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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: May 15, 1996
BROWN DISC PRODUCTS COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Colorado 33-31068 84-1067075
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation File No.) Identification No.)
or organization)
1120-B Elkton Drive, Colorado Springs, Colorado 80907-3568
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(719) 593-1015
(Not applicable)
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(Former name or former address, if changed since last report)
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BROWN DISC PRODUCTS COMPANY, INC.
ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
Brown Disc Products Company, Inc. (the "Company") previously
indicated in its last Report on Form 10-QSB for the period ended March
31, 1996 that its management was reassessing the Company's existing
products, services and business strategy. In view of the Company's
operating losses and limited resources, the Report on Form 10-QSB
noted, among other things, that this strategy anticipated the
acquisition of additional assets or business operations in exchange
for a controlling interest in the Company via the issuance of
additional equity securities. It was also noted that any such
transaction was expected to involve substantial dilution to the equity
interests of the Company's stockholders.
PROSPECTIVE CHANGE IN CONTROL
On May 15, 1996 the Company publicly announced it has entered
into 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. As described in
greater detail below in Item 5 of this Report, if transactions
contemplated by the Reorganization Agreement are successfully
completed (as to which there can be no assurance), the changes in
management, issuance of additional common stock in a private placement
financing and issuance thereafter of common stock equivalent to 60% of
the Company's common equity calculated on a fully diluted basis at
closing of the Reorganization Agreement would result in a change in
control of management, voting control and equity ownership of the
Company.
Information concerning the three principal 3SI shareholders who
would receive 60% of the Company's common stock at closing of the
Reorganization Agreement and other terms of the Reorganization
Agreement are discussed in Item 5 below. Consideration that would be
received from the 3SI shareholders in exchange for their acquisition
of control of the Company under the Reorganization Agreement would be
all of their equity interests in 3SI.
Except as set forth in Item 5 of this Report, there are no other
arrangements or understandings among parties to the Reorganization
Agreement with respect to the election of directors or other matters
on which shareholders of the Company are entitled to vote.
ITEM 5. OTHER EVENTS.
AGREEMENT AND PLAN OF REORGANIZATION TO ACQUIRE 3SI
The Company entered into the Reorganization Agreement on May 15,
1996 with Kimbrough Computer Sales Inc. 3SI, Inc., a Colorado
corporation ("3SI"), the three principal shareholders of 3SI (the "3SI
Shareholders"), Ronald H. Cole and BDPC Acquisition Corporation. The
3SI Shareholders include Frank W. Backes, Frederick J. Slack and
Felipe Larry Valdez. Ronald H. Cole is the Chairman of the Board,
President and Chief Executive Officer of the Company. BDPC
Acquisition Corp. ("BDPC Acquisition") will be organized at a future
date under the laws of Colorado as a newly formed subsidiary of the
Company.
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Subject to completion or waiver of various conditions precedent
to closing, the Reorganization Agreement provides that 3SI will merge
into BDPC Acquisition with the result that 3SI will become a wholly-
owned subsidiary of the Company. The consideration to be received by
3SI Shareholders upon completion of the merger and closing of the
Reorganization Agreement will include: (i) $1,200,000 in cash to be
paid by the Company, and (ii) newly-issued common stock of the Company
in an amount equal to 60% of the total shares of Company common stock
then outstanding and reserved for issuance on a fully-diluted basis.
The Company is also obligated at closing to pay approximately
$1,014,000 of 3SI indebtedness incurred in connection with financing
the August 1993 acquisition of ownership in 3SI by the 3SI
Shareholders; such payment may be deemed additional consideration to
be paid at closing that would benefit the 3SI Shareholders.
ADDITIONAL EQUITY FINANCING AND CERTAIN OTHER CONDITIONS
Conditions to closing under the Reorganization Agreement include,
among others, requirements that the Company: (a) pay or make
provision for the payment and settlement of all of the Company's past
due debts and liabilities; and (b) obtain additional common stock
equity financing in an amount adequate to provide at least $3,500,000
in working capital available to the Company at closing after providing
for payment of (i) $1,200,000 at closing to the 3SI Shareholders as
described above, (ii) approximately $1,014,000 of 3SI's indebtedness
to its former owners, (iii) $200,000 in contingent obligations that
will become due to the Company's former President, R. Eugene Rider, as
a result of the financing, (iv) payment or settlement of the Company's
past due debts and liabilities, and (v) costs and expenses of the
private placement financing. The Company's management estimates that
at least $6.6 million in gross proceeds from an offering and sale of
common stock will be required for the Company to satisfy these
requirements. There can be no assurance that the Company will be
successful in efforts to raise additional equity capital.
In order to satisfy this additional financing condition, the
Company plans to offer additional common stock for sale in a private
placement financing transaction within the next 30 days. The amount
and pricing of securities that will be offered in an effort to obtain
this financing has not yet been determined by the Company's Board of
Directors. Based upon the current market price for the Company's
common stock of approximately $4.25 per share, at least 1.6 million
additional shares of common stock will be required to obtain such
financing if the Company's efforts are successful, and the number of
shares required for this purpose may increase beyond that level,
perhaps significantly, based upon market conditions at the time of the
proposed private placement, the price for the Company's securities,
negotiations with prospective private investors, results of
negotiations to settle past due Company liabilities, and other
relevant factors.
Additional conditions to closing of the Reorganization Agreement
include, among others, completion of due diligence investigations by
the respective parties; completion of financial statements of 3SI in a
form required to be filed with a subsequent Report on Form 8-K;
delivery by 3SI to the Company of certain disclosure schedules
required by the Reorganization Agreement; execution of employment
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agreements at closing between the Company and the three 3SI
Shareholders; the absence of any material misrepresentations as to, or
material change in, the business, assets, obligations or financial
condition of the Company or 3SI; and the filing of a certificate of
merger to effect the merger of 3SI into BDPC Acquisition after BDPC
Acquisition has been organized as a wholly-owned subsidiary of the
Company. Any of the foregoing or other conditions to closing may be
waived by the parties to the Agreement. The Company does not
anticipate that approval of the Reorganization Agreement will require
a vote of the Company's shareholders.
VOTING AND MANAGEMENT AGREEMENTS
Ronald H. Cole, the Company's Chief Executive Officer and a
director, has agreed to support the Reorganization Agreement and to
vote all shares of the Company he is entitled to vote in favor of the
transactions provided by that agreement. Mr. Cole currently holds
proxies irrevocable until September 7, 1997 to vote 1,202,410 of the
shares of the Company's common stock owned by R. Eugene Rider and Eva-
Forsberg Rider, 100,000 shares held by a Trustee for the benefit of
Mr. & Mrs. Rider and 62,000 shares of common stock owned by Harry K.
McCreery, a director of the Company. Such shares represent, in the
aggregate, approximately 36.2% of the 3,768,071 shares of voting
common stock currently outstanding. Upon closing of the
Reorganization Agreement, Mr. Cole has agreed to transfer his right to
exercise voting power represented by these irrevocable proxies to the
three principal 3SI Shareholders.
Upon closing of the Reorganization Agreement, Messrs. Mark R.
Lane, Daryl M. Silversparre and David J. Lopes are to resign as
directors of the Company, two incumbent directors (Ronald H. Cole and
Harry K. McCreery) will remain on the Board, and the three principal
3SI shareholders will be elected to the Board and will constitute a
majority of a five-person Board. In addition, all existing executive
officers of the Company will resign and be replaced by the principal
3SI shareholders and their nominees.
OTHER AGREEMENTS
If the closing under the Reorganization Agreement occurs, Ronald
H. Cole and the Company have agreed to cause 3.0 million of the
Company's outstanding Class A common stock purchase warrants and all
1.0 million of the Company's Class B common stock warrants, currently
held by certain members of the Company's Board and their affiliates,
to be exchanged for 808,050 newly-issued shares of the Company's
common stock. [The Class A warrants are exercisable at $0.25 per
share until expiration on September 7, 2000 and the Class B warrants
are exercisable at $0.10 per share until expiration on September 7,
2000; these warrants would be cancelled after the exchange.] The
Company has agreed to grant certain "piggy-back" rights for the
registration of up to 200,000 shares under the Securities Act of 1933
of the 808,050 shares to be issued in exchange for the surrender and
cancellation of 4,000,000 warrants described above.
The Reorganization Agreement also provides that piggy-back
registration rights may be granted at a future date as to the
remaining shares to be issued in exchange for warrants and as to the
shares of common stock to be issued upon closing to the 3SI
Shareholders by mutual agreement among the parties to the agreement.
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Employment agreements for the 3SI Shareholders required at
closing will each be for a term of 3 years, renewable on a year-to-
year basis thereafter except on 60 days' prior notice of intent not to
renew. Base annual salaries for each 3SI Shareholder as an executive
employee of the Company will be $100,000 in the first year, $110,000
in the second year and $120,000 in the third year. Each will be
entitled to participate in benefit programs generally available to all
executive employees of the Company including, without limitation,
health and group life insurance. If employment is terminated
involuntarily without cause (as defined in the employment agreements),
the executive will be entitled to receive severance payments monthly
for the balance of the remaining original terms of his employment
agreement equal to 150% of the base salary otherwise provided by his
employment agreement. Each employment agreement will require that the
executive employee devote his full business time and services to the
affairs of the Company and will contain inventions assignment
provisions in favor of the Company.
INFORMATION AS TO 3SI AND THE 3SI SHAREHOLDERS
The following information relating to 3SI and the 3SI
shareholders have been extracted from certain information provided to
the Company by 3SI and the 3SI Shareholders. Although the Company
does not have any knowledge that would indicate the statements and
summary data contained below are untrue, the Company is still in the
due diligence process of collecting information as to 3SI, and the
Company and its directors take no responsibility for the accuracy of
the following information or any failure to disclose additional facts
that may affect the significance or accuracy of such information.
After closing of transactions contemplated by the Reorganization
Agreement, the Company intends to file an amendment to this Form 8-K
Report to provide more comprehensive information.
Summary of 3SI Business
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3SI was founded in 1979 as a Colorado corporation under the name
"Kimbrough Computer Sales" and initially concentrated exclusively on
providing software solutions for Digital Equipment Corporation ("DEC")
minicomputers in the Denver metropolitan area. By the late 1980's,
Kimbrough Computer Sales had become an authorized dealer for IBM,
Compaq and DEC equipment and Novell software. As the trend to replace
mainframe and minicomputers with more cost-effective PC LAN (Personal
Computer Local Area Network) or UNIX-based multiuser systems evolved,
Kimbrough Computer Sales developed expertise in both PC LAN and UNIX-
based networking systems.
In August 1993, Kimbrough Computer Sales was purchased from its
former owners by the 3SI Shareholders and changed its business name
and style to "Kimbrough Solutions, Inc.". Three major changes
inplemented by 3SI Shareholders as new management of 3SI included:
(i) reducing efforts on low margin PC business and significantly
increasing concentration on mid-range systems; (ii) expanding services
to include consulting, in addition to prior product support
activities; and (iii) development of a consulting model for business
solutions which allows 3SI to develop a longer-range associations with
its customers. These changes altered 3SI's primary focus from being
a hardware and network software dealer with value-added product
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support services to a company whose primary focus is computer
consulting and services with product sales as a value-added item.
In October of 1995, 3SI changed its business name and style from
Kimbrough Solutions to 3SI (representing "Solution, System and Service
Integration") to better describe its focus and direction at assisting
customers in the design, develop, and implementation of business
solutions. The current business of 3SI includes design and
development of information technology solutions, such as client/server
systems design and implementation, network design and management,
Internet connection planning, design and implementation, systems
development and integration for UNIX, Windows NT and Windows-based
systems, database design and development, applications development and
anomaly identification and resolution. It is a supplier of over 20
major lines of computer products.
3SI's staff includes personnel qualified as Novell Enterprise
CNEs, Microsoft Certified Professionals, Oracle Masters, TCP/IP and
UNIX professionals. It designs and implements instructional programs
for clients and also offers in-depth educational programs at a fee of
approximately $195 per day specializing in Windows-based applications
such as Windows 3.1, Windows for Workgroups, Windows 95, Microsoft
Office and its components, PerfectOffice and its components, Lotus
SmartSuite and Lotus Notes, Novell system administration, the World
Wide Web ("WWW") and Internet applications. 3SI offers a broad range
of Internet and WWW services and equipment, including evaluation of
network requirements, installation and implementation of World Wide
Web servers and the design and maintenance of WWW pages. 3SI also
supplements a client's existing network resources by offering remote
net management and administration via modem connection. Hardware
services include on-site maintenance, depot repair of PCs and
printers, monitor repair, cable installation and customized service
programs for corporate clients.
3SI's customer base is located primarily in Colorado, Utah and
New Mexico and includes healthcare companies, federal and local
government agencies, prime contractors to federal government agencies,
and general commercial accounts.
The principal offices and facilities of 3SI are located at 6886
South Yosemite Street, Englewood, Colorado 80112, telephone number
(303) 741-9123, where it has approximately 60 employees, and it has a
small office in Colorado Springs, Colorado. During 1995, 3SI also
opened an office in Albuquerque, New Mexico with approximately 20
employees.
Management of 3SI
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The owners of 3SI include Felipe Larry Valdez, Frederick J. Slack
and Frank W. Backes. The following sets forth certain information as
to the 3SI Shareholders and management of 3SI:
Felipe Larry Valdez is Chairman of the Board & Chief Operating
Officer of 3SI. Mr. Valdez has over 25 years of business experience
working in computer technology companies including sixteen years with
Digital Equipment Corporation from October 1997 to August 1993 in a
variety of sales, services and customer support management positions.
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Mr. Valdez holds a BS degree in Business Administration from the
University of Albuquerque and an MBA for the University of Phoenix.
Upon closing of the Reorganization Agreement, Mr. Valdez is to be
elected a director, Chairman of the Board and Chief Operating Officer
of the Company.
Frederick J. Slack serves as the Chief Executive Officer of 3SI.
Mr. Slack has over 17 years of marketing and sales experience in
information technology and was previously employed by Digital
Equipment Corporation from November 1986 to July 1993. Mr. Slack's
experience includes Program Management of several government programs.
He holds a BS from the University of Northern Colorado. Upon closing
of the Reorganization Agreement, Mr. Slack is to be elected a director
and Chief Executive Officer of the Company.
Frank W. Backes is the President of 3SI. Mr. Backes has over 12
years of technical experience in the computer industry. He was a
technical sales consultant for Digital Equipment Corporation from
January 1989 to July 1989, a senior software engineer and systems
analyst for Softech from November 1987 to January 1989 and held
various software programming and engineering positions with Science
Applications International Corp. from June 1982 to November 1987. As a
civilian Lead Engineer and Program Manager, Mr. Backes led the design
and implementation of U.S. Military Command and Control Systems at
NORAD, Peterson Air Force Base and Falcon Air Force Base. While
employed by Digital Equipment Corporation, Mr. Backes focused on
compartmented-mode workstations and secure networks. Mr. Backes holds
an BS degree in Electrical Engineering from the University of
California at San Diego. Upon closing of the Reorganization
Agreement, Mr. Backes is to be elected a director and President of the
Company.
Paul Kaufhold is 3SI's Chief Financial Officer. Mr. Kaufhold
has over ten years experience in finance, operations and management of
emerging, high technology companies. Mr. Kaufhold served as Chief
Financial Officer at CWE, Inc. from 1990 to 1994. While at CWE, Mr.
Kaufhold was responsible for all financing and administrative
functions. Prior to his employment at CWE, Mr. Kaufhold worked at
KPMG Peat Marwick from 1980 to 1990 serving numerous growth companies
in meeting theft audit, accounting and tax needs. Mr. Kaufhold is a
Certified Public Accountant and holds an MBA from the University of
Wisconsin and a BS in Business Administration from Ohio State
University.
Summary Financial Information
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The Company has been advised that historical results of
operations of 3SI for its fiscal years ended December 31, 1994 and
1993 have been reviewed, but not audited, by an independent public
accountant. An audit of 3SI's historical financial statements is
expected to be completed within the next 60 days. Subject to audit
adjustments, if any, the following table summarizes certain unaudited
operating results and financial information as to 3SI for the periods
indicated:
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Kimbrough Computer Sales, Inc. dba 3SI
(Expressed in Thousands, 000 omitted)
Year Ended December 31,
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1995 1994 1993
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Statement of
Operations Data:
Net sales .............. $21,774 $17,504 $ 9,574
Gross profit ........... 3,824 2,759 1,770
Selling, general
and administrative
expenses ............. 3,931 2,410 1,738
Other income (expense).. (69) 18 21
Net income (loss)....... (175) 367 53
December 31,
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1995 1994 1993
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Balance Sheet Data:
Current assets ......... $ 4,735 $ 3,019 $ 3,038
Current liabilities..... 4,530 2,297 2,488
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Working capital ........ 205 722 550
Total assets ........... 5,078 3,124 3,084
Long term debt ......... 99 -- --
Stockholders' equity ... 448 826 596
Results of operations for 3SI in 1995 compared to 1994 were adversely
affected by an increase in selling and administrative expenses of
approximately 64% primarily due to increasing staff, opening an office
in Albuquerque, New Mexico and increasing the 3SI sales force.
REASONS FOR THE REORGANIZATION AGREEMENT
As previously reported in the Company's prior filings with the
Securities and Exchange Commission, the Company operates in a mature
industry characterized by intense competition and narrow gross profit
margins, and has sustained continuing losses from operations since
inception. The Company has minimal cash resources, negative working
capital, past due secured debt obligations and a deficiency in
stockholders' equity. In view of declining sales trends and gross
margin deterioration, the Company's management has focused its efforts
primarily on the acquisition of another business enterprise in the
computer software and service industry and does not intend to expand
the Company's activities in software duplication and allied services.
In recent months, the Company and 3SI have jointly financed a
business plan for the development of certain proprietary software,
designs and specifications relating to Internet security applications
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developed in part by 3SI. The proposed program is to develop security
solutions for business use of the Internet in cooperation with a
third-party Internet access provider. Development and implementation
of this program will require additional working capital, and a portion
of private placement funds proposed to be raised as a requirement of
closing the Reorganization Agreement will be dedicated to this
purpose.
The Company's management believes that the acquisition of 3SI by
the Company, resulting in the acquisition of 3SI's computer consulting
and services businesses, will be in the best interests of the
Company's stockholders and provides the only viable alternative
currently available to the Company in its efforts to obtain additional
financing necessary to sustain itself as an operating company.
There can be no assurance that transactions contemplated by the
Reorganization Agreement will be successfully completed, and the
closing of the Reorganization Agreement is subject to certain material
conditions including, among others, the various conditions described
above.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED: Upon closing of the
Reorganization Agreement, the Company plans to file a Report on
Form 8-K containing additional information required by Items 1, 2
and 7 of Form 8-K. Financial statements of 3SI for the periods
required by Rule 3.05(b) of Regulation S-X required at that time
are not currently available, and are in the process of being
prepared. If the closing under the Reorganization Agreement
occurs, the Company expects that relevant financial statements of
3SI are expected to be filed as part of that subsequent Form 8-K
Report not later than 60 days after that closing of the proposed
business acquisition.
(b) PRO FORMA FINANCIAL INFORMATION: At the time financial
statements discussed in Item 7(a) above are available to the
Company, the Company plans to file pro forma financial
information relative to the acquired business as part of a
subsequent Form 8-K Report.
(c) EXHIBITS:
Exhibit
Number Description
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2.1 Agreement and Plan of Reorganization dated May 1996
among the Registrant, BDPC Acquisition Corp.,
Kimbrough Computer Sales Inc. 3SI, Inc., Ronald H.
Cole, Frank Backes, Frederick Slack and Felipe Larry
Valdez.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: May 24, 1996
BROWN DISC PRODUCTS COMPANY, INC.
(Registrant)
By: /s/ RONALD H. COLE
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Ronald H. Cole, Chairman of the Board,
Chief Executive Officer,
Chief Financial Officer
and Chief Accounting Officer