-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H7+gzId7JnwqzJOFx70jiTDN+7PxHB3hPKBfYy9fKp+Fc20lI8+5GXp+nqF56hoJ +Qd3TMblNrsU/6LCG3tuLw== 0000855373-96-000006.txt : 19961212 0000855373-96-000006.hdr.sgml : 19961212 ACCESSION NUMBER: 0000855373-96-000006 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961211 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWN DISC PRODUCTS CO INC CENTRAL INDEX KEY: 0000855373 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 841067075 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-31068 FILM NUMBER: 96679048 BUSINESS ADDRESS: STREET 1: 1120 B ELKTON DR CITY: COLORADO SPRINGS STATE: CO ZIP: 80907 BUSINESS PHONE: 7195931015 10KSB 1 ============================================================================ 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 ---------------------------- BROWN DISC PRODUCTS COMPANY, INC. --------------------------------------------- (Name of small business issuer in its charter) COLORADO 84-1067075 - -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1120-B Elkton Drive, Colorado Springs, Colorado 80907-3568 - ------------------------------------------------------ ------------ (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. ============================================================================ BROWN DISC PRODUCTS COMPANY, INC. FORM 10-KSB ANNUAL REPORT Table of Contents
Item No. Page - ------- ----- 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
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. - i - 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 - 1 - 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. - 2 - 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. - 3 - 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. - 4 - 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.
Period High Low -------------- ---------- ---------- 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
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. - 5 - 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. - 6 - 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. - 7 - 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 - 8 - 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 - 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 - ITEM 7. FINANCIAL STATEMENTS The following financial statements are included in this Report:
BROWN DISC PRODUCTS COMPANY, INC. FINANCIAL STATEMENTS AT JUNE 30, 1996 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
- 11- 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- BROWN DISC PRODUCTS COMPANY, INC. BALANCE SHEET JUNE 30, 1996 - ------------------------------------------------------------------------------
June 30, 1996 ------------- 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 ============
See notes to financial statements. - 13 - BROWN DISC PRODUCTS COMPANY, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 - ------------------------------------------------------------------------------
Year ended June 30, ------------------------- 1996 1995 ----------- ----------- 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) =========== ===========
See notes to financial statements. - 14- BROWN DISC PRODUCTS COMPANY, INC. STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR THE YEARS ENDED JUNE 30, 1996 and 1995 - ------------------------------------------------------------------------------
Preferred Stock Series B Common Stock Warrants Additional ------------------ ---------------------- ------------------- Paid-in Accumulated Shares Amount Shares Amount Shares Amount Capital Deficit Total -------- -------- --------- ----------- --------- -------- --------- ----------- ----------- 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) ======== ======== ========= =========== ========= ======== ========= =========== ===========
See notes to financial statements. - 15- BROWN DISC PRODUCTS COMPANY, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 - ------------------------------------------------------------------------------
Year ended June 30, ------------------------- 1996 1995 ----------- ----------- 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 --
See notes to financial statements. - 16- 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- 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: Raw materials ........................................ $ 28,571 Work-in-process ...................................... 31,140 Finished goods ....................................... 26,700 ----------- Total $ 86,411 ===========
3. PROPERTY AND EQUIPMENT Property and equipment consists of the following: 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 ===========
- 18- NOTES TO FINANCIAL STATEMENTS (continued) 4. NOTES PAYABLE Notes payable consist of the following: 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 ============
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: 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 ============
- 19- 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: 1997 ................................................. $ 54,409 1998 ................................................. 7,635 1999 ................................................. 8,604 2000 ................................................. 9,694 2001 ................................................. 10,924
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 - 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 - 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:
Number of Exercise Price Expiration Warrants Per Share Date ----------- -------------- ----------- 292,350 $.01 2000 1,000,000 $.10 2000 3,010,000 $.25 2000 - 2001
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 - 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: Net operating loss carryforward ...................... $ 1,050,000 Less valuation allowance ............................. 1,050,000 ------------ Total ................................................ $ -- ============
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 - 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 - 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:
Name Age Positions -------------------------- --- ----------------------------------- 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
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 - 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 - 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 $60,000 per annum for such periods.
Annual Compensation Long Term Compensation ------------------------------- ------------------------------- Awards Payouts Other ---------------------- ------- Annual Restricted Securities Compen- Stock Underlying LTIP All Other Name and Fiscal Salary Bonus sation Awards Options/ Payouts Compen- Principal Position Year(1) ($) ($) ($)(2) ($) SARs(#) ($) sation($) - ------------------ ------- --------- --------- -------- --------- ----------- ------- ---------- 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)
________________________________________ (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 $34,488 was paid in June 1996. - 27 - STOCK OPTIONS The Company did not grant any stock options for the fiscal year ended June 30, 1995 except for common stock warrants issued to new members of management, and there were no outstanding stock options granted during prior periods. The following tables summarize stock option activity during the fiscal year ended June 30, 1996 for each of the named officers shown in the table "Summary Executive Compensation":
Option/SAR Grants in Last Fiscal Year Ended June 30, 1996 ---------------------------------------------------------------------------- Potential Realizable Value at Assumed Number of % of Total Annual Rates of Stock Securities Options/SARs Price Appreciation Underlying Granted to Exercise or for Option Term Options/SARs Employees in Base Price Expiration ------------------------ Name Granted (#) Fiscal Year ($/sh) Date 5%($) (2) 10%($) (2) - --------------------- ----------- ----------- ----------- ----------- ----------- ----------- Ronald H. Cole 1,000,000 (1) 33.3% $0.25 9/7/00 $ 69,070 $ 152,628 R. Eugene Rider -0- -- -- -- -- --
_________________________________________________ (1) Warrants exercisable at $0.25 exercise price equal to the fair market value on date of grant. Does not include warrants issued to a general partnership in which Mr. Cole was a general partner insofar as the partnership held the warrants for the benefit of an unaffiliated third party. (3) The dollar amounts under these columns are the result of calculations at 5% and 10% appreciation rates compounded annually as required by rules of the Securities and Exchange Commission, and are not intended to forecast possible future appreciation, if any, of the stock price.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values ----------------------------------------------------------------------------------------- Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs at Options/SARs at at Fiscal Year-End (#) at Fiscal Year-End ($)(A) Shares Acquired Value ------------------------- ------------------------- Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable - ---------------------- --------------- ------------ ---------- -------------- ----------- ------------- Ronald H. Cole -0- n/a 1,000,000 / -0- $3,875,000/ -0- R. Eugene Rider -0- n/a -0- -0- -0- -0-
________________________________________________________________ (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 - 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 - 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:
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 - ------------------------------- -------------- ---------- ------------- ---------- 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- --
- ------------------------------- (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 - (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.
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 - 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". - 32 - 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. - 33 - 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 - 34 - 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. - 35 - 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. - 36 - 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.
Exhibit No. Description ------- ------------------------------------------------------- # 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. - 37 - 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. - 38 - (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. - 39 - # 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.
(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. - 40 - 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:
Signature Capacity Date - ------------------------- --------- ---------------- /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 -
EX-3.1 2 AMENDED AND FULLY RESTATED ARTICLES OF INCORPORATION 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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - "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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - EX-3.2 3 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION 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 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- 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- 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- 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- EX-3.3 4 CERTIFICATE OF DESIGNATION FOR SERIES A PREFERRED STOCK 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 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 ---------------------------- 2 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. 3 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 4 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. 5 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. 6 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 7 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. 8 EX-3.4 5 CERTIFICATE OF DESIGNATION FOR SERIES B PREFERRED STOCK 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 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 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 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 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 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 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 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 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 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 EX-3.5.1 6 REGISTRANT'S BY-LAWS ADOPTED OCTOBER 12, 1989 BYLAWS OF BROWN DISC PRODUCTS COMPANY, INC. 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 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 -ii- 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 -iii- 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. 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 -2- 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, -3- 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 -4- 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 -5- 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 -6- 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. -7- (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- 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: -9- (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- 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 -11- 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 -12- 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 -13- 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 -14- 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. -15- (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. -16- (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 -17- 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. -18- (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 -19- 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 -20- 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 -21- 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 -22- 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 -23- 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: -24- (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 -25- 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 -26- 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 -27- 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 -28- 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 -29- 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 -30- 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. -31- (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. -32- 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. -33- 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. -34- 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 -35- 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. -36- 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. -37- 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 -38- 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 -39- 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 -40- 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- 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- (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- 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- EX-3.5.2 7 AMENDMENT TO SECTION 3.3 OF REGISTRANT'S BY-LAWS 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. EX-10.4.3 8 RELEASE OF PROXY AS TO 45,000 SHARES 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 EX-10.4.4 9 RELEASE OF PROXY AS TO 40,000 SHARES 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 EX-10.4.5 10 RELEASE OF PROXY AS TO 250,000 SHARES 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 EX-10.4.6 11 IRREVOCABLE PROXY AS TO 250,000 SHARES 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 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- 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- EX-10.13.2 12 SETTLEMENT TRUST AGREEMENT 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. 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 EX-10.14 13 MODIFICATION OF PROMISSORY NOTE TO SBA 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 EX-10.15.1 14 FORM OF SUBSCRIPTION AGREEMENT FOR SALE OF COMMON STOCK 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) 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. 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. 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] 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: -------------------------------
****************************************************************************** ACCEPTED: BROWN DISC PRODUCTS COMPANY, INC. By: ----------------------------------------- Title: ----------------------------------------- DATE: , 1996 ----------------------------------- Rev 96-a1 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 EX-10.15.2 15 AMENDMENT TO SUBSCRIPTION AGREEMENT FOR SALE OF COMMON STOCK 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. 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 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 EX-10.15.3 16 REGISTRATION RIGHTS AGREEMENTS 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. 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 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 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 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 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 EX-10.16 17 CLASS D COMMON STOCK WARRANTS 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 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 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 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 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 EX-10.17 18 CONSULTING AGREEMENT WITH TRANSPAC HOLDINGS, INC. 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. (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. 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. 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
EX-10.18 19 SALE OF SERVICES AGREEMENT WITH HORIZON INTERACTIVE, INC. 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. 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 EX-19 20 1996 STOCK COMPENSATION PLAN 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 - 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 - 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 - 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 - 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 - EX-10.20 21 AGREEMENT TO EXCHANGE CLASS A WARRANTS FOR COMMON STOCK 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 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 EX-27 22 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 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. 0000855373 BROWN DISC PRODUCTS COMPANY, INC. 1 Jun-30-1996 Jul-01-1995 Jun-30-1996 12-MOS 615,229 0 205,436 17,609 86,411 908,747 1,422,213 1,327,345 1,009,886 778,746 353,318 133,698 96,368 1,770,889 (2,113,133) 1,009,886 1,256,641 1,256,641 1,011,800 554,272 753,787 0 58,270 (1,121,488) 0 (1,121,488) 0 274,151 0 (857,493) (.27) (.27)
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