-----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, QVwzRXno6rSJeLbdoUlSu+ifIDJcq0Cwroga3sVwU2fAD62QEpL68OqlIzk67MaK h+Mv0qBnqgl89XR/0QbxJA== 0000855373-97-000001.txt : 19970128 0000855373-97-000001.hdr.sgml : 19970128 ACCESSION NUMBER: 0000855373-97-000001 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970127 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-31068 FILM NUMBER: 97511070 BUSINESS ADDRESS: STREET 1: 1120 B ELKTON DR CITY: COLORADO SPRINGS STATE: CO ZIP: 80907 BUSINESS PHONE: 7195931015 10QSB 1 ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended: SEPTEMBER 30, 1996. [ ] Transition Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 33-31068 BROWN DISC PRODUCTS COMPANY, INC. - ------------------------------------------------------------------------------ (Exact name of small business issuer as specified 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) Registrant's telephone number, including area code: (719) 593-1015 (Not applicable) - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) 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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, without par value, outstanding as of January 23, 1997: 5,729,837 shares Transitional Small Business Disclosure Format (check one): YES [ ] NO [X] ============================================================================== BROWN DISC PRODUCTS COMPANY, INC. INDEX
Page Number Part I - FINANCIAL INFORMATION: Item 1. Unaudited Financial Statements: Balance Sheets at September 30, 1996 and June 30, 1996 ... 1 Statements of Operations for the Three Months ended September 30, 1996 and 1995 ...................... 3 Statements of Cash Flows for the Three Months ended September 30, 1996 and 1995 ...................... 4 Statement of Changes in Stockholders' Equity for the Three Months ended September 30, 1996 .......... 5 Notes to Unaudited Financial Statements .................. 6 Item 2. Management's Discussion and Analysis or Plan of Operation: Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 10 Part II - OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K ......................... 13 Signatures .......................................................... 14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements 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: economic, competitive and technological factors affecting the Company's operations, markets, services and prices, market acceptance of new products or services, 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. CAUTIONARY STATEMENTS In connection with the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. Reference is made to Exhibit 99.1 filed with this Report. - i - PART I. FINANCIAL INFORMATION BROWN DISC PRODUCTS COMPANY, INC. BALANCE SHEETS (Unaudited)
September 30, June 30, 1996 1996 ----------- ----------- ASSETS: Current Assets: Cash ...................................... $ 65,436 $ 615,229 Accounts receivable -- net of allowance for doubtful accounts of $17,609 at at September 30, 1996 and June 30, 1996 . 267,240 187,827 Inventory ................................. 130,171 86,411 Other ..................................... -- 19,280 ----------- ----------- Total Current Assets ........................ 462,847 908,747 ----------- ----------- Property, Plant and Equipment: Property, plant & equipment, at cost ...... 1,453,657 1,422,213 Less accumulated depreciation ............. (1,335,221) (1,327,345) ----------- ----------- Property, Plant & Equipment, net ............ 118,436 94,868 ----------- ----------- Other Assets ................................ 9,690 6,271 ----------- ----------- Total Assets ................................ $ 590,973 $ 1,009,886 =========== ===========
See accompanying notes to unaudited financial statements. -1- BROWN DISC PRODUCTS COMPANY, INC. BALANCE SHEETS (continued) (Unaudited)
September 30, June 30, 1996 1996 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Accounts payable .......................... $ 79,541 $ 360,296 Accrued liabilities ....................... 181,789 93,539 Accrued liabilities to related parties .... 184,731 235,400 Current portion of notes payable to related parties ...................... 42,355 54,409 Current portion of notes payable .......... 10,204 35,102 ----------- ----------- Total Current Liabilities ................... 498,620 778,746 ----------- ----------- Long-term Debt: Notes payable to related parties .......... 37,974 39,798 Note payable .............................. 330,592 313,520 ----------- ----------- Total Long-term Debt ........................ 368,566 353,318 ----------- ----------- Total Liabilities ........................... 867,185 1,132,064 ----------- ----------- Redeemable Preferred Stock: Series A Redeemable Preferred stock, no par value; 63,000 shares authorized, 12,613 shares outstanding at September 30, 1996 and June 30, 1996 .............. 134,328 133,698 ----------- ----------- Stockholders' Deficiency: 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; outstanding, 6,000 shares at September 30, 1996 and 20,000 shares at June 30, 1996 ...................... 26,368 96,368 Common stock, no par value, 50,000,000 shares authorized; 5,729,837 shares outstanding at September 30, 1996 and 5,070,671 shares outstanding at June 30, 1996 ........... 1,964,926 1,770,889 Warrants .................................. 27,336 61,323 Additional paid-in capital ................ 543,930 554,560 Accumulated deficit ....................... (2,973,101) (2,729,016) ----------- ----------- Total Stockholders' Deficiency .............. (410,541) (255,876) ----------- ----------- Total Liabilities and Stockholders' Equity .. $ 590,973 $ 1,009,886 =========== ===========
See accompanying notes to unaudited financial statements. -2- BROWN DISC PRODUCTS COMPANY, INC. STATEMENTS OF OPERATIONS (Unaudited)
Three Months ended September 30, ------------------------------- 1996 1995 ----------- ----------- Net Sales ................................... $ 431,632 $ 319,392 Cost of Sales ............................... 306,791 234,124 ----------- ----------- Gross Margin ................................ 124,841 85,268 ----------- ----------- Operating Costs and Expenses: General and administrative ................ 324,453 67,772 Selling ................................... 38,189 31,065 ----------- ----------- Total Operating Costs and Expenses .......... 362,642 98,837 ----------- ----------- Operating Loss .............................. (237,801) (13,569) Other Income (Expense): Interest expense .......................... (6,284) (18,689) ----------- ----------- Net Loss .................................... (244,085) (32,258) Increase in Carrying Value of Redeemable Preferred Stock and Preferred Stock Dividends ........................... (1,308) (3,000) ----------- ----------- Net Loss Attributable to Common Shares ...... $ (245,465) $ (35,258) =========== =========== Per Common Share: Net loss .................................. $ (.05) $ (.01) Increase in carrying value of redeemable preferred stock and preferred stock dividends ......................... (.00) (.00) ----------- ----------- Net loss attributable to common shares .... $ (.05) $ (.01) =========== =========== Weighted Average Common Shares Outstanding... 5,384,683 2,751,641 =========== ===========
See accompanying notes to unaudited financial statements. -3- BROWN DISC PRODUCTS COMPANY, INC. STATEMENTS OF CASH FLOWS (Unaudited)
Three Months ended September 30, ------------------------------- 1996 1995 ----------- ----------- OPERATING ACTIVITIES: Net loss ......................................... $ (244,085) $ (32,258) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Stock issued for services .................... -- -- Asset write-downs ............................ -- -- Depreciation ................................. 7,831 11,210 Loss on sale of equipment .................... -- -- Gain on restructuring of troubled debt ....... -- -- Changes in operating assets and liabilities: Accounts receivable ........................ (79,413) (37,561) Inventory .................................. (43,760) (12,393) Other assets ............................... 15,861 19,279 Accounts payable ........................... (242,505) 37,113 Accrued liabilities ........................ 88,250 (2,096) Accrued liabilities to related parties ..... (50,669) -- ----------- ----------- Cash Provided By (Used In) Operating Activities .. (548,490) (16,706) ----------- ----------- INVESTING ACTIVITIES: Proceeds from sale of equipment .................. -- -- Purchases of equipment ........................... (31,399) (1,289) ----------- ----------- Cash Provided By (Used In) Investing Activities .. (31,399) (1,289) ----------- ----------- FINANCING ACTIVITIES: Proceeds from issuance of common stock ........... 50,000 -- Proceeds from issuance of preferred stock ........ -- -- Proceeds from exercise of warrants ............... 1,800 -- Proceeds from borrowings ......................... -- 50,000 Repayment of notes payable ....................... (21,704) (17,479) Repayment of capital lease obligations ........... -- -- ----------- ----------- Cash Provided By (Used In) Financing Activities .. 30,096 32,521 ----------- ----------- NET INCREASE (DECREASE) IN CASH .................. (549,793) 14,526 Cash, Beginning of Period ........................ 615,229 3,890 ----------- ----------- CASH, END OF PERIOD .............................. $ 65,436 $ 18,416 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest ........................... $ 6,284 $ -- SUPPLEMENTAL NONCASH FINANCING ACTIVITIES: Redeemable preferred stock exchanged for common stock ................................... $ -- $ -- Stock issued for services ........................ -- -- Warrants issued to satisfy accounts payable ...... -- -- Common stock issued to satisfy accounts payable .. 38,250 --
See accompanying notes to unaudited financial statements. -4- 7 BROWN DISC PRODUCTS COMPANY, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 (Unaudited)
Preferred Stock Series B Common Stock Warrants Additional ------------------ ---------------------- ------------------- Paid-in Accumulated Shares Amount Shares Amount Shares Amount Capital Deficit Total -------- -------- --------- ----------- --------- -------- --------- ----------- ----------- 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) Sale of common stock for cash....... -- -- 66,666 50,000 -- -- -- -- 50,000 Conversion of Series B preferred stock to common stock... (14,000) (70,000) 140,000 70,000 -- -- -- -- -- Warrants exercised...... -- -- 180,000 35,787 (180,000) (33,987) -- -- 1,800 Issuance of common stock to satisfy accounts payable........ -- -- 22,500 38,250 -- -- -- -- 38,250 Issuance of common stock for cancellation of 1,000,000 Class A warrants....... -- -- 250,000 -- -- -- -- -- -- Increase in carrying value of redeemable preferred stock.......... -- -- -- -- -- -- (630) -- (630) Net loss........ -- -- -- -- -- -- -- (244,085) (244,085) -------- -------- --------- ----------- --------- -------- --------- ----------- ----------- BALANCES, SEPT 30, 1996.. 6,000 $ 26,368 5,729,837 $ 1,964,926 122,350 $ 27,336 $ 543,930 $(2,973,101) $ (410,541) ======== ======== ========= =========== ========= ======== ========= =========== ===========
See accompanying notes to unaudited financial statements. -5- BROWN DISC PRODUCTS COMPANY, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE 1. BASIS OF PRESENTATION; UNAUDITED INTERIM STATEMENTS The accompanying unaudited financial statements at September 30, 1996 have been prepared by Brown Disc Products Company, Inc. (the "Company") pursuant to the rules of the Securities and Exchange Commission ("Commission"). The information set forth in the financial statements as of September 30, 1996 and for the three month periods ended September 30, 1996 and 1995 are derived from financial statements which are not covered by the report of independent public accountants and may be subject to normal year-end audit adjustments. In the opinion of management, the unaudited data for these interim periods reflects all adjustments which are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods covered by such statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Commission's rules. Reference is made to Note 1 of the Notes to Financial Statements contained in the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996 for a summary of significant accounting policies utilized by the Company. It is suggested that the unaudited financial statements and notes thereto included in this Report be read in conjunction with the audited financial statements and notes thereto included in the Company's latest Annual Report on Form 10-KSB. The unaudited statements of operations for the interim periods included with this Report are not necessarily indicative of the results to be expected for the full year. NOTE 2. GOING CONCERN QUALIFICATION; MANAGEMENT'S PLAN 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 $411,000 at September 30, 1996 and has sustained substantial operating losses in recent years and for the three months ended September 30, 1996. The Company's liabilities of $867,000 at September 30, 1996 exceeded its total assets of $591,000 at that date. It had a negative working capital at September 30, 1996 of $36,000 resulting from an excess of $499,000 in current liabilities compared to current assets of $463,000 at September 30, 1996. These factors, among others, adversely affect the ability of the Company to continue as a going concern. The interim financial statements included with this Report do not include any adjustments relating to the recoverability and classification of recorded assets 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. 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. The added 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 and intends to introduce electronic software distribution services which are expected to increase revenues. -6- NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 1996 NOTE 2. GOING CONCERN QUALIFICATION; MANAGEMENT'S PLAN (continued) The Company is continuing to seek and evaluate candidates for possible acquisition of another business, 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. NOTE 3. INVENTORIES Inventories consist of the following at September 30, 1996 and June 30, 1996:
September 30, June 30, 1996 1996 ------------ ------------ Raw materials ......................... $ 48,986 $ 28,571 Work-in-process ....................... 31,539 31,140 Finished goods ........................ 49,646 26,700 ------------ ------------ Total Inventories ................. $ 130,171 $ 86,411 ============ ============
NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following at September 30, 1996 and June 30, 1996: September 30, June 30, 1996 1996 ------------ ------------ Manufacturing equipment ............... $ 1,149,718 $ 1,139,329 Quality control equipment ............. 126,292 126,292 Office furniture and equipment ........ 159,826 138,771 Leasehold improvements ................ 17,821 17,821 ------------ ------------ 1,453,657 1,422,213 Less accumulated depreciation ......... (1,335,221) (1,327,345) ------------ ------------ Property and equipment -- net ......... $ 118,436 $ 94,868 ============ ============
NOTE 5. STOCKHOLDERS' EQUITY Class C common stock purchase warrants were exercised for the purchase of 180,000 shares of common stock at $1,800 on July 3, 1996. The Company issued 22,500 shares of its common stock on July 19, 1996 in payment of $38,240 of accounts payable for consulting services. -7- NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 1996 NOTE 5. STOCKHOLDERS' EQUITY (continued) During the quarter ended September 30, 1996, 14,000 shares of the Series B convertible preferred stock were converted into 140,000 shares of the Company's common stock. Accrued and unpaid dividends were automatically waived on the shares converted. 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 66,666 shares were sold in the quarter ended September 30, 1996 for net proceeds of $50,000. 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 that was subsequently abandoned. 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. On September 28, 1996 the Company issued 250,000 shares of its common stock in exchange for the surrender of 1,000,000 Class A common stock purchase warrants. NOTE 6. WARRANTS The following stock purchase warrants are outstanding at September 30, 1996:
Number of Exercise Price Expiration Warrants Per Share Date ----------- -------------- ----------- 112,350 $.01 2000 1,000,000 $.10 2000 2,010,000 $.25 2000 - 2001
NOTE 7. EARNINGS PER SHARE Net income per common share is based upon the weighted average number of common shares outstanding during the periods presented. No effect has been given to conversion of preferred stock or exercise of common stock purchase warrants since the effect would be antidilutive. NOTE 8. 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 -8- NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 1996 NOTE 8. LEGAL PROCEEDINGS (continued) 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 September 30, 1996. NOTE 9. RELATED PARTY TRANSACTIONS 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 in monthly installments of $1,000 through September 2001, with $5,000 payments on July 1, September 1, and November 1, 1996; (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. -9- BROWN DISC PRODUCTS COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis 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 reflected 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 September 30, 1996, the Company had total liabilities of approximately $867,000, 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 $2,973,000, and a deficit in stockholders' equity of $411,000. 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, 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 in the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996. 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. -10- 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. 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 projected to increase unit sales. The Company is currently in the process of soliciting customers for its Channelsoft service and intends to implement this program later in 1997. The Company is actively seeking the acquisition of additional assets or another business in a related computer services industry, 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. -11- RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1996 ("1996 PERIOD") COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995 ("1995 PERIOD"): REVENUES: The Company's revenues for the three months ended September 30, 1996 (the "1996 Period") were $431,632, an increase of $112,240, or approximately 35.1%, from $319,392 in revenues for the three months ended September 30, 1995 (the "1995 Period). The increase in sales was primarily attributable to an increase in customers. Revenues for the 1996 Period also increased by $99,824, or 30.1%, compared to sales of $331,808 in the immediately preceding quarter ended June 30, 1996. COST OF SALES: Cost of sales for the 1996 Period were $306,791, resulting in a gross profit of $124,841, or 28.9% of net sales, compared to a gross profit of $85,268, or 26.7% of net sales in the 1995 Period. The improvement in gross profit margins was due in part to cost reductions and in part to efficiencies resulting from added sales volume. In view of the Company's 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 Period were $362,642, of which $38,189 were selling and marketing expenses and $324,4533 were general and administrative costs. Total selling, general and administrative expenses increased by $263,805 as compared to selling, general and administrative expenses of $98,837 in the 1995 Period. General and administrative expenses increased by $256,681 in the 1996 Period compared to the 1995 Period primarily as a result of expenses incurred for capital raising activities and abandoned acquisitions. 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. INTEREST EXPENSE: Interest expense in the 1996 Period was $6,284, compared to $18,689 for the 1995 Period. The reduction in interest expense is due to a reduction in outstanding indebtedness during fiscal 1996. OPERATING RESULTS: Net loss for the 1996 Period was $244,085 compared to a net loss of $32,258 incurred in the prior 1995 Period. As discussed above, the increase in net loss was due increases in general and administrative expenses. Net loss per common share was $.05 in the 1996 Period, compared to $.01 per share in the 1995 Period. LIQUIDITY AND CAPITAL RESOURCES: At September 30, 1996, the Company had cash resources of $65,436, current assets of $462,847 and current liabilities of $498,620, resulting in a deficit working capital position of $35,773. 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 deficit working capital of $35,773 at September 30, 1996 declined from positive working capital of $130,001 at June 30, 1996. The 165,774 reduction in working capital during the quarter ended September 30, 1996 was primarily due to (1) $102,000 deposited for an attempted purchase of assets that has been abandoned (see Note 8 of the Notes to Financial Statements above) and (2) $548,490 in cash used by operating activities during the quarter ended September 30, 1996. -12- 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 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 Period, capital asset additions were $31,399. The Company currently has no 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. BROWN DISC PRODUCTS COMPANY, INC. PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: The following exhibits are filed as part of this Report: Exhibit No. Description - ------ ------------ 27 Financial Data Schedule at September 30, 1996. 99.1 Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 1996. -13- SIGNATURES Pursuant to the requirements of Section 13 of 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. Date: January 24, 1997 BROWN DISC PRODUCTS COMPANY, INC. (Registrant) By: /s/ Ronald H. Cole ----------------------------- Ronald H. Cole, Chairman of the Board, Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer -14- EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from the Statements of Operations and Balance Sheets 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-30-1997 Jul-01-1996 Sep-30-1996 3-MOS 65,435 0 284,849 17,609 130,171 462,847 1,453,657 1,335,221 590,973 498,620 0 134,328 25,368 1,964,926 (2,401,835) 590,973 431,632 431,632 306,791 669,433 0 0 6,284 (244,085) 0 (244,085) 0 0 0 (244,085) (.05) (.05)
EX-99.1 3 CAUTIONARY STATEMENTS EXHIBIT 99.1 CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION Brown Disc Products Company, Inc. (the "Company") wishes to caution readers that the following important factors, among others, in the future could cause actual results and needs of the Company to vary materially from forward-looking statements made from time to time by the Company on the basis of management's then-current expectations. The Company has noted, among other factors, that the production and sale of software media storage devices is a mature business characterized by intense competition and narrow gross profit margins; the Company intends to expand its services and product lines by increasing internal capacity, developing electronic software distribution for customers via the Internet and/or seeking the acquisition of an additional business in the computer services industry. These plans have not been fully implemented, are directed to competitive markets and involve a high degree of risk. Accuracy with respect to forward-looking projections is difficult. Therefore, an investment in the securities of the Company is speculative in nature, involves a high degree of risk, and should not be made by an investor who cannot afford the risk of loss of his or her investment. Investors should carefully consider the following risk factors associated with an investment in the Company's securities. HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; DEFICIENCY IN STOCKHOLDERS' EQUITY; AUDITOR'S QUALIFICATION; DEFICIT IN WORKING CAPITAL: The Company commenced operations in September 1987, was required to seek the protection of Chapter 11 of the U.S. Bankruptcy Act in 1992, and has not operated on a profitable basis. Net losses before extraordinary items were $1,121,000 and $372,000 for the fiscal years ended June 30, 1996 and 1995, respectively, and $244,000 for the three months ended September 30, 1996. At September 30, 1996, the Company had an accumulated deficit from operations since its inception of $2,973,000 and a $411,000 deficiency in its stockholders' equity. Total liabilities at September 30, 1996 were $867,000 and there were also redeemable Series A preferred stock outstanding of $134,000 which require mandatory redemption from future net income, if any. At September 30, 1996, the Company had limited cash resources of $65,000 and a deficiency in working capital of $36,000; included in current liabilities, however, 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 proceeds realized from subsequent financings by the Company. There can be no assurance that the Company will obtain additional financing. THE REPORT OF STOCKMAN KAST RYAN & 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 elsewhere in this Report and in Note 1 of the Notes to Financial Statements included in the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996. See "Management's Discussion and Analysis or Plan of Operation" and the financial statements elsewhere in this Report and in prior filings with the Securities and Exchange Commission. - 1 - Although increases in revenues are required for the Company to absorb existing overhead, in view of historical losses from operations, negative working capital and the Company's debt service obligations, the Company has not been able to invest significantly in sales and marketing and accordingly has generally limited these activities to telemarketing and selected trade shows. Results of operations in the future will be influenced by numerous factors, including the ability of the Company to successfully expand its products and services and/or to negotiate the acquisition of another business enterprise, the development and implementation of sales and marketing programs, competitive factors and the ability of the Company to control costs. As a result of these factors, the forecast of future business operations is subject to numerous uncertainties. There can be no assurance that revenue growth or profitability on a quarterly or annual basis will be attained. The Company therefore is subject to all the risks incident to a business with a limited history of operations including, among others, the possibility of unforeseen expenses, difficulties, complications and delays, and it may be difficult or impossible to obtain additional financing if required for the Company's business. DEPENDENCE ON GENERATING ADDITIONAL REVENUES AND NO ASSURANCE OF MARKET ACCEPTANCE: The Company's core business involves the duplication of software produced by third parties on media discs and services for printing and decoration of software media storage discs. Notwithstanding continued growth in demand for software media storage products, the Company's core business is in a mature industry with limited capital entry requirements in which the Company and its competitors hold no significant patent rights, and the industry is characterized by intense competition and narrow gross profit margins. Improved cash flows will be dependent on increasing sales, and there can be no assurance that sales levels for software duplication and related services will increase. Management's plan contemplates expansion of the Company's products and services by internal development and/or obtaining rights to distribute other products, seeking negotiations for the acquisition of another business enterprise and the development and implementation of sales and marketing programs. The Company believes that its future growth and profitability will depend upon expanding its products and services and market acceptance of such additional products and services. Market acceptance of new products and services requires substantial time and effort and is subject to various risks. There can be no assurance of market acceptance of new products and services or that sales levels will be increased. NEED FOR ADDITIONAL FINANCING: Management anticipates the Company may be required to seek additional equity financing in the future to sustain its operations, to support the introduction of new products or services and/or to finance the acquisition of another business if a suitable acquisition candidate is identified. The Company's actual future capital requirements will depend on numerous factors, including, but not limited to, the Company's progress in generating increased revenues from the introduction of new products and services, the cost of marketing and advertising programs, management's ability to control costs, inventory requirements, competing technological and market developments and the cost of obtaining additional rights to additional products for distribution. If the Company generates revenue increases, it may require additional working capital to support increases in manufacturing capacity and for additional capital required to finance receivable and inventory increases. No assurance can be given that additional financing will be forthcoming or, if available, would be sufficient to satisfy the Company's future operating requirements. The Company has no commitment to obtain additional funds and there can be no assurance it will be successful in the event management determines the Company should initiate efforts to obtain additional financing. - 2 - Because of the Company's limited capital, it also may undertake additional equity offerings whenever conditions are favorable, even if it does not have an immediate need for additional capital at that time. There can be no assurance that the Company will be able to obtain additional financing when needed, or that any such financing, if available, will be obtainable on reasonable terms. Any such additional financing may result in significant dilution to existing stockholders. If adequate funds are not available, the Company may be required to accept unfavorable alternatives, including the delay, reduction or elimination of product introductions and expansion, marketing and advertising and other operating expenses. DEPENDENCE ON KEY PERSONNEL: The success of the Company is substantially dependent on the services of its officers, key employees and professional consultants. The Company is dependent in particular upon the services of Ronald H. Cole, its President and Chief Executive Officer. The Company also relies, and for the foreseeable future will rely, on independent advisors and consultants to provide certain services to the Company. There can be no assurance that such services will continue to be available to the Company on a timely basis when needed, or that the Company could find qualified replacements. The Company's operations therefore are dependent upon a limited number of key employees and consultants and the loss of the services of these or other key personnel could have a material adverse effect upon the Company. The Company does not maintain key man insurance on the lives of its executive officers and key consultants. CONFLICTS OF INTEREST: The Company in the past has engaged in a number of material transactions with its directors and executive officers and/or their affiliates, and may engage in such transactions in the future. All such transactions have been in the past, and will be in the future, approved by a majority of the Company's disinterested directors. COMPETITION: The business in which the Company is engaged is characterized by intense competition, especially as to price. The Company competes with much larger, well-established companies that have greater financial, technical, manufacturing, marketing and research and development resources as well as a wide variety of companies comparable in size to the Company. RISK OF TECHNOLOGICAL CHANGE: The technologies relating to computer data storage devices have undergone, and continues to experience, rapid and significant change. The Company's success will depend on its ability to maintain a competitive position with respect to its products and services and to attract and retain qualified personnel. There can be no assurance that future technological developments will not render products and services of the Company uneconomical or obsolete. NO SIGNIFICANT PROPRIETARY RIGHTS: The Company does not hold any patents or significant proprietary rights as to any of its products. Accordingly, the Company relies upon trade secrets to protect limited proprietary information and customer data. There can be no assurance that trade secrecy obligations will be honored or that others have or will not independently develop similar or superior information. DILUTIVE EFFECT OF OUTSTANDING SECURITIES OR SECURITIES TO BE ISSUED; POSSIBLE RISK OF MARKET OVERHANG: The Company has reserved shares of its Common Stock for issuance upon exercise of outstanding warrants and upon exercise of conversion rights for outstanding shares of convertible preferred stock. Outstanding warrrants include up to 112,350 shares exercisable at $.01 per share, up to 1,000,000 shares exercisable at $.10 per share and up to 2,010,000 shares exercisable at $.25 per share, In addition, it is anticipated that the Company may issue additional Common Stock, warrants or other securities convertible or exercisable into Common Stock in connection with management's plan to seek the - 3 - acquisition of another business in the computer software and service industry and/or for future equity financings. Exercise of warrants, the conversion of preferred stock or the future issuance of equity securities could involve significant dilution to holders of the Company's Common Stock. Holders of convertible securities and warrants are likely to exercise them when, in all likelihood, the Company could obtain additional capital on terms more favorable than those provided by the convertible securities or warrants. Shares issued upon exercise of warrants or conversion rights or future issuance of securities, as well as restricted shares previously issued by the Company in private placement transactions, may become available for public sale under the provisions of Rule 144 of the Securities Act of 1933 or if the Company elects to register its securities under the Securities Act of 1933. As such, there may be a significant market overhang with respect to the Company's Common Stock in the public market from time to time in the future, and the existence thereof may have a depressive effect upon the market price for the Company's Common Stock and securities convertible into Common Stock. UNDETERMINED EFFECT OF BLANK CHECK PREFERRED STOCK AND AUTHORIZED COMMON STOCK; POSSIBLE CHANGE IN CONTROL: The Company's articles of incorporation authorize the issuance of up to 50 million shares of "blank check preferred stock" with such rights, preferences, privileges and limitations as may be determined from time to time by the Board of Directors, and up to 50 million shares of Common Stock. Accordingly, the Board has the power without prior shareholder approval to issue additional shares of common stock and/or one or more series of preferred stock with such rates of dividends, redemption provisions, liquidation preferences, voting rights, conversion privileges and any other characteristics as the Board may deem necessary. Any such additional issuances of common stock and/or preferred stock may result in substantial and material dilution to existing holders of the Company's securities. In addition, the existence of a substantial amount of authorized and unissued common stock and blank check preferred stock could discourage, delay or prevent a takeover of the Company if any such transaction were to be proposed. In view of the Company's current financial condition, the acquisition of another business by the Company or additional financing transactions may involve the issuance of additional equity securities that could be significantly dilutive to the interests of current stockholders and/or may result in a change in control of the Company. VOLATILITY OF MARKET PRICE FOR COMMON STOCK: The Company's Common Stock is publicly traded in the over-the-counter market and quoted on the NASD Electronic Bulletin Board under the trading symbol "BDPC". There has been significant volatility in the market price of securities relating to the computer industry generally and for the Company's Common Stock specifically. Factors such as quarterly variations in operating results, trading volume, general market trends, announcements of technological innovations or new commercial products, announcements by competitors and general market conditions may have a significant effect on the market price of the Company's Common Stock. - 4 - -----END PRIVACY-ENHANCED MESSAGE-----