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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.
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(Exact name of small business issuer as specified in its charter)
Colorado 84-1067075
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1120-B Elkton Drive, Colorado Springs, Colorado 80907-3568
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (719) 593-1015
(Not applicable)
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(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]
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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.
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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
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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.
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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
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