)(ii) of Regulation D, i.e. a person having such knowledge
and experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment; or
(8) Any entity in which all of the equity owners are accredited investors
under any of the paragraphs above.
<PAGE> 4
Signature Page
THE UNDERSIGNED SUBSCRIBER IS AN ACCREDITED INVESTOR BY REASON OF PARAGRAPH(S)
_______ SET FORTH IN THE DEFINITIONS ON THE PRIOR PAGE.
(If not an Accredited Investor, the following page must be completed.)
THE UNDERSIGNED AGREES TO PURCHASE __________________________ SHARES OF THE
COMPANY'S COMMON STOCK AT $2.50 PER SHARE, FOR A TOTAL PURCHASE PRICE OF $
____________________.
Very truly yours,
DATE: ____________________, 1996
- ----------------------------------------------------------------
[Signature(s)]
- -----------------------------------------------------------------
[Please print name as it should appear on your stock certificate]
<TABLE>
<S> <C>
ADDRESS: TELEPHONE NUMBER:
-------------------------------- ------------------
-------------------------------- SOCIAL SECURITY OR
IRS IDENTIFICATION NUMBER:
--------------------------------
-------------------------------
YOUR BUSINESS OR PROFESSIONAL OCCUPATION:
-------------------------------
HIGHEST EDUCATIONAL DEGREE OR YEARS ATTAINED:
-------------------------------
STATE IN WHICH REGISTERED TO VOTE:
-------------------------------
</TABLE>
******************************************************************************
ACCEPTED: BROWN DISC PRODUCTS COMPANY, INC.
By:
-----------------------------------------
Title:
-----------------------------------------
DATE: , 1996
-----------------------------------
Rev 96-a1
<PAGE> 5
ADDITIONAL INFORMATION SUBMITTED BY
PERSONS WHO DO NOT QUALIFY AS "ACCREDITED INVESTORS"
1. I represent to the Company that my net worth is in excess of the
following amount:
[ ] $ 200,000, of which _________ represents the value of my residence.
[ ] $ 500,000, of which _________ represents the value of my residence.
[ ] $ 750,000, of which _________ represents the value of my residence.
[ ] $1,000,000, of which _________ represents the value of my residence.
In calculating "net worth," the value of a principal residence must be
valued at cost or at a written appraised value used by an institutional
lender to make a loan secured by the property, in either case net of
current encumbrances on the property.
2. I represent to the Company that my annual income is in excess of the
following amount and that I have no reason to believe that such annual
income would be reduced in future years:
[ ] $ 50,000, of which _________ represents salary and wages.
[ ] $ 75,000, of which _________ represents salary and wages.
[ ] $ 100,000, of which _________ represents salary and wages.
[ ] $ 150,000, of which _________ represents salary and wages.
3. Name and address of Employer:
_________________________________________
_________________________________________
4. I currently own the following securities for investment purposes
_________________________________________
_________________________________________
_________________________________________
I certify that the above information is true and correct and agree to furnish
any additional information requested by the Company concerning my ability to
qualify as a Qualified Investor in the Offering.
------------------------------------------
Signature
<PAGE> 1
OFFER to Amend Subscription Agreement to
Reduce Offering Cost from $2.50 per Share to $0.75 per Share
Brown Disc Products Company, Inc.
Common Stock, no par value
THIS OFFER EXPIRES AT 5:00 P.M. MOUNTAIN TIME ON THURSDAY, OCTOBER 31, 1996
UNLESS EXTENDED AT THE SOLE OPTION OF BROWN DISC PRODUCTS COMPANY, INC.
September 27, 1996
TO: (NAME OF INVESTOR)
(ADDRESS OF INVESTOR)
Dear Sir or Madam:
On or about June 25, 1996, BROWN DISC PRODUCTS COMPANY, INC., a Colorado
corporation (the "Company"), accepted your subscription for the purchase of
_______ shares of the Company's Common Stock, no par value (the "Common
Stock") at a price of $2.50 per share pursuant to a private placement offering
of Common Stock by the Company (the "Offering") and your executed Subscription
Agreement to participate in the Offering (the "Subscription Agreement").
As of September 27, 1996, the Company's Board of Directors has authorized the
Company to OFFER TO AMEND THE TERMS OF THE OFFERING for the purpose of
reducing the offering price per share from $2.50 to $0.75 per share.
This Offer to amend the per share subscription price is based upon the
following circumstances:
During the period of the Offering in June 1996, the public market
price for the Common Stock had increased significantly from
previous periods, which the Board of Directors believes was
attributable in substantial part to anticipation by public
investors of a proposed merger of the Company with Kimbrough
Computer Sales Inc. 3SI pursuant to an Agreement and Plan of
Reorganization originally announced by the Company on May 15,
1996.
The proposed merger between the Company and Kimbrough Computer
Sales Inc. 3SI was first delayed, and then ultimately abandoned on
September 16, 1996, resulting in a significant decrease in the
public market price of the Corporation's common stock since June
25, 1996.
In view of the above circumstances and securities law restrictions
applicable to shares of Common Stock sold to private placement
investors in the Offering, the Company's Board of Directors of the
Company has determined it will be equitable to private placement
investors in the June 1996 Offering, and in the best interests of
the Company to preserve goodwill of its investors and the
investment community, to offer to reprice the offering price of
the shares of the Company's Common Stock sold in the Offering from
$2.50 per share to $0.75 per share.
<PAGE>
If you elect to accept this Offer to re-price the shares covered by your
Subscription Agreement, please sign the attached Acceptance of Offer and
return the Acceptance of Offer to the Company at its principal offices in
Colorado. Upon receipt by the Company, an additional stock certificate for
the adjusted number of shares will be ordered and delivered to you.
1. By your agreement to accept this Offer, you represent and agree as
follows:
1.1. You acknowledge that the additional securities you will
receive as a result of the amended per share price for the Offering have not
been registered under the Securities Act of 1933 (the "Securities Act") or
qualified under applicable state securities laws; and accordingly all such
shares are subject to the same representations, warranties and limitations as
were set forth in your original Subscription Agreement.
1.2. You represent and warrant that all representations,
warranties and agreements made by you in the Subscription Agreement are true
and correct as of the date your Acceptance of Offer is received by the
Company.
1.3. You are aware that the Company announced on September 16,
1996 that its previously announced Agreement and Plan of Reorganization for a
proposed merger with Kimbrough Computer Sales Inc., 3SI, otherwise known as
Solution, System and Service Integration ("3SI"), expired on September 15,
1996 without a closing of the proposed merger, and the Company has abandoned
the proposed merger transaction with 3SI.
2. Upon receipt of your signed Acceptance of Offer, the Company
hereby confirms that all additional shares of Common Stock issued to you as an
adjustment to the per share offering price will be covered by, and entitled to
the benefits of, that certain Registration Rights Agreement executed by the
Company relating to your right to participate in or demand registration of the
Common Stock under the Securities Act at a future date.
3. This Offer to amend your Subscription Agreement shall be deemed to
have been made and executed, and all performance shall be deemed to take
place, upon its acceptance within the State of Colorado. This Offer, as well
as the Subscription Agreement, shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Colorado. Any
dispute arising out of or relating to this Offer and the Subscription
Agreement and the transactions contemplated herein or therein shall be
resolved by arbitration pursuant to the Rules of the American Arbitration
Association then in effect. Any arbitration pursuant to this Offer or the
Subscription Agreement shall take place in the City of Colorado Springs, State
of Colorado. Any litigation, including litigation arising out of or
concerning such arbitration, shall be conducted exclusively in the trials
courts of general jurisdiction for the State of Colorado. All parties hereby
consent to the jurisdiction of such court for all such litigation.
Very truly yours,
By Order of the Board of Directors,
BROWN DISC PRODUCTS COMPANY, INC.
By:
------------------------------
Colorado Springs, Colorado Ronald H. Cole, President
<PAGE>
Signature Page
THE UNDERSIGNED INVESTOR, having previously purchased shares of Brown
Disc Products Company, Inc. (the "Company") common stock in June 1996 at a
private placement price of $2.50 per share paid in cash, HEREBY ACCEPTS THE
COMPANY'S OFFER dated September 27, 1996 (the "Offer") to re-price such
offering of common stock, covered by the Subscription Agreement previously
executed by the undersigned, from $2.50 per share to SEVENTY-FIVE CENTS
($0.75) per share.
The undersigned accepts the Company's Offer, including all terms and
conditions thereof, and understands that the Company will issue and deliver an
additional stock certificate to the undersigned to provide for such adjusted
price per share.
Date:
------------------------------ -----------------------------------
Signature
Name and Address of Investor:
-----------------------------------
-----------------------------------
Original Shares Issued:
-----------------------------------
Additional Shares to be Issued Upon Acceptance of this Offer: shares.
----------
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SIGN AND RETURN THIS ACCEPTANCE OF OFFER BEFORE OCTOBER 31, 1996 TO:
Brown Disc Products Company, Inc.
1120-B Elkton Drive
Colorado Springs, Colorado 80907-3568
Fax Number (719) 590-7466
DO NOT RETURN YOUR ORIGINAL STOCK CERTIFICATE.
AN ADDITIONAL CERTIFICATE WILL BE ISSUED FOR THE ADJUSTMENT
<PAGE> 1
REGISTRATION RIGHTS AGREEMENT
This Agreement has been executed and delivered this 12th day of June,
1996, by and between BROWN DISC PRODUCTS COMPANY, INC., a Colorado corporation
(herein called "BROWN DISC"), and investors (the "Investors") subscribing to
restricted shares of common stock of BROWN DISC at a price of $2.50 per share
in June 1996 (the "Offering"). For the purposes of this Agreement, the
"Shares" shall be defined to include:
(A) shares of the BROWN DISC Common Stock issued to Investors pursuant to
the private placement Offering; and
(B) any shares of BROWN DISC Common Stock issued as a stock dividend, stock
split, combination or other reclassification with respect to any of the
foregoing.
SECTION 1. DEFINITIONS. Unless the context clearly requires
otherwise, the following capitalized terms used in this Agreement shall be
defined as follows:
1.1 "BROWN DISC", "Investors" and "Shares", respectively, shall have
the meanings defined hereinabove.
1.2 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute then in effect, and a reference to a
particular section thereof shall be deemed to include a reference to the
comparable section, if any, of any such similar federal statute.
1.3. "SEC" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
1.4 "Registration Expenses" shall mean expenses and fees incident to
compliance with the registration obligations of BROWN DISC under this
Agreement, including without limitation: (i) all SEC registration and filing
fees, (ii) all fees and expenses of complying with the Securities Act and the
securities or blue sky laws of the States of New York and Colorado, (iii) all
printing, messenger and delivery expenses incident to the foregoing and/or to
the distribution of securities contemplated herein, and (iv) the fees and
disbursements of counsel for BROWN DISC and of its independent public
accountants; provided, however, that Registration Expenses shall not include
any fees and disbursements of counsel to the Investors, brokerage commissions
and/or discounts charged on the sale of the Shares.
SECTION 2. "PIGGY-BACK" REGISTRATION RIGHTS.
2.1. If, at any time after September 30, 1996, BROWN DISC thereafter
shall file a registration statement or post-effective amendment to a
registration statement on Form SB-1, SB-2, S-1, S-2 or S-3, or any form
substituted therefor, with respect to any shares of its capital stock under
the Securities Act, BROWN DISC will give to the Investors at least ten (10)
days prior written notice of BROWN DISC's intention to file such registration
statement.
2.2. Upon the request of the Investors given within fifteen (15) days
after receipt of notice under Section 2.1, BROWN DISC shall include all Shares
designated by the Investors in any such registration statement and will
maintain the prospectus included in any registration statement which may be so
filed current for a period of at least three (3) months subsequent to the
effective date of such registration statement plus, if applicable, an
additional period equal to that portion of time in which the limitation set
forth in Section 2.6 of this Agreement delayed the ability of the Investors to
sell Shares registered hereunder.
<PAGE> 2
2.3. Nothing in this Section 2 shall be deemed to require BROWN DISC
to proceed with any registration of its securities after giving the notice
herein provided.
2.4. The obligations of BROWN DISC under this Section 2 shall expire
(i) after one (1) registration statement or post-effective registration
statement has been filed hereunder and become effective under the Securities
Act and, in any event, (ii) as to any Shares which may otherwise be resold by
the Investors in accordance with the provisions and restrictions of Rule 144
promulgated under the Securities Act.
2.5. All Registration Expenses of any piggy-back registration
statement filed pursuant to the provisions of this Section 2 incurred by BROWN
DISC shall be paid by BROWN DISC.
2.6. LIMITATION UPON "PIGGY-BACK" REGISTRATION RIGHTS FOR A FIRM
COMMITMENT OFFERING BY THE COMPANY. If an investment banker engaged by BROWN
DISC in connection with a then pending firm commitment underwritten public
offering of securities proposed for registration under the Securities Act for
the account of BROWN DISC determines, in its sole discretion, that piggy-back
registration of Shares for the account of the Investors would interfere with
or be detrimental to such firm commitment offering for the account of BROWN
DISC, BROWN DISC shall give prompt written notice of such determination to the
Investors. In such event BROWN DISC, upon written notice to the Investors,
shall have the right to require, as a condition of such piggy-back
registration under this Section 2, that the Investors execute a written
agreement that the Investors will not sell such securities for a period of up
to six (6) months after the effective date of the registration statement
without the prior consent of the underwriter subject to the condition that all
shareholders other than the Investors to be included in such registration, if
any, shall also be subject to the foregoing limitation.
SECTION 3. MANDATORY REGISTRATION RIGHTS.
3.1. If the holders of the Shares shall have not been offered the
opportunity of participating in a registration statement as contemplated by
Section 2 above prior to May 31, 1997, then during the month of June 1997 any
holder of Shares shall have the right during the month of June 1997 to demand
in writing that BROWN DISC use its best efforts to register the Shares under
the Securities Act. Upon receipt of a demand for registration hereunder, the
Company within 45 days thereafter will file a registration statement under the
Securities Act covering all Shares covered by any such request, and will
maintain the prospectus included in any registration statement which may be so
filed current for a period of at least three (3) months subsequent to the
effective date of such registration statement. The obligations of the Company
under this Section 3 shall be fully satisfied upon the effective date of the
first such registration statement to which either Section 2 or this Section
3.1 is applicable. All Registration Expenses of any registration statement
filed pursuant to the provisions of this Section 3.1 incurred by BROWN DISC
shall be paid by BROWN DISC.
SECTION 4. AMENDMENT OR SUPPLEMENT TO PROSPECTUS.
4.1. If at any time within the period set forth in Section 2.2 or
Section 3 above after a registration statement covering Shares hereunder shall
have become effective, to the knowledge of BROWN DISC any event occurs as a
result of which a prospectus included therein relating to the Shares as then
amended or supplemented would include any untrue statement of a material fact,
or would not state a material fact necessary to make the statements therein,
in the light of the circumstances then existing, not misleading, BROWN DISC
will promptly notify the Investors thereof and BROWN DISC will at its own cost
and expense amend or supplement such
<PAGE> 3
prospectus in order to correct such statement or omission in order that the
prospectus as so amended or supplemented will comply with the requirements of
Section 10(a) of the Securities Act.
SECTION 5. OTHER UNDERTAKINGS.
5.1. If and whenever BROWN DISC causes the registration of any Shares
under the Securities Act as provided herein, BROWN DISC will, as expeditiously
as possible:
(a) prepare and file with the SEC a registration statement with
respect to such Shares and use its best efforts to cause such registration
statement to become effective. BROWN DISC will promptly notify the Investors
and confirm such advice in writing, (i) when such registration statement
becomes effective, (ii) when any post-effective amendment to such registration
statement becomes effective and (iii) of any request by the SEC for any
amendment or supplement to such registration statement or any prospectus
relating thereto or for additional information as to the Investors included in
the registration statement;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and current for the applicable period required by Section 2.2 or
Section 3.1 of this Agreement and to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement during such period. If at any time the SEC should
institute or threaten to institute any proceedings for the purpose of issuing
a stop order suspending the effectiveness of any such registration statement,
BROWN DISC will promptly notify the Investors and will use all reasonable
efforts to prevent the issuance of any such stop order or to obtain the
withdrawal thereof as soon as possible;
(c) furnish to the Investors such number of copies of such
registration statement and of each such amendment and supplement thereto, such
number of copies of the prospectus included in such registration statement, in
conformity with the requirements of the Securities Act, and such other
documents as the Investors may reasonably request in order to facilitate the
disposition of Shares by the Investors;
(d) use its best efforts to register or qualify such Shares
covered by such registration statement under such securities or blue sky laws
of any State of the United States as the Investors shall reasonably request
[which shall be at the expense of BROWN DISC as to the States of Colorado and
New York and at the expense of the Investors as to any other states], and do
any and all other acts and things which may be reasonably necessary or
advisable to enable the Investors to consummate the disposition in such
jurisdictions of the Shares covered by such registration statement, except
that BROWN DISC shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction where,
but for the requirements of this clause (d), it would not be obligated to be
so qualified, to subject itself to taxation in any such jurisdiction, or to
consent to general service of process in any such jurisdiction;
(e) promptly notify the Investors, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act within
the appropriate period mentioned in Section 2.2 or Section 3.1 above of BROWN
DISC becoming aware that the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary
to make the statements
<PAGE> 4
therein not misleading in the light of the circumstances then existing; and at
the request of the Investors promptly prepare and furnish to such seller a
reasonable number of copies of an amended or supplemental prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Shares,
such prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing; and
(f) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its securities
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve (12) months, beginning with the first month after
the effective date of the registration statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act.
5.2. BROWN DISC may require the Investors, as the seller of Shares as
to which any registration is being effected, to furnish BROWN DISC in writing
such information and documents regarding the Investors and the distribution of
their Shares as may be required to be disclosed in the registration statement
by the rules and regulations under the Securities Act.
5.3. As a condition to registration, each Investor shall agree by any
registration of Shares hereunder that, upon receipt of any notice from BROWN
DISC of the happening of any event of the kind described in clause (e) of
Section 5.1, the Investors will forthwith discontinue disposition of Shares
pursuant to the registration statement covering such Shares until the
Investor's receipt of the copies of the supplemented or amended prospectus
contemplated by clause (e) of Section 5.1, and, if so directed by BROWN DISC,
the Investors will deliver to BROWN DISC (at BROWN DISC's expense) all copies,
other than permanent file copies then in the Investors' possession, of the
prospectus covering such Shares current at the time of receipt of such notice.
SECTION 6. INDEMNIFICATION.
6.1 INDEMNIFICATION BY BROWN DISC. In the event of any registration
of Shares under the Securities Act pursuant to this Agreement, BROWN DISC
will, and it hereby does, indemnify and hold harmless, to the extent permitted
by law, the Investors as the seller of any Shares covered by such registration
statement, its directors and officers and any other person who may be deemed
to control the Investors within the meaning of Section 15 of the Securities
Act and each other person who participates as an underwriter in the offering
or sale of such securities and each other person, if any, who controls any
such underwriter within the meaning of the Securities Act, against any and all
losses, claims, damages or liabilities, joint or several, and expenses
(including any amounts paid in any settlement effected with BROWN DISC's
consent) to which the Investors, any such director or officer or any such
underwriter or controlling person may become subject under the Securities Act,
common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary, final or
summary prospectus contained therein, or any amendment or supplement thereto,
or (ii) any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and BROWN DISC will reimburse the Investors and each such
director, officer, underwriter and controlling person for legal or any other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided,
that BROWN DISC shall not be liable in any such case to the extent that any
such loss, claim, damage, liability (or action or proceeding in respect
thereof) or expense arises out of or is based
<PAGE> 5
upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement or amendment or supplement
thereto or in any such preliminary, final or summary prospectus or amendment
or supplement thereto, in reliance upon and in conformity with information
furnished in writing to BROWN DISC by or on behalf of the Investors or any
other person or underwriter for use in the preparation thereof; and provided,
further, that BROWN DISC will not be liable to any person who participates as
an underwriter in the offering or sale of Shares, or to any other person who
controls such underwriter, within the meaning of the Securities Act, under the
indemnity agreement in this Section 6 with respect to any preliminary
prospectus or the final prospectus, or the final prospectus as amended or
supplemented, as the case may be, to the extent that any such loss, claim,
damage or liability of such underwriter or controlling person results from the
fact that such underwriter sold Shares to a person to whom there was not sent
or given, at or prior to the written confirmation of sale of the final
prospectus as then amended or supplemented, whichever is most recent, if BROWN
DISC has previously furnished copies thereof to such underwriter and such
final prospectus, as then amended or supplemented, has corrected any such
misstatement or omission. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Investors
or any such director, officer, underwriter or controlling person and shall
survive the transfer of such securities by such person.
6.2 INDEMNIFICATION BY INVESTOR/SELLER. BROWN DISC may require, as a
condition to including any Shares in any registration statement filed in
accordance with this Agreement, that BROWN DISC shall have received an
undertaking reasonably satisfactory to it from each of the Investors to
indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 6.1), BROWN DISC, each director of BROWN DISC, each officer
of BROWN DISC who shall sign the registration statement and its controlling
persons, if any, and all other prospective sellers and their respective
directors, officers and controlling persons with respect to any statement or
alleged statement in or omission or alleged omission from such registration
statement, any preliminary, final or summary prospectus contained therein, or
any amendment or supplement, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
information furnished to BROWN DISC by or on behalf of such Investor for use
in the preparation of such registration statement, preliminary, final or
summary prospectus or amendment or supplement. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
BROWN DISC.
6.3 CONTRIBUTION. If the indemnification provided for in Section 6.1
or 6.2 is unavailable to a party that would have been an indemnified party
under any such section in respect of any and all losses, claims, damages or
liabilities, joint or several (or actions in respect thereof), referred to
therein, then each party that would have been an indemnifying party thereunder
shall, in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and such indemnified party on the other in connection
with the statements or omissions which resulted in such losses, claims,
damages or liabilities, joint or several (or actions in respect thereof). The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statements of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or such indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission. BROWN DISC agrees that it would not be
just and equitable if contribution pursuant to this Section 6 were determined
by pro rata allocation or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
6. The amount paid or payable by an indemnified party as a
<PAGE> 6
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this Section 6 shall include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
SECTION 7. NO ASSIGNMENTS. The provisions of this Agreement relating
to registration rights for the Shares are personal to the Investors and may
not be transferred or assigned by the Investors to any third party except with
the prior consent in writing of BROWN DISC.
SECTION 8. OTHER PROVISIONS.
8.1 NOTICES. Any notices or other communications required or
permitted hereunder shall be sufficiently given if written and delivered in
person or sent by registered mail, postage prepaid, addressed (if to BROWN
DISC) to BROWN DISC's principal office and (if to Investors) to the last known
address of the Investors on the records of BROWN DISC, or to such other
address as shall be furnished in writing by the appropriate person, and any
such notice or communication shall be deemed to have been given as of the date
so mailed.
8.2 CAPTIONS. The captions set forth in this Agreement are for
convenience only and shall not be considered as part of this Agreement or as
in any way limiting or amplifying the terms and provisions hereof.
8.3 INTEGRATION. This Agreement embodies the entire representations,
warranties and agreements in relation to the subject matter hereof, and no
other representations, warranties, understandings, or agreements in relation
thereto exist between the parties.
8.4 CHOICE OF LAW. This Agreement shall be deemed to have been made
and executed, and all performance shall be deemed to take place, within the
State of Colorado. This Agreement shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Colorado.
IN WITNESS WHEREOF, BROWN DISC has this Agreement as of the day and year
first above written.
BROWN DISC PRODUCTS COMPANY, INC.
By:
----------------------------------
Ronald H. Cole,
Chairman of the Board and Chief Executive
Officer
<PAGE>
No. D-01
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"). ACCORDINGLY, NO TRANSFER OF THESE
SECURITIES OR ANY INTEREST THEREIN MAY BE MADE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT UNLESS THE ISSUER HAS RECEIVED AN OPINION
OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER DOES NOT REQUIRE REGISTRATION
UNDER THE ACT.
BROWN DISC PRODUCTS COMPANY, INC.
(Incorporated under the laws of the State of Colorado)
CLASS D COMMON STOCK PURCHASE WARRANT
10,000 SHARES OF COMMON STOCK
Void After December 31, 2001 (the "Expiration Date")
This is to certify that, for value received, receipt of which is hereby
acknowledged, INTERNATIONAL CAPITAL, c/o Steve Ragan, 4846 West Gandy
Boulevard, Tampa, Florida 33611, or assigns (hereinafter called the "holder"),
is entitled to purchase from BROWN DISC PRODUCTS COMPANY, INC., a Colorado
corporation (hereinafter called the "Company"), at the Warrant Price of
TWENTY-FIVE CENTS ($0.25) per share, subject to adjustment as hereinafter
provided (hereinafter called the "Warrant Price"), at any time on or before
5:00 P.M. local Denver, Colorado time on December 31, 2001 (the "Expiration
Date"), up to TEN THOUSAND (10,000) fully paid and non-assessable shares of
Common Stock of the Company (hereinafter called "Common Stock"), subject to
the terms and conditions hereof.
This Warrant was originally issued in 1996 as part of Class D Common
Stock Purchase Warrants (the "Warrants") issued in consideration of certain
consulting services rendered to the Company. This Warrant represents part of
such issue of Class D Common Stock Purchase Warrants and is herein called
"this Warrant."
This Warrant may be exercised by the holder as hereinabove provided as
to the whole or any part of the shares of Common Stock covered hereby, by
surrender of this Warrant at the principal office of any transfer agent for
the Common Stock, or, if the Company shall not have any transfer agent for the
Common Stock, at the principal office of the Company (any such transfer agent,
or the Company acting hereunder, being hereinafter called the "Warrant
Agent"), with the statement of election to subscribe attached hereto duly
executed and upon payment to the Company of the Warrant Price for shares so
purchased in cash or by certified check or bank draft. Thereupon (except that
if, upon such date, the stock transfer books of the Company shall be closed,
then upon the next succeeding date on which such transfer books are open),
this Warrant shall be deemed to have been exercised and the person exercising
the same to have become a holder of record of shares of Common Stock (or of
the other securities or property to which such person is entitled upon such
exercise) purchased hereunder for all purposes, and certificates for such
shares so purchased shall be delivered to the purchaser within a reasonable
time (not exceeding five business days, except while the transfer books of the
Company are closed) after this Warrant shall have been exercised as set forth
hereinabove. If this Warrant shall be exercised in respect
<PAGE>
of a part only of the shares of Common Stock covered hereby, the holder shall
be entitled to receive a similar warrant of like tenor and date covering the
number of shares in respect of which this Warrant shall not have been
exercised.
The Company covenants and agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue thereof (other than taxes
in respect of any transfer occurring contemporaneously with such issue). The
Company further covenants and agrees that, during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
The rights of the holder of this Warrant shall be subject to the
following terms and conditions:
SECTION 1. CERTAIN ADJUSTMENTS AND NOTICES
1.1. In case the Company shall hereafter at any time change as a whole,
by split-up, subdivision or combination in any manner or by the making of a
stock dividend, the number of outstanding shares of Common Stock into a
different number of shares of Common Stock with or without par value, (i) the
number of shares of Common Stock which immediately prior to such change the
holder of this Warrant shall have been entitled to purchase pursuant to this
Warrant shall be increased or decreased in direct proportion to the increase
or decrease, respectively, in the number of shares of Common Stock outstanding
immediately prior to such change, and (ii) the Warrant Price in effect
immediately prior to such change shall be increased or decreased, as the case
may be, in inverse proportion to such increase or decrease in the number of
such shares outstanding immediately prior to such change; in any such event,
the rights of the holder of this Warrant to an adjustment in the number of
shares of Common Stock purchasable on exercise of this Warrant as herein
provided shall continue and be preserved in respect of any shares, securities,
or assets which the holder of this Warrant becomes entitled to purchase
hereafter.
1.2. In case of any capital reorganization or any reclassification of
the capital stock of the Company or in case of the consolidation or merger of
the Company with another corporation, or in case of any sale, transfer or
other disposition to another corporation of all or substantially all the
property, assets, business and goodwill of the Company as an entirety, as the
case may be, the holder of this Warrant shall thereafter be entitled to
purchase (and it shall be a condition to the consummation of any such
reorganization, reclassification, consolidation, merger, sale, transfer or
other disposition, that appropriate provision shall be made so that such
holder shall thereafter be entitled to purchase) the kind and amount of shares
of stock and other securities and property receivable, upon such capital
reorganization, reclassification of capital stock, consideration, merger,
sale, transfer or other disposition, by a holder of the number of shares of
Common Stock which this Warrant entitled the holder thereof to purchase
immediately prior to such capital reorganization, reclassification of capital
stock, consolidation, merger, sale, transfer or other disposition; and in any
such case appropriate adjustments (as determined in good faith by the Board of
Directors of the Company or of such other corporation, as the case may be)
shall be made in the application of the provisions herein set forth with
respect to rights and interests thereafter of the holder of this Warrant, to
the end that the provisions set forth herein (including the specified changes
in and other adjustments of the Warrant Price) shall thereafter be applicable,
as near as reasonably may be, in relation to any shares or other property
thereafter purchasable upon the exercise of this Warrant.
Page 2
<PAGE>
1.3. In case the Company shall hereafter at any time declare a dividend
upon shares of Common Stock payable otherwise than out of retained earnings or
otherwise than in shares of Common Stock or in stock or obligations directly
or indirectly convertible into or exchangeable for Common Stock, the holder of
this Warrant shall, upon exercise of this Warrant in whole or in part, be
entitled to receive, in addition to the number of shares of Common Stock
deliverable upon such exercise against payment of the Warrant Price therefor,
but without further consideration, the cash, stock or other securities or
property which the holder of this Warrant would have received as dividends
(otherwise than out of such retained earnings and otherwise than in shares of
Common Stock or in such convertible or exchangeable stock or obligations) if
continuously since the date set forth at the foot of this Warrant such holder
(i) had been the holder of record of the number of shares of Common Stock
deliverable upon such exercise and (ii) had retained all dividends in stock or
other securities (other than shares of Common Stock or such convertible or
exchangeable stock or obligations) paid or payable in respect of said number
of shares of Common Stock or in respect of any such stock or other securities
so paid or payable as such dividends. For purposes of this Section 1.3, a
dividend payable otherwise than in cash shall be considered to be payable out
of retained earnings only to the extent of the fair value of such dividend as
determined by the Board of Directors of the Company.
1.4. No certificates for fractional shares of Common Stock shall be
issued upon the exercise of this Warrant, but in lieu thereof the Company
shall, upon exercise in full of this Warrant, purchase out of funds legally
available therefor any such fractional interest for an amount in cash equal to
the current market value of such fractional interest calculated to the nearest
cent, computed on the basis of the closing sale price, as reported by the
National Quotation Bureau, of the Common Stock in the over-the-counter market
on the most recent day within ten days prior to the date of such exercise for
which such closing prices shall have been so reported, or, if the Common Stock
is listed on a stock exchange registered with the Securities and Exchange
Commission or traded on the NASDAQ Stock Market, the last reported sale price
on such day; and if there shall have been no sale on said day, then the
computation shall be made on the basis of the last reported sale price within
ten days prior to such date. If there have been no reported closing sale
prices, as the case may be, within such ten days, the current market value
shall be fixed in a manner determined in good faith by the Board of Directors
of the Company.
1.5. Whenever the Warrant Price is adjusted, as herein provided, the
Company shall forthwith file with the Warrant Agent a statement signed by the
President or any one of the Vice Presidents of the Company and by its
Treasurer or an Assistant Treasurer, stating the adjusted Warrant Price
determined as herein provided. Such statement shall show in detail the facts
requiring such adjustment, including a statement of the consideration received
by the Company for any additional securities issued. Whenever the Warrant
Price is adjusted, the Company will forthwith cause a notice stating the
adjustment and the Warrant Price to be mailed to the registered holder of this
Warrant at the address of such holder shown on the books of the Company.
SECTION 2. INVESTMENT INTENT
2.1 The holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant and shares of the Company's Common Stock issuable upon
exercise hereof have not been registered under the Securities Act of 1933.
Upon any exercise of this Warrant, the holder of this Warrant represents and
warrants that it will provide the Company with a written investment intent
letter by which the holder represents and warrants it is acquiring Common
Stock issuable on exercise for his or her own account for investment only and
without a view to the resale or other distribution thereof.
Page 3
<PAGE>
2.2. Before any transfer of this Warrant or the Common Stock issuable
upon exercise hereof shall be processed by the Company, the holder of this
Warrant agrees to give written notice to the Company before exercising or
selling such securities of such holder's intention to do so, describing
briefly the manner of any proposed sale of this Warrant or such holder's
intention as to the disposition to be made of shares of Common Stock issuable
upon such proposed exercise hereof. Promptly upon receiving such written
notice, the Company shall present copies thereof to counsel for the Company
for such counsel's opinion. If in the opinion of such counsel the proposed
exercise or sale may be effected without registration under the Securities Act
of 1933 of this Warrant or the shares of Common Stock issuable on the exercise
hereof, the Company, as promptly as practicable, shall notify such holder of
such opinion, whereupon such holder shall be entitled to sell this Warrant, or
to exercise this Warrant in accordance with its terms and dispose of the
shares received upon such exercise, all in accordance with the terms of the
notice delivered by such holder to the Company. If in the opinion of such
counsel the proposed exercise or sale described in said written notice given
by the holder of this Warrant may not be effected without registration of this
Warrant or the shares of Common Stock issuable on the exercise hereof, the
Company shall promptly give written notice of such opinion to the holder of
this Warrant. The holder of this Warrant agrees that, if the proposed
exercise or sale by such holder cannot, in the opinion of such counsel, be
effected without such registration, the holder will not so exercise or sell
this Warrant or the shares of Common Stock issuable upon the exercise hereof
except in a transaction which in the opinion of counsel for the Company has
adequate representations and warranties for such transaction to be exempt from
the registration requirements of the Securities Act of 1933.
SECTION 3. MISCELLANEOUS
3.1. The issue of any stock or other certificate upon the exercise of
this Warrant shall be made without charge to the registered holder hereof for
any tax in respect of the issue of such certificate. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the registered holder of this Warrant, and the Company shall not
be required to issue or deliver any such certificate unless and until the
person or persons requesting the issue thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
3.2. This Warrant and all rights hereunder or any portion thereof are
transferable on the books of the Company, upon surrender of this Warrant, with
the form of assignment attached hereto duly executed by the registered holder
hereof or by his attorney duly authorized in writing, to the Warrant agent at
its principal office hereinabove referred to, and thereupon there shall be
issued in the name of the transferee or transferees, in exchange for this
Warrant, a new Warrant or Warrants of like tenor and date, representing in the
aggregate the right to subscribe for and purchase the number of shares, or
such portion thereof as shall be so transferred, which may be subscribed for
and purchased hereunder and if there shall be any balance of such shares not
so transferred, there shall be issued in the name of the registered holder of
this Warrant, a new Warrant or Warrants of like tenor and date representing in
the aggregate the right to subscribe for and purchase the balance of the
number of shares which may be subscribed for and purchased hereunder.
3.3. If this Warrant shall be lost, stolen, mutilated or destroyed, the
Company may instruct the Warrant Agent, on such terms as to indemnify or
otherwise as the Company may in its discretion impose, to issue a new Warrant
of like denomination, tenor and date as the Warrant so lost, stolen, mutilated
or destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen,
mutilated or destroyed Warrant shall be at any time enforceable by anyone.
Page 4
<PAGE>
3.4. The Company and any Warrant Agent may deem and treat the
registered holder of this Warrant as the absolute owner of this Warrant for
all purposes and shall not be affected by any notice to the contrary.
3.5. This Warrant shall not entitle the holder to any rights of a
stockholder of the Company, either at law or in equity, including, without
limitation, the right to vote, to receive dividends and other distributions,
to exercise any preemptive rights or to receive any notice of meetings of
stockholders or of any other proceedings of the Company.
3.6. This Warrant shall be governed by the laws of the State of
Colorado.
IN WITNESS WHEREOF, BROWN DISC PRODUCTS COMPANY, INC. has caused this
Warrant to be signed in its corporate name by its duly authorized officer as
of the day and year written below.
Dated: April 1, 1996
BROWN DISC PRODUCTS COMPANY, INC.
By /s/ Ronald H. Cole
-------------------------------------
Ronald H. Cole, Chairman of the Board
and Chief Executive Officer
Attest:
/s/ Daryl M. Silversparre
- --------------------------
Secretary
Page 5
<PAGE> 1
TRANSPAC HOLDINGS, INC.
International Investment Bankers
CONSULTING AGREEMENT
This Agreement is made this 25th day of June 1996, between Brown Discs
Products, Inc., located at 1120 B Elkton Drive, Colorado Springs, Co, 80907
and Transpac Holdings, Inc., located at 10671 Wilkins Ave. #5, Los Angeles Ca,
90024, a Nevada Corporation, and PRECISE PRECISION PRODUCTS, located at 11862
Balboa Blvd. Suite 178, Granada Hills, CA 91344.
In consideration of the mutual promises contained herein and other good
valuable considerations, it is agreed as follows:
1. Independent Contractor Status
Parties to this contract intend that the relation between them by
this contract is that of company and independent contractor. No
agent, employee or servant of the independent contractor shall be
deemed an employee or agent or servant of the employer. The
Company is only interested in the results obtained under this
contract; the manner and means of conduction of the work are under
the sole control of the independent contractor. None of the
benefits provided by the Company to its employees, which includes,
but are not limited to compensation insurance and unemployment
insurance will be available to the independent contractor or its
agents. The independent contractor will be solely and entirely
responsible for its acts and for the acts of its agents, servants
and subcontractors during the performance of this contract.
2. Statement of Contract Intent
A. TRANSPAC is primarily engaged as a financing and corporate
development company on an independent contractor basis. TRANSPAC
derives its revenues from consulting fees charged to clients and
from the capital appreciation of securities obtained as part of the
consulting fees from the client companies that engage TRANSPAC to
guide them in their corporate development activities and bridge from
the private to public markets.
B. The Board of Directors of TRANSPAC agrees to enter into a consulting
and advisory contract. On that basis, aforementioned BROWN DISC has
expressed a desire to retain TRANSPAC on an advisory basis to assist
them in the preparation of the following, pursuant to an agreement
with BROWN DISC.
C. Duties to be Performed:
(1) Organize bridge or mezzanine financing for BROWN DISC, in which
TRANSPAC will introduce its investors to equity ownership in
the restricted shares of BROWN DISC. TRANSPAC and with the
help of PRECISE PRECISION PRODUCTS will raise $576,250 at a
price of $2.50 per share, and deliver proceeds no later than
June 26, 1996, and secure and deliver a Subscription Agreement
and Registration Rights Agreement generated directly by BROWN
DISC. TRANSPAC is also responsible for delivery of the
aforementioned documents including the 10Q dated March 31, 1996
and 8K dated May 15, 1996.
<PAGE>
(2) On an "as requested" basis, TRANSPAC will engage in active
promotion of the common stock of BROWN DISC. This promotion,
which includes, but is in no way limited to bringing awareness
to potential investors through interviews on the Business
Channel in Los Angeles, newsletters exposure, and introductions
to professional public relations and other promotions
companies. Each individual promotional request will be
submitted in writing from BROWN DISC to TRANSPAC. BROWN DISC
will pay all expenses relating to this promotion.
(3) TRANSPAC will devote up to (30) hours per month on an as needed
basis to the described above and herein to BROWN DISC.
It is the intent of BROWN DISC, evidenced by the signature
hereto, to contract TRANSPAC to provide the services described
above and within.
ARTICLE I
1.1 BROWN DISC hereby contracts TRANSPAC commencing on the 25th day of June
1996, as stated in section (2)(c).
1.2 The financial consulting fees for services and company advisor fee
offered by TRANSPAC as set forth in this agreement consists of the
following:
(A) An organization and due diligence fee of (10%) of the funds
raised from the aforementioned bridge financing;
(B) TRANSPAC shall receive 10,000 shares of the restricted shares
of the common stock of BROWN DISC PRODUCTS, INC, all shares of
which will inherit "piggy back" rights as stated in the
Registration Rights Agreement, as generated by BROWN DISC,
executed and delivered to TRANSPAC on June 12, 1996. The 10%
cash advisor fee will be paid no later than seven days after
deposit of proceeds and acceptance of the Subscription
Agreement by BROWN DISC. The common stock will be delivered
simultaneous to delivery of the shares issued as a result of
TRANSPAC's efforts.
(C) PRECISE PRECISION PRODUCTS (DANNY JAGIDAR - PRESIDENT) shall
also receive 10,000 shares of the restricted stock of BROWN
DISC and will inherit "piggy back" rights as described in
letter (B) directly above, and will be paid 10% cash of all
monies it raises. This equates to $29,125 of which $5,000 will
be paid directly to TRANSPAC. The same terms apply as stated
in letter (B) regarding the payment of cash and delivery of
equity earned in transaction.
ARTICLE II
3.1 If any portion of this Agreement is determined to be void as against law
or public policy, such provision shall not render this entire agreement
void, but only the invalid portion shall be so construed.
3.2 The parties agrees that in the event any party to this agreement shall
fail or refuse to perform any of the provisions of this Agreement, the
other party shall be entitled to injunctive relief.
3.3 This Agreement is made with reference to the laws of California,unless
another state may have jurisdiction in this transaction.
<PAGE>
3.4 This Agreement is complete and constitutes the entire and only contract
between all parties hereto and it is mutually understood that no other
agreements, statements, inducements or representations, written or
verbal have been made or relied upon by either party. The modifications
hereto or amendments hereto shall be binding when presented in writing
and signed by both parties.
3.5 This agreement shall be terminated upon the mutual consent of both
parties stated herein. This Agreement may be signed in counterpoint.
Agreed and Accepted This 25th day of June, 1996.
<TABLE>
<S> <C>
BROWN DISC PRODUCTS, INC. TRANSPAC HOLDINGS, INC.
BY: /s/ Ronald H. Cole BY: /s/ Rich Kaye
---------------------- ----------------------
President & CEO President & CEO
RONALD H. COLE
PRECISE PRECISION PRODUCTS
BY: /s/ Danny Jagidar 6/25/96
----------------------
President
</TABLE>
<PAGE>
Horizon Interactive, Inc.
==============================================================================
Sale of Services Agreement
This Sale of Services Agreement is made and entered into this 19th day of
July, 1996 by Horizon Interactive, Inc., having its principal place of
business at 4360 Montebello Drive, Suite 200, Colorado Springs, CO 80918
(Horizon Interactive) and Brown Disc Products Company, Inc., having its
principal place of business at 1120-B Elkton Drive, Colorado Springs, CO 80919
(Brown Disc).
1. SERVICES RENDERED
Brown Disc acknowledges that Horizon Interactive has rendered the following
services:
* Education and consulting on Internet and related Internet commerce
* Drafting of Horizon Interactive, Inc. Business Plan for Acquisition by
Brown Disc Products Company, Inc. "A Strategy for Profitable Commerce on
the Internet"
* Drafting of Functional Specification for World Wide Web Downloadable
Software Internet Venture
* Preparation and presentation of Investment Opportunity presentation
* Design effort for electronic software delivery system
* Recoding prototype software to meet the functional specification
* Program management (NETCOM, 3SI)
Furthermore, Brown Disc acknowledges the following additional value provided
by Horizon Interactive:
* Introduction to 3SI for a new partnering agreement
* Visibility of electronic software delivery application to X/Open and
World Market Strategies, Ltd.
2. TERMS
Brown Disc agrees they have accepted the services rendered by Horizon
Interactive and agrees to pay for them in accordance with the terms of this
Agreement.
Brown Disc promises to pay Horizon Interactive, Inc. 22,500 shares of common
stock of Brown Disc (BDPC) for the previously mentioned services rendered.
Brown Disc agrees to issue the 22,500 shares of common stock to Horizon
Interactive within 10 days of the signing this Agreement.
Brown Disc also agrees to enter into a Right of First Refusal Agreement with
Horizon Interactive, in which Brown Disc gives Horizon Interactive the right
of first refusal for all training, documentation, and Internet Web design
services needed by Brown Disc. The Right of First Refusal Agreement shall be
executed on or within 30 business days of completing the merger between Brown
Disc and 3SI.
<PAGE>
In exchange for signing this Sales of Services Agreement, Horizon Interactive
will transfer all rights to the Horizon Interactive, Inc. Business Plan for
Acquisition by Brown Disc Products Company, Inc. "A Strategy for Profitable
Commerce on the Internet" and to the Functional Specification for World Wide
Web Downloadable Software Internet Venture to Brown Disc. Furthermore,
Horizon Interactive agrees not to pursue a software distribution strategy, as
outlined in the above documents, as long as Brown Disc maintains a Right of
First Refusal Agreement with Horizon Interactive.
3. APPLICABLE LAW
This Agreement shall be governed by the laws of the State of Colorado.
This Agreement supersedes all prior agreements, written or oral, between
Horizon Interactive and Brown Disc relating to the services rendered as noted
in this Agreement. This Agreement may not be modified, changed or discharged,
in whole or in part, except by an agreement in writing signed by both Horizon
Interactive and Brown Disc.
This Agreement has been executed in duplicate, whereby both Horizon
Interactive and Brown Disc have retained one copy each, executed on July 19th,
1996.
HORIZON INTERACTIVE, INC.
By: /s/ Steven Imke
------------------------------
Steven Imke, President and CEO
BROWN DISC
By: /s/ Ronald H. Cole
------------------------------
Ron Cole, Chairman and CEO
<PAGE>
BROWN DISC PRODUCTS COMPANY, INC.
1996 STOCK COMPENSATION PLAN
SECTION 1. PURPOSE OF THE PLAN AND CERTAIN DEFINITIONS.
1.1. The purpose of the 1996 Stock Compensation Plan (the "Plan") is to
aid BROWN DISC PRODUCTS COMPANY, INC., a Colorado corporation
(the"Corporation") and its subsidiaries, if any, by providing an "employee
benefit plan" within the meaning of that term in Rule 405 promulgated under
the Securities Act of 1933, as amended (the "Securities Act"), for use by the
Board of Directors or a Committee of the Board (such Committee or the Board of
Directors acting as the Committee being herein called the "Committee") and, at
the discretion of said Committee, to compensate officers, directors, employees
and other individuals acting in the place of employees of the Corporation or
its subsidiaries as professionals, consultants and/or advisers to the
Corporation, in each instance as designated from time to time by the Committee
(such persons being individually called a "Plan Participant" and collectively
the "Plan Participants").
1.2. For purposes of the Plan, a "subsidiary" of the Corporation shall
be any corporation in which the Corporation at the time of a compensation
award hereunder owns or controls, directly or indirectly, at least fifty
percent (50%) or more of the outstanding voting capital stock.
1.3. Compensation issuable under the Plan to Plan Participants shall be
payable in shares of the Corporation's common stock, no par value (the "Common
Stock"), in lieu of cash compensation and shall be issued solely in payment
for the value of services actually rendered to the Corporation by the Plan
Participant. Shares issued hereunder shall be valued at the fair market value
thereof on the date such shares are authorized to be issued to a specified
Plan Participant by the Committee for designated services rendered, or to be
rendered, in a specified dollar amount. In determining the fair market value
of any payment in Common Stock issued under this Plan from time to time, the
Committee shall take into consideration the quoted prices in the public market
for the Common Stock on the date such shares are authorized for issuance by
the Committee and, if deemed applicable by the Committee to its determination
of fair market value, a reasonable discount to quoted market prices not
exceeding 25% of the low bid price on the date of such authorization if such
discount is deemed appropriate by the Committee to allow for price volatility
and/or possible lack of liquidity based on reported price and trading volume
in the public market for the Common Stock when compared to the number of
shares and any applicable forfeiture or restrictive provisions authorized for
issuance to a Plan Participant in accordance herewith.
1.4. Compensation paid in Common Stock under this Plan may be issued
only with respect to services of the type for which shares pursuant to an
employee benefit plan may be registered on Form S-8 under the Securities Act
and the rules and regulations of the Securities and Exchange Commission
applicable thereto, as the same are in effect at the date this Plan is adopted
by the Board of Directors and as said Form S-8 and such rules and regulations
may be amended from time to time hereafter during the term of this Plan. In
no event shall any compensation be payable hereunder: (i) for services which
are either directly or indirectly related to the offer or sale of securities
in a capital-raising transaction by the Corporation; or (ii) for the sale of
goods, merchandise, products, tangible assets or other personal property.
Shares of Common Stock authorized by this Plan may be issued as compensation
only upon the execution of an agreement by the recipient of such shares to
accept the same in lieu of all or a designated portion of cash compensation
otherwise payable for such services.
- 1 -
<PAGE>
1.5. Each prospective recipient of a payment of shares of Common Stock
under this Plan shall not, with respect to such payment, be deemed to have
become a Plan Participant, or to have any rights with respect to such payment,
until and unless such recipient shall have executed an agreement or other
instrument evidencing the payment in form and substance acceptable to the
Committee and delivered a fully executed copy thereof to the Corporation, and
otherwise complied with any then applicable terms and conditions of the
payment.
1.6. Subject to the provisions of this Plan, shares or interests in
shares of Common Stock issued as compensation under the Plan may not be sold,
assigned, transferred, pledged or otherwise encumbered prior to the date on
which such shares are issued, or, if later, the date on which any applicable
restriction or performance condition and period shall lapse without a
requirement of forfeiture.
SECTION 2. ADMINISTRATION.
2.1. The Board of Directors of the Corporation (the "Board") shall
designate a Committee of not less than two directors (the "Committee") who
shall serve at the pleasure of the Board. In lieu of designating such
members, the Board as a whole may elect to act as the Committee. No member
of the Committee shall be eligible to participate in the Plan while serving on
the Committee, and each member of the Committee shall conform to such other
qualifications as shall be necessary for payments of Common Stock compensation
under the Plan to be exempt from the provisions of Section 16(b) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") by virtue
of the provisions of Rule 16b-3 thereunder as the same shall be amended from
time to time.
2.2. The Committee shall have full power and authority, subject to such
resolutions not inconsistent with the provisions of the Plan as may be issued
or adopted by the Board, to authorize the issuance of Common Stock as
compensation for services in accordance with this Plan to eligible Plan
Participants designated by the Committee from time to time. In furtherance of
such powers:
(a) The Committee shall interpret the provisions of this Plan
and any payments of Common Stock compensation issued under the Plan (and
any agreements relating thereto) and supervise the administration of the
Plan.
(b) The Committee shall: (i) select the Plan Participants to
whom Common Stock compensation may from time to time be granted
hereunder; (ii) determine the number of shares and the fair market
value thereof for each payment of Common Stock compensation granted
hereunder; (iii) determine any other terms and conditions of such Common
Stock compensation payments, not inconsistent with the provisions of the
Plan (including but not limited to any restrictions or forfeiture
conditions relating to the performance of services by the Plan
Participant); (iv) determine whether, to what extent and under what
circumstances a Common Stock payment of compensation hereunder may be
deferred either automatically or at the election of the Plan Participant
under a written agreement; and (v) approve any agreement executed by
Plan Participants and the Corporation in accordance with this Plan.
(c) All decisions made by the Committee pursuant to the
provisions of the Plan and related orders or resolutions of the Board
(as and to the extent permitted hereunder) shall be final, conclusive
and binding on all persons, including the Corporation, its shareholders
and Plan Participants.
- 2 -
<PAGE>
SECTION 3. STOCK SUBJECT TO THE PLAN.
3.1. The total number of shares of Common Stock of the Corporation
available for payment of compensation under the Plan is Five Hundred Thousand
(500,000) shares. Such shares may consist, in whole or in part, of
authorized and unissued shares or treasury shares. If any shares that have
been issued as compensation hereunder cease to be outstanding as a result of
any forfeiture or failure to satisfy restrictive conditions of a payment, such
shares shall again be available for compensation payments under the Plan.
3.2. In the event of any merger, reorganization, consolidation,
recapitalization, stock split, stock dividend, extraordinary cash dividend, or
other change in corporate structure affecting the Common Stock, such
adjustment shall be made in the aggregate number of shares which may be issued
under the Plan as may be determined to be appropriate by the Committee, in its
sole discretion; provided that the number of shares subject to any
compensation payment shall always be a whole number. In addition, the
Committee is authorized to make adjustments in the terms and conditions of,
and performance criteria relating to, payments of compensation hereunder in
recognition of unusual or nonrecurring events affecting the Corporation, the
financial statements of the Corporation, the services to be rendered by a Plan
Participant, or in response to changes in applicable laws, regulations or
accounting principles.
SECTION 4. STOCK CERTIFICATES AND CERTAIN RESTRICTIONS.
4.1. To the extent deemed necessary by the Committee, acting upon the
advice of counsel to the Corporation, stock certificates issued under the Plan
may bear an appropriate legend referring to any applicable restrictions under
the Securities Act. In such event, the Committee may require any Plan
Participant receiving shares pursuant to a Common Stock payment of
compensation under the Plan to represent to and agree with the Corporation in
writing that such Plan Participant is acquiring the shares without a view to
distribution thereof.
4.2. To the extent deemed necessary by the Committee, stock
certificates issued under the Plan may bear an appropriate legend referring to
the any restrictions applicable to any such payment, substantially in the
following form:
"The transferability of this certificate and the shares
represented hereby are subject to the terms and conditions
(including forfeiture) of the Corporation's 1996 Stock
Compensation Plan and an Agreement entered into between the
registered owner and the Corporation. Copies of such Plan and
Agreement are on file in the principal offices of the
Corporation."
4.3. If deemed appropriate by the Committee, the Committee may require
that the stock certificates evidencing shares subject to forfeiture or other
restrictions be held in custody by the Corporation until the restrictions
thereon shall have lapsed, and may require, as a condition of any restricted
payment, that the Plan Participant shall have delivered a stock power,
endorsed in blank, relating to the Common Stock covered by such payment.
- 3 -
<PAGE>
SECTION 5. AMENDMENTS AND TERMINATION.
5.1. The Board may amend, alter, or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made which would:
(a) impair the rights previously granted to any Plan Participant
without the Plan Participant's consent;
(b) except with approval of shareholders of the Corporation
within one year after the same is proposed, increase the total number of
shares available for the purpose of the Plan;
(c) amend the Plan or an agreements thereunder in a manner that
would render the shares of Common Stock covered by the Plan to become
ineligible for registration on Form S-8 under the Securities Act (except
in the event Form S-8 shall be revoked by the Securities and Exchange
Commission);
(d) amend the Plan in a manner that would cause payments of
Common Stock compensation under the Plan to become subject to the
provisions of Section 16(b) of the Exchange Act (except in the event
Rule 16b-3 thereunder shall be revoked by the Securities and Exchange
Commission);
(e) otherwise materially increase the benefits accruing to Plan
Participants under the Plan or materially modify the requirements as to
eligibility for participation in the Plan.
5.2 The Committee may amend the terms of any Common Stock payment
theretofore granted under this Plan, prospectively or retroactively, but no
such amendment shall impair the rights of any Plan Participant without such
Plan Participant's consent.
SECTION 6. OTHER PROVISIONS.
6.1. Nothing in the Plan shall confer upon any Plan Participant the
right to continue in the employment of the Corporation or any of its
subsidiaries or affect any right that the Corporation or any of its
subsidiaries may have to terminate the employment of any such employee.
6.2. A Plan Participant shall have no rights as a shareholder until he
or she becomes the registered holder of record of Common Stock certificates
delivered under the Plan. The Corporation shall have no liability to any Plan
Participant for any delay in the issuance and delivery of such Common Stock
certificates; provided, however, that in the event of any unanticipated delay
in the issuance and delivery of shares authorized for issuance under the Plan,
in appropriate circumstances the Committee in its discretion may adjust the
number of share so issued to compensate for any loss to the Plan Participant
arising from a decline in the fair market value of shares issued as a result
of said unanticipated delay.
6.3. If any Plan Participant receiving a payment of Common Stock
compensation hereunder is an employee of the Corporation, such Plan
Participant shall make arrangements satisfactory to the Committee to pay to
the Corporation, in the calendar quarter of such payment, any Federal, state
or local taxes required to be withheld from the employee with respect to such
compensation. If such employee shall fail to make such tax payments as are
required, the Corporation and its subsidiaries shall, to the
- 4 -
<PAGE>
extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the Plan Participant.
6.4. The Plan shall be effective on the date it is approved by the
Board of Directors, but its continuance shall be subject to the approval,
obtained in accordance with Rule 16b-3(b) of the Exchange Act (if so
required), of the holders of a majority of all outstanding shares of Common
Stock within twelve months after the date the Plan is adopted by the Board.
Any stock compensation payments proposed for issuance before shareholder
approval is obtained must be rescinded if shareholder approval is not obtained
within twelve months after the Plan is adopted by the Board.
6.5. The validity, construction and effect of the Plan and any action
taken or relating to the Plan shall be determined in accordance with the laws
of the state of Colorado and applicable federal law of the United States.
6.6 No payments of compensation hereunder shall be granted pursuant to
the Plan after the tenth anniversary of the earlier of either the date the
Plan is adopted by the Board or the date the Plan is approved by the
shareholders of the Corporation, but payments of compensation theretofore
granted may extend beyond that date.
# # # # # # # # # # #
- 5 -
<PAGE>
AGREEMENT to Tender 1,000,000
Class A Common Stock Purchase Warrants
in
Brown Disc Products Company, Inc.
in exchange for
250,000 shares of Common Stock, no par value
September 27, 1996
TO: Brown Disc Products Company, Inc.
1120-B Elkton Drive
Colorado Springs, Colorado 80907-3568
Dear Sirs:
RCML Partners, a California general partnership and the record holder of
1,000,000 Class A common stock purchase warrants issued by BROWN DISC PRODUCTS
COMPANY, INC., a Colorado corporation (the "Company"), evidenced by Warrant
Certificate number A-04 (the "Warrants") hereby tenders and offers all such
Warrants to the Company in full payment and consideration for the issuance of
TWO HUNDRED FIFTY THOUSAND (250,000) shares of the Company's common stock, no
par value. RCML Partners further represents and warrants that the Warrants
are held by such general partnership for the beneficial account of Roger
Brewer, the party designated below as the person to receive Common Stock under
this Agreement.
The parties understand that the exercise price for the Warrants is $0.25
per share, and that the closing price for the Company's common stock in the
over-the-counter market on the date of this Agreement, September 27, 1996, was
$1.625 per share. Based upon such closing price, the difference between the
market value at $1.625 per share of 1,000,000 shares less the warrant exercise
price of $250,000, were the Warrants to be exercised, would be $1,375,000. In
comparison, the market value at $1.625 per share of 250,000 shares of the
Company's common stock would be $406,250. RCML Partners has agreed to
discount the value of the Warrants in making the offer herein to reflect a
lack of liquidity for the Warrants and the underlying shares as a result of
the size of the block and restrictions as to resale under applicable
securities laws. Should the fair value of the Warrants surrendered exceed the
fair value of 250,000 shares of Common Stock issued in exchange therefor upon
acceptance by the Company of this Agreement, RCML Partners agrees that any
such excess shall be deemed a contribution to the capital of the Company.
Upon acceptance of this Agreement, you are directed and instructed to
issue, register and deliver the 250,000 shares of Common Stock as follows:
ROGER BREWER
71 Halsetown, St. Ives
Cornwall TR26 3LZ
England, United Kingdom
<PAGE>
RCML Partners further represents and warrants that the transferee of the
shares of Common Stock to be issued hereunder is not a U.S. Person as such
term is defined in Rule 902 under Regulation S under the Securities Act of
1933, as amended ("Securities Act") and said transferee has been advised such
shares of Common Stock have not been registered under the Securities Act and
will bear a restrictive legend.
If applicable to Regulation S, the transferee has been further advised
as follows: Any interest in the securities of Brown Disc Products Company,
Inc. subscribed to hereunder may be resold within the jurisdiction of the
United States or to U.S. Persons [as defined in Rule 902(o) of Regulation S
under the United States Securities Act of 1933 ("Securities Act")] by or for
the account of a foreign investor only: (i) pursuant to a registration
statement under the Securities Act; or (ii) pursuant to an applicable
exemption, if any, from such registration.
This Offer shall be deemed to have been made and executed, and all
performance shall be deemed to take place, upon its acceptance within the
State of Colorado.
The Offer contained in this Agreement will expire unless accepted in
accordance with its terms by the Company on or before the close of business on
Monday, October 1, 1996. Upon acceptance, a copy of this Agreement and the
original certificate number A-03 evidencing the Warrants shall be promptly
transmitted to the Company's counsel for preparation of appropriate
instructions for issuance of the shares and for cancellation of the Warrants.
Very truly yours,
RCML Partners
By: /s/ Ronald H. Cole
-------------------------------
Ronald H. Cole, General Partner
By: /s/ Mark Lane
-------------------------------
Mark Lane, General Partner
ACCEPTED AND APPROVED:
Date: September 28 , 1996
BROWN DISC PRODUCTS COMPANY, INC.
By: /s/ Ronald H. Cole
-----------------------------
Ronald H. Cole, President
Colorado Springs, Colorado
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the
Statements of Operations and Balance Sheet of Brown Disc Products
Company, Inc. and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000855373
<NAME> BROWN DISC PRODUCTS COMPANY, INC.
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> Jun-30-1996
<PERIOD-START> Jul-01-1995
<PERIOD-END> Jun-30-1996
<PERIOD-TYPE> 12-MOS
<CASH>615,229
<SECURITIES> 0
<RECEIVABLES> 205,436
<ALLOWANCES> 17,609
<INVENTORY> 86,411
<CURRENT-ASSETS> 908,747
<PP&E>1,422,213
<DEPRECIATION> 1,327,345
<TOTAL-ASSETS> 1,009,886
<CURRENT-LIABILITIES> 778,746
<BONDS> 353,318
133,698
96,368
<COMMON> 1,770,889
<OTHER-SE> (2,113,133)
<TOTAL-LIABILITY-AND-EQUITY> 1,009,886
<SALES> 1,256,641
<TOTAL-REVENUES> 1,256,641
<CGS> 1,011,800
<TOTAL-COSTS> 554,272
<OTHER-EXPENSES> 753,787
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,270
<INCOME-PRETAX> (1,121,488)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,121,488)
<DISCONTINUED> 0
<EXTRAORDINARY> 274,151
<CHANGES> 0
<NET-INCOME> (857,493)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
