-----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, CmOjcknrxFqawzUHEme2+0Tifc3iedMRi/Wv0EUcNkhnomlbbsHTa1g53nYQOYU5 tYoH5yFxdx8htGM+EfYvAw== 0000855373-97-000004.txt : 19970520 0000855373-97-000004.hdr.sgml : 19970520 ACCESSION NUMBER: 0000855373-97-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 97608913 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: MARCH 31, 1997. --------------- [ ] 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.) 3029 S. HARBOR BLVD., SANTA ANA, CALIFORNIA 92704 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 429-5984 -------------- Former Address: 1120-B Elkton Drive, Colorado Springs, Colorado 80907-3568 - ------------------------------------------------------------------------------ (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 May 14, 1997: 6,129,837 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 March 31, 1997 and June 30, 1996 ....... 1 Statements of Operations for the Three Months and Nine Months ended March 31, 1997 and 1996 .............. 3 Statements of Cash Flows for the Nine Months ended March 31, 1997 and 1996 .......................... 4 Statement of Changes in Stockholders' Equity for the Nine Months ended March 31, 1997 ............... 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 .......... 11 Part II - OTHER INFORMATION: Item 5. Other Events .................................. 14 Item 6. Exhibits and Reports on Form 8-K .............. 16 SIGNATURES .......................................................... 17
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 products, the ability of the Company to negotiate the acquisition of other businesses or products to expand the Company's product line, 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 has filed 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 the Company's Quarterly Report on Form 10-QSB for the Period ended September 30, 1996 and other information in filings with the Securities and Exchange Commission. - i - PART I. FINANCIAL INFORMATION BROWN DISC PRODUCTS COMPANY, INC. BALANCE SHEETS (Unaudited)
March 31, June 30, 1997 1996 ----------- ----------- ASSETS: Current Assets: Cash ...................................... $ 26,438 $ 615,229 Accounts receivable -- net of allowance for doubtful accounts of $41,778 at at March 31, 1997 and $17,609 at June 30, 1996 ........................ 169,203 187,827 Inventory ................................. 16,304 86,411 Other ..................................... 18,200 19,280 ----------- ----------- Total Current Assets ........................ 230,145 908,747 ----------- ----------- Property, Plant and Equipment: Property, plant & equipment, at cost ...... 1,495,169 1,422,213 Less accumulated depreciation ............. (1,353,593) (1,327,345) ----------- ----------- Property, Plant & Equipment, net ............ 141,576 94,868 ----------- ----------- Other Assets ................................ 9,691 6,271 ----------- ----------- Total Assets ................................ $ 381,412 $ 1,009,886 =========== ===========
See accompanying notes to unaudited financial statements. -1- BROWN DISC PRODUCTS COMPANY, INC. BALANCE SHEETS (continued) (Unaudited)
March 31, June 30, 1997 1996 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Accounts payable .......................... $ 322,508 $ 360,296 Accrued liabilities ....................... 77,649 93,539 Accrued liabilities to related parties .... 168,633 235,400 Current portion of notes payable to related parties ...................... 12,000 54,409 Current portion of notes payable .......... 35,000 35,102 ----------- ----------- Total Current Liabilities ................... 615,790 778,746 ----------- ----------- Long-term Debt: Notes payable to related parties .......... 39,573 39,798 Note payable .............................. 290,620 313,520 ----------- ----------- Total Long-term Debt ........................ 330,193 353,318 ----------- ----------- Total Liabilities ........................... 945,983 1,132,064 ----------- ----------- Redeemable Preferred Stock: Series A Redeemable Preferred stock, no par value; 63,000 shares authorized, 12,613 shares outstanding at March 31, 1997 and June 30, 1996 .................. 136,306 133,698 ----------- ----------- 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 March 31, 1997 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 March 31, 1997 and 5,070,671 shares outstanding at June 30, 1996 ........... 1,957,901 1,770,889 Warrants .................................. 102,336 61,323 Additional paid-in capital ................ 543,430 554,560 Accumulated deficit ....................... (3,330,912) (2,729,016) ----------- ----------- Total Stockholders' Deficiency .............. (700,877) (255,876) ----------- ----------- Total Liabilities and Stockholders' Equity .. $ 381,412 $ 1,009,886 =========== ===========
See accompanying notes to unaudited financial statements. -2- BROWN DISC PRODUCTS COMPANY, INC. STATEMENTS OF OPERATIONS (Unaudited)
Nine Months ended Three Months ended March 31, March 31, ------------------------ ------------------------ 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Net Sales .................. $ 1,129,107 $ 924,833 $ 345,560 $ 291,438 Cost of Sales .............. 731,794 727,795 225,049 211,281 ----------- ----------- ----------- ----------- Gross Margin ............... 397,313 197,038 120,511 80,187 ----------- ----------- ----------- ----------- Operating Costs and Expenses: General and administrative 874,720 327,370 282,264 142,360 Selling .................. 116,187 107,441 35,147 33,569 ----------- ----------- ----------- ----------- Total Operating Costs and Expenses ............. 990,907 434,811 317,411 175,929 ----------- ----------- ----------- ----------- Operating Loss ............. (593,594) (237,773) (196,900) (95,742) Other Income (Expense): Interest expense ......... (10,988) (16,096) (1,584) (6,088) Other .................... 2,686 (882) (6,570) (882) ----------- ----------- ----------- ----------- Net Loss Before Extraordinary Item ....... (601,896) (254,751) (205,054) (102,712) Extraordinary Item -- Gain on restructuring of troubled debt ............ -- 189,889 -- -- ----------- ----------- ----------- ----------- Net Income (Loss) .......... (601,896) (64,862) (205,054) (102,712) Increase in Carrying Value of Redeemable Preferred Stock and Preferred Stock Dividends .......... (2,608) 17,966 -- (630) ----------- ----------- ----------- ----------- Net Income (Loss) Attributable to Common Shares ......... $ (604,504) $ (46,896) $ (205,054) $ (103,342) =========== =========== =========== =========== Per Common Share: Net income (loss) before extraordinary item ..... $ (0.11) $ (0.09) $ (0.04) $ (0.03) Extraordinary item ....... -- 0.07 -- -- Increase in carrying value of redeemable preferred stock and preferred stock dividends ........ (0.00) 0.00 (0.00) 0.00 ----------- ----------- ----------- ----------- Net income (loss) attributable to common shares .......... $ (0.11) $ (0.02) $ (0.04) $ (0.03) =========== =========== =========== =========== Weighted Average Common Shares Outstanding ..... 5,614,786 2,767,459 5,729,837 3,565,873 =========== =========== =========== ===========
See accompanying notes to unaudited financial statements. -3- BROWN DISC PRODUCTS COMPANY, INC. STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months ended March 31, ----------------------------- 1997 1996 ----------- ----------- OPERATING ACTIVITIES: Net (loss) income ................................ $ (601,896) $ (64,862) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Stock issued for services .................... 75,000 151,968 Asset write-downs ............................ -- -- Depreciation ................................. 26,248 32,610 Loss on sale of equipment .................... -- -- Gain on restructuring of troubled debt ....... -- (189,889) Changes in operating assets and liabilities: Accounts receivable ........................ 18,624 8,182 Inventory .................................. 70,107 23,457 Other assets ............................... (2,340) 20,989 Accounts payable ........................... (37,788) 42,473 Accrued liabilities ........................ (15,890) 149,256 Accrued liabilities to related parties, net (34,064) -- ----------- ----------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .. (501,999) 174,183 ----------- ----------- INVESTING ACTIVITIES: Proceeds from sale of equipment .................. -- -- Purchases of equipment ........................... (72,956) (3,323) ----------- ----------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .. (72,956) (3,323) ----------- ----------- FINANCING ACTIVITIES: Proceeds from issuance of common stock ........... 50,000 -- Proceeds from issuance of preferred stock ........ -- 218,820 Proceeds from exercise of warrants ............... 1,800 -- Proceeds from borrowings ......................... -- -- Repayment of notes payable, net .................. (65,636) (390,844) Repayment of capital lease obligations ........... -- -- ----------- ----------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .. (13,836) (172,024) ----------- ----------- NET INCREASE (DECREASE) IN CASH .................. (588,791) (1,164) CASH, BEGINNING OF PERIOD ........................ 615,229 3,890 ----------- ----------- CASH, END OF PERIOD .............................. $ 26,438 $ (2,726) =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest ........................... $ 10,988 $ 18,759 SUPPLEMENTAL NONCASH FINANCING ACTIVITIES: Redeemable preferred stock exchanged for common stock ................................... $ 70,000 $ 496,430 Stock issued for services ........................ -- -- Warrants issued for consulting services .......... 75,000 -- Common stock issued to satisfy accounts payable .. 38,250 151,968
See accompanying notes to unaudited financial statements. -4- 7 BROWN DISC PRODUCTS COMPANY, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MARCH 31, 1997 (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 -- -- -- -- -- -- Issuance of Class D warrants for consulting services ...... -- -- -- -- 400,000 75,000 -- -- 75,000 Increase in carrying value of redeemable preferred stock.......... -- -- -- -- -- -- -- 2,608 2,608 Stock issuance costs.......... -- -- -- (7,025) -- -- (1,130) -- (8,155) Net loss........ -- -- -- -- -- -- -- (604,504) (604,504) -------- -------- --------- ----------- --------- -------- --------- ----------- ----------- BALANCES, MAR 31, 1997... 6,000 $ 26,368 5,729,837 $ 1,957,901 522,350 $102,336 $ 543,430 $(3,330,912) $ (700,877) ======== ======== ========= =========== ========= ======== ========= =========== ===========
See accompanying notes to unaudited financial statements. -5- BROWN DISC PRODUCTS COMPANY, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS MARCH 31, 1997 NOTE 1. BASIS OF PRESENTATION; UNAUDITED INTERIM STATEMENTS The accompanying unaudited financial statements at March 31, 1997 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 March 31, 1997 and for the three month and nine month periods ended March 31, 1997 and 1996 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 $700,877 at March 31, 1997 and has sustained substantial operating losses in recent years and for the nine months ended March 31, 1997. The Company's liabilities of $946,000 at March 31, 1997 exceeded its total assets of $381,000 at that date. It had a negative working capital at March 31, 1997 of $386,000 resulting from an excess of $616,000 in current liabilities compared to current assets of $230,000 at March 31, 1997. 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 last year, 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. During the third quarter ended March 31, 1997, the Company closed its manufacturing operations in Colorado and relocated its corporate office and distribution operations to offices in California. -6- NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued) MARCH 31, 1997 NOTE 2. GOING CONCERN QUALIFICATION; MANAGEMENT'S PLAN (continued) The Company is continuing to seek and evaluate candidates for possible acquisition of another business in order to expand the Company's product lines and sources of revenues. However, 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. NOTE 3. INVENTORIES Inventories consist of the following at March 31, 1997 and June 30, 1996:
March 31, June 30, 1997 1996 ------------ ------------ Raw materials ......................... $ 16,304 $ 28,571 Work-in-process ....................... -- 31,140 Finished goods ........................ -- 26,700 ------------ ------------ Total Inventories ................. $ 16,304 $ 86,411 ============ ============
During the quarter ended March 31, 1997, obsolete inventories of $58,000 were written off and charged to general and administrative expenses. NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following at March 31, 1997 and June 30, 1996: March 31, June 30, 1997 1996 ------------ ------------ Manufacturing equipment ............... $ 1,187,031 $ 1,139,329 Quality control equipment ............. 126,292 126,292 Office furniture and equipment ........ 159,025 138,771 Leasehold improvements ................ 22,821 17,821 ------------ ------------ 1,495,169 1,422,213 Less accumulated depreciation ......... (1,353,593) (1,327,345) ------------ ------------ Property and equipment -- net ......... $ 141,576 $ 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. -7- NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued) MARCH 31, 1997 NOTE 5. STOCKHOLDERS' EQUITY (continued) 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. 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. The Company issued 400,000 Class D common stock purchase warrants on December 30, 1996 in payment of financial consulting services. These warrants are exercisable at $0.25 per share until the warrants expire on December 31, 2001. An amount of $75,000 for the value of these warrants at date of issue was charged against a previously established $100,000 reserve for settlement and consulting costs. NOTE 6. WARRANTS The following stock purchase warrants are outstanding at March 31, 1997:
Number of Exercise Price Expiration Warrants Per Share Date ----------- -------------- ----------- 112,350 $.01 2000 1,000,000 $.10 2000 2,410,000 $.25 2000 - 2001
As discussed in Note 11 below, the Company has entered into agreements providing for the cancellation of all 1,000,000 warrants exercisable at $.10 per share and 2,000,000 of the warrants exercisable at $.25 per share included in the above table. 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. -8- NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued) MARCH 31, 1997 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 agreement. The Company's legal counsel was unsuccessful in efforts to negotiate a settlement, and this matter has been referred to arbitration proceedings scheduled for mid-1997 in which the Company seeks the return of $102,000, a release from the agreement to assume a $200,000 note payable and recovery of expenses and damages. The Company's legal counsel has advised management that at this preliminary stage the outcome of such legal proceedings is indeterminable. As of March 31, 1997, the Company had recorded approximately $305,000 of general and administrative expenses relating to the abandoned efforts to acquire equipment from First New Hampshire Bank, including the $102,000 cash deposit described above. The Company believes that it will prevail in this matter and no accrual for additional possible loss has been made in the financial statements of the Company at March 31, 1997. 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. As of December 31, 1996, the Company had paid $34,488 of the contingent payment due as a result of item 4 above and the balance of $165,512 has been recorded as a current liability because management believes it is probable that future equity financing 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 a former 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 and was fully paid during the quarter ended September 30, 1996. See also Note 11 below. -9- NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued) MARCH 31, 1997 NOTE 10. 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. NOTE 11. SUBSEQUENT EVENTS ISSUANCE OF COMMON STOCK FOR SERVICES In April 1997, the Company's Board of Directors adopted a 1997 Stock Award Plan (the "1997 Stock Plan") and elected to abandon its previously authorized 1996 Stock Compensation Plan. No shares were issued under the 1996 Stock Compensation Plan. The 1997 Stock Plan permits the Board to issue shares of the Company's common stock to compensate officers, directors, employees and other individuals acting as consultants to the Company for services rendered to the Company. Up to 500,000 shares of common stock will be available for payment of compensation under the 1997 Stock Plan. The 1997 Stock Plan was adopted effective as of April 1, 1997 and will expire on December 31, 2000 or earlier if all shares covered by the 1997 Stock Plan have been awarded. On April 30, 1997, the Company issued 400,000 shares of common stock to various individuals under the 1997 Stock Plan which were issued in satisfaction of approximately $66,000 of accounts payable as of March 31, 1997 and approximately $135,000 as compensation for services subsequent to March 31, 1997. ISSUANCE OF COMMON STOCK AND CANCELLATION OF WARRANTS On March 17, 1997, the President of the Company, David J. Lopes, agreed to surrender for cancellation 500,000 Class A common stock purchase warrants as a contribution to the capital of the Company. On March 19, 1997, an officer and director of the Company, Daryl Silversparre, agreed to surrender for cancellation 500,000 Class A common stock purchase warrants and 1,000,000 Class B common stock purchase warrants in exchange for the issuance by the Company of 250,000 shares of the Company's common stock. On March 19, 1997, a former officer and director of the Company, Ronald H. Cole, agreed to surrender for cancellation 1,000,000 Class A common stock purchase warrants in exchange for the issuance by the Company of 50,000 shares of the Company's common stock and the transfer to Mr. Cole of all of the Company's rights to the trademark "Channel Soft", the Internet World Wide Web URL address "channelsoft.com" and any software previously developed by the Company for use with the Channel Soft tradename. Channel Soft software was intended to provide for distribution of clients' software via electronic download to customers desiring immediate access to software purchases. The Company elected to abandon the implementation of this program and has reserved a right to receive royalties equal to 1% of any revenues that may be generated by Mr. Cole's future use, if any, of the Channel Soft rights assigned to Mr. Cole. The Company's obligation to issue 300,000 shares of common stock and the cancellation of 3,000,000 common stock purchase warrants as a result of the above agreements has not been reflected in the Company's financial statements at March 31, 1997, and will be recorded for financial reporting purposes when the shares are issued pursuant to these agreements. -10- 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 was 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. Although revenues for the nine months ended March 31, 1997 improved by approximately $204,000 compared to the nine months ended March 31, 1996, an additional net loss of $605,000 was incurred for the nine months ended March 31, 1997. At March 31, 1997, the Company had total liabilities of approximately $946,000, redeemable Series A preferred stock of $136,000 requiring mandatory redemption from future net income, an accumulated deficit from operations since inception in 1987 of $3,331,000, and a deficit in stockholders' equity of $701,000. 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, 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. -11- 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 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. Since February 1996, certain debt restructuring agreements reduced annual interest expenses. 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. In the third quarter of the current fiscal year, new management concluded that the Company would not be able to increase revenues of its existing products to a degree necessary to absorb fixed and variable overhead expenses. Accordingly, the Company determined not to actively pursue plans for development of a World Wide Web site for customer software distribution or to further develop internal capacity for software duplication services. In February 1997, the Company ceased its manufacturing operations in Colorado and relocated its corporate office and distribution operations to California to further reduce monthly overhead expenses. The Company's current management is pursuing business strategies to increase sales and improve results of operation by seeking the acquisition of one or more additional businesses with a view to expanding the Company's product lines and increasing revenues from such expansion. The Company is actively seeking the acquisition of additional assets or other businesses in the industry of fabricating and supplying quartz glass products for use in the manufacture of integrated circuits by the semiconductor industry. 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. RESULTS OF OPERATIONS: NINE MONTHS ENDED MARCH 31, 1997 ("1997 PERIOD") COMPARED TO THE NINE MONTHS ENDED MARCH 31, 1996 ("1996 PERIOD"): REVENUES: The Company's revenues for the nine months ended March 31, 1997 (the "1997 Period") were $1,129,000, an increase of $204,000, or approximately 22%, from $925,000 in revenues for the nine months ended March 31, 1996 (the "1996 Period). The increase in sales was primarily attributable to an increase in customers. Revenues for the three months ended March 31, 1997 were $346,000 compared to $291,000 for the comparable three months ended March 31, 1996 and $352,000 of revenues in the immediately preceding quarter ended December 31, 1996. -12- COST OF SALES: Cost of sales for the 1997 Period were $732,000, resulting in a gross profit of $397,000, or 35.2% of net sales, compared to a gross profit of $197,000, or 21.3% of net sales in the 1996 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 1997 Period were $991,000, of which $116,000 were selling and marketing expenses and $875,000 were general and administrative costs. Total selling, general and administrative expenses increased by $556,000 as compared to selling, general and administrative expenses of $435,000 in the 1996 Period. General and administrative expenses increased by $556,000 in the 1997 Period compared to the 1996 Period primarily as a result of non-recurring expenses including a $58,000 write-off of inventories due to obsolescence and lack of sales demand, $92,000 for capital raising activities and $305,000 of costs incurred primarily in connection with an abandoned effort to acquire additional equipment in New Hampshire. 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 1997 Period was $11,000, compared to $16,000 for the 1996 Period. The reduction in interest expense is due to a reduction in outstanding indebtedness during fiscal 1997. OPERATING RESULTS: Net loss for the 1997 Period was $602,000 compared to a net loss before extraordinary item of $255,000 incurred in the prior 1996 Period. As discussed above, the increase in net loss from operations was due to increases in general and administrative expenses including non-recurring expenses of approximately $455,000. Net loss per common share was $.11 in the 1997 Period, compared to a net loss before extraordinary items of $.09 per share in the 1996 Period. An extraordinary gain of $190,000 was recorded in the prior 1996 Period for gains on restructuring troubled debt. LIQUIDITY AND CAPITAL RESOURCES: At March 31, 1997, the Company had cash resources of $26,000, current assets of $230,000 and current liabilities of $616,000, resulting in a deficit working capital position of $386,000. 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 subsequent financings by the Company, if any. The Company's deficit working capital of $386,000 at March 31, 1997 declined from positive working capital of $130,000 at June 30, 1996. The $516,000 reduction in working capital during the nine months ended March 31, 1997 was primarily due to $502,000 of cash used in operating activities during the nine months ended March 31, 1997 which included $455,000 of nonrecurring expenses described above. 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 -13- fixed costs, as to which there is no assurance. Revenue increases will be dependent upon a variety of factors such as 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 1997 Period, capital asset additions were $73,000. 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. In part as a result of these considerations, the Company ceased its manufacturing operations in Colorado in February 1997 and relocated its corporate office and distribution operations to California to further reduce monthly overhead expenses. 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. PART II -- OTHER INFORMATION ITEM 5. OTHER EVENTS. RELOCATION OF OFFICES To further reduce monthly overhead expenses, in February 1997 the Company ceased its manufacturing operations in Colorado and relocated its corporate office and distribution operations to California. The Company's principal office is has been relocated to 3029 S. Harbor Blvd., Santa Ana, California 92704 and its telephone number is (714) 429-5984. CHANGE IN EXECUTIVE OFFICERS On February 16, 1996, Ronald H. Cole was removed as an executive officer of the Company by its Board of Directors. Mr. David J. Lopes, a member of the Board, was elected to serve as Chairman of the Board, President and Treasurer to replace Mr. Cole. CHANGE IN STRATEGIC PLAN FOR EXPANSION The Company's Report on Form 10-KSB for the fiscal year ended June 30, 1996 and its Report on Form 10-QSB for the quarter ended September 30, 1996 indicated that management's strategic plan to increase revenues included evaluating the possibility of adding capacity to process internally CD-ROM replications, development of a World Wide Web site as a channel of distribution for customer software, and seeking the acquisition of additional assets or another business in a related computer services industry. During -14- the first quarter of the current fiscal year, 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. Concurrent with the Board of Directors' decision to remove Ronald H. Cole as an executive officer on February 16, 1996, the Company's management terminated all other programs to expand the Company's service capabilities in software duplication and distribution and abandoned development of a World Wide Web site as a channel of distribution for customer software. Under the direction of its new Chief Executive Officer, David J. Lopes, the Company's strategic plan will be to seek the acquisition of assets or other businesses in the industry of fabricating and supplying quartz glass products for use in the manufacture of integrated circuits by the semiconductor industry. Mr. Lopes had prior experience in this field during his tenure as President and Chief Executive Officer of California Quartz, Inc., which owned a quartzglass products fabrication business from 1979 until that business was sold in September 1994 to Heraeus Amersil, Inc., a North American affiliate of Heraeus Quarzglas GmbH. There can be no assurance that one of more such acquisitions 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. ADOPTION OF 1997 STOCK AWARD PLAN AND ISSUANCE OF 400,000 SHARES In April 1997, the Company's Board of Directors adopted a 1997 Stock Award Plan (the "1997 Stock Plan") and elected to abandon its previously authorized 1996 Stock Compensation Plan. No shares were issued under the 1996 Stock Compensation Plan. The 1997 Stock Plan permits the Board to issue shares of the Company's common stock to compensate officers, directors, employees and other individuals acting as consultants to the Company for services rendered to the Company. Up to 500,000 shares of common stock will be available for payment of compensation under the 1997 Stock Plan. The 1997 Stock Plan was adopted effective as of April 1, 1997 and will expire on December 31, 2000 or earlier if all shares covered by the 1997 Stock Plan have been awarded. All of the shares covered by the 1997 Stock Plan have been registered on Form S-8 under the Securities Act of 1933. On April 30, 1997, the Company issued 400,000 shares of common stock to various individuals under the 1997 Stock Plan which were issued in satisfaction of approximately $66,000 of accounts payable as of March 31, 1997 and approximately $135,000 as compensation for services subsequent to March 31, 1997. AGREEMENTS RELATING TO CANCELLATION OF 3,000,000 WARRANTS AND ISSUANCE OF 300,000 SHARES OF COMMON STOCK On March 17, 1997, the President of the Company, David J. Lopes, agreed to surrender for cancellation 500,000 Class A common stock purchase warrants as a contribution to the capital of the Company. On March 19, 1997, an officer and director of the Company, Daryl Silversparre, agreed to surrender for cancellation 500,000 Class A common stock purchase warrants and 1,000,000 Class B common stock purchase warrants in exchange for the issuance by the Company of 250,000 shares of the Company's common stock. -15- On March 19, 1997, a former officer and director of the Company, Ronald H. Cole, agreed to surrender for cancellation 1,000,000 Class A common stock purchase warrants in exchange for the issuance by the Company of 50,000 shares of the Company's common stock and the transfer to Mr. Cole of all of the Company's rights to the trademark "Channel Soft", the Internet World Wide Web URL address "channelsoft.com" and any software previously developed by the Company for use with the Channel Soft tradename. Channel Soft software was intended to provide for distribution of clients' software via electronic download to customers desiring immediate access to software purchases. The Company elected to abandon the implementation of this program and has reserved the right to receive royalties equal to 1% of revenues, if any, that may be generated by Mr. Cole's future use of the Channel Soft rights assigned to Mr. Cole. The exercise price for the Class A warrants surrendered for cancellation was $0.25 per share and the exercise price for the Class B warrants surrendered for cancellation was $.10 per share. Under their terms, these warrants were exercisable until September 7, 2000. The prices for the Company's Common Stock in the over-the-counter market on March 17, 1997, the date that the above agreements were first offered by the Company, ranged from $0.50 to $0.59 per share. Messrs. Silverspaare and Cole agreed to discount the value of the Class A Warrants and Class B Warrants surrendered in exchange for the Company's common stock to reflect a lack of liquidity for the warrants and their underlying shares of common stock as a result of the size of the block and restrictions as to resale under applicable securities laws. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: The following exhibits are filed as part of this Report or are incorporated by reference to prior filings with the Securities and Exchange Commission. * Indicates exihibits filed with this Report.
Exhibit No. Description - ------ ------------ 10.19 Registrant's 1997 Stock Award Plan, incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement on From S-8 filed with the Securities and Exchange Commission on April 25, 1997. * 10.21 Agreement dated March 17, 1997 for the Cancellation of 500,000 Class A Common Stock Purchase Warrants between the Registrant and David J. Lopes. * 10.22 Agreement dated March 19, 1997 for the Issuance of 250,000 shares of Common Stock in exchange for Cancellation of 500,000 Class A Common Stock Purchase Warrants and 1,000,000 Class B Common Stock Purchase Warrants between the Registrant and Daryl Silversparre. * 10.23 Agreement dated March 19, 1997 for the Issuance of 50,000 shares of Common Stock and assignment of Channel Soft rights in exchange for Cancellation of 1,000,000 Class A Common Stock Purchase Warrants between the Registrant and Ronald H. Cole. -16- * 27 Financial Data Schedule at March 31, 1997.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1997. 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: May 15, 1997 BROWN DISC PRODUCTS COMPANY, INC. (Registrant) By: /s/ David J. Lopes ----------------------------- David J. Lopes, President Chief Executive Officer and Chief Financial Officer -17- EX-10.21 2 AGREEMENT FOR CANCELLATION OF 500,000 WARRANTS AGREEMENT to Tender 500,000 Class A Common Stock Purchase Warrants in Brown Disc Products Company, Inc. TO: Brown Disc Products Company, Inc. March 17, 1997 3029 South Harbor Blvd. Santa Ana, CA 92704 Dear Sirs: I, DAVID J. LOPES, a resident of Southern California, with home address of 19421 Sierra Luna, Irvine, Cnlifornia 92612, being the record holder of 500,000 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 returns all such Warrants to the Company. Very truly yours, David J. Lopes By: /s/ David J. Lopes ----------------------- David J. Lopes EX-10.22 3 AGREEMENT FOR CANCELLATION OF 1,500,000 WARRANTS AND ISSUANCE OF 250,000 COMMON SHARES AGREEMENT to Tender 1,000,000 Class B Common Stock Purchase Warrants and 500,000 Class A Warrants in Brown Disc Products Company, Inc. In exchange for 250,000 shares of Common Stock, no par value TO: Brown Disc Products Company, Inc. 17th March, 1997 3029 South Harbor Blvd. Santa Ana, CA 92704 Dear Sirs: I, Daryl Silversparre a resident of Southern California with a mailing address, 3649 El Caminito, La Cresentia CA 91214 Being the holder of 1,000,000 Class B common stock purchase warrants and 500,000 Class A common stock purchase warrants issued by BROWN DISC PRODUCTS COMPANY, INC. a Colorado corporation (THE "COMPANY"), evidenced by Warrant Certificate numbers B-01 and A-01 respectfully (THE "WARRANTS") hereby tenders and offers all such Warrants to the Company in full payment and consideration for the issuance of TWO HUNDRED and FIFTY THOUSAND (250,000) shares of the Company's common stock, no par value. The parties understand that the exercise price for the 1,000,000 Class B warrants is $0.10 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 17th March 1997, was $0.50. Based upon such closing price, the difference between the market value at $0.50 Per share of 1,000,000 shares less the warrant exercise price of $0.10 warrants to be exercised, would be $400,000. In comparison, the market value at $0.50 Per share of 250,000 of the company's common stock would be $100,000. The parties also understand that the exercise price for the Class A warrants is $0.25, and that the closing price for the common stock in the over-the- counter market on the date of this Agreement 17th March, 1997, was $0.50 Per share. Based upon the closing price, the difference between the market value at $0.50 Per share of 500,000 shares less the warrant exercise price of $0.25 warrants to be exercised, would be $125,000. In comparison, the market value at $0.50 Per share of 50,000 of the company's common stock would be $25,000. Offer to Tender Warrants in Exchange for Common Stock Page 1 of 2 Daryl Silversparre has agreed to discount the value of 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 the Company of this Agreement, Daryl Silversparre 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: Daryl Silversparre 3549 El Caminito, Las Crescenta California 91214 TEL 818-249-1884 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 Friday March 21st, 1997. Upon acceptance, a copy of this Agreement and the original certificate with the number (D-02) 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, Daryl Silversparre By: /s/ Daryl Silversparre ------------------------ Daryl Silversparre SIGNED AND APPROVED MARCH 19, 1997 - --------- Brown Disc Products Company, Inc. By: /s/ David J. Lopes ----------------------------- David Lopes, President Colorado Springs, Colorado Offer to Tender Warrants in Exchange for Common Stock Page 2 of 2 EX-10.23 4 AGREEMENT FOR CANCELLATION OF 1,000,000 WARRANTS AND ISSUANCE OF 50,000 COMMON SHARES AGREEMENT to Tender 1,000,000 Class A Common Stock Purchase Warrants in Brown Disc Products Company, Inc. In exchange for 50,000 shares of Common Stock, no par value and the exclusive use of "Channel Soft"(tm) a TRADE MARK name developed by and for Brown Disc Products Company TO: Brown Disc Products Company, Inc. March 17, 1997 3029 South Harbor Blvd, Santa Ana, California 92704 Dear Sirs: I, Ronald H. Cole Jr, a resident of Southern California, with home address 630 West Palm Ave, # 26 Hampton Court, Orange County, California 92868 Being 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 ......... (THE "WARRANTS") hereby tenders and offers all such Warrants to the Company in full payment and consideration for the issuance of FIFTY THOUSAND (50,000) shares of the Company's common stock, no par value and exclusive use of "Channel Soft"(trade mark). In consideration for exclusive use of the "Channel Soft"(trade mark), Ronald H. Cole Jr. or any subsequent owner of the "Channel Soft"(trade mark) will pay Brown Disc Products Company a royalty payment equal to one percent (1%) of annual revenue, such royalty payment will be paid to Brown Disc Products Company annually on the first day of March. Brown Disc Products Co. Inc. further agrees to assign channelsoft.com Internet URL (address) and transfer (register) Ronald H. Cole Jr. as the sole owner of channelsoft.com @ the Internet. Brown Disc further agrees to assign all software developed for Channelsoft to Ronald H. Cole Jr. 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, 17th March 1997, was $0.59. Based upon such closing price, the difference between the market value at $0.59 Per share of 1,000,000 shares less the warrant exercise price of $250,000, warrants to be exercised, would be $340,000. In comparison, the market value at $0.59 Per share of 50,000 of the company's common stock would be $29,500. Ronald H. Cole Jr. has agreed to discount the value of 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 50,000 shares of Common Stock issued in exchange therefore upon acceptance the Company of this Agreement, Ronald H. Cole Jr. agrees that any such excess shall be deemed a contribution to the capital of the Company. Offer to Tender Warrants in Exchange for Common Stock Page 1 of 2 The parties further agree to give Mr. Ronald H Cole Jr. the Exclusive use of "Channel Soft"(trade mark) it is understood by the parties that presently the name "Channel Soft"(trade mark) does not produce any revenues and indeed may never produce any revenues, however Mr. Cole believes that there is the potential to do so, and so in the event of this occurrence he has agreed to pay Brown Disc Products Company a royalty of one percent (1%) of any gross proceeds derived from exclusive use of "Channel Soft"(trade mark), or any of its future subsidiaries. Should the due royalty payments not be paid within three (3) calendar months of the stated date above the ownership of the "Channel Soft"(trade mark) shall revert back to Brown Disc Products Company, Inc. In order to verify the amount of royalty to be paid to Brown Disc Products Company, Inc. by the user of "Channel Soft"(trade mark) Brown Disc Products Company, Inc must be supplied with the yearly profit and loss statement of the user company, on the first (1st) day of March whether or not a royalty payment is due. Upon acceptance of this Agreement, you are directed and instructed to issue, register and deliver the 50,000 shares of Common Stock as follows: RONALD H. COLE JR. 630 West Palm Ave #26 Hampton Court Orange County CA 92868 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 Friday March 21, 1997. Upon acceptance, a copy of this Agreement and the original certificate with the number ........... 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, Ronald H. Cole Jr. By: /s/ Ronald H. Cole, Jr. ------------------------ Ronald H. Cole, Jr. SIGNED AND APPROVED 3/19 , 1997 - --------- Brown Disc Products Company, Inc. By: /s/ David J. Lopes, President ----------------------------- David Lopes, President Colorado Springs, Colorado Offer to Tender Warrants in Exchange for Common Stock Page 2 of 2 EX-27 5 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 Mar-31-1997 9-MOS 26,438 0 210,981 41,778 16,304 230,145 1,495,169 1,353,593 381,412 615,790 330,193 136,306 26,368 1,957,901 (2,685,146) 381,412 1,129,107 1,129,107 731,794 990,907 (2,686) 0 10,988 (601,896) 0 (601,896) 0 0 0 (604,504) (.11) (.11)
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