EXHIBIT 99.1
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
Brown Disc Products Company, Inc. (the "Company") wishes to caution
readers that the following important factors, among others, in the future
could cause actual results and needs of the Company to vary materially from
forward-looking statements made from time to time by the Company on the basis
of management's then-current expectations. The Company has noted, among other
factors, that the production and sale of software media storage devices is a
mature business characterized by intense competition and narrow gross profit
margins; the Company intends to expand its services and product lines by
increasing internal capacity, developing electronic software distribution for
customers via the Internet and/or seeking the acquisition of an additional
business in the computer services industry. These plans have not been fully
implemented, are directed to competitive markets and involve a high degree of
risk. Accuracy with respect to forward-looking projections is difficult.
Therefore, an investment in the securities of the Company is speculative
in nature, involves a high degree of risk, and should not be made by an
investor who cannot afford the risk of loss of his or her investment.
Investors should carefully consider the following risk factors associated with
an investment in the Company's securities.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; DEFICIENCY IN STOCKHOLDERS'
EQUITY; AUDITOR'S QUALIFICATION; DEFICIT IN WORKING CAPITAL:
The Company commenced operations in September 1987, was required to seek
the protection of Chapter 11 of the U.S. Bankruptcy Act in 1992, and has not
operated on a profitable basis. Net losses before extraordinary items were
$1,121,000 and $372,000 for the fiscal years ended June 30, 1996 and 1995,
respectively, and $244,000 for the three months ended September 30, 1996. At
September 30, 1996, the Company had an accumulated deficit from operations
since its inception of $2,973,000 and a $411,000 deficiency in its
stockholders' equity. Total liabilities at September 30, 1996 were $867,000
and there were also redeemable Series A preferred stock outstanding of
$134,000 which require mandatory redemption from future net income, if any.
At September 30, 1996, the Company had limited cash resources of $65,000
and a deficiency in working capital of $36,000; included in current
liabilities, however, is a contingent liability of $166,000 due the Company's
former President under a settlement agreement that is required to be paid only
from 5% of proceeds realized from subsequent financings by the Company. There
can be no assurance that the Company will obtain additional financing.
THE REPORT OF STOCKMAN KAST RYAN & SCRUGGS, PC, ON THE FINANCIAL
STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED JUNE 30, 1996 CONTAINS A
PARAGRAPH EXPRESSING SUBSTANTIAL DOUBT CONCERNING THE ABILITY OF THE COMPANY
TO CONTINUE AS A GOING CONCERN. Management's plan to address these matters is
discussed elsewhere in this Report and in Note 1 of the Notes to Financial
Statements included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1996. See "Management's Discussion and Analysis or
Plan of Operation" and the financial statements elsewhere in this Report and
in prior filings with the Securities and Exchange Commission.
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Although increases in revenues are required for the Company to absorb
existing overhead, in view of historical losses from operations, negative
working capital and the Company's debt service obligations, the Company has
not been able to invest significantly in sales and marketing and accordingly
has generally limited these activities to telemarketing and selected trade
shows. Results of operations in the future will be influenced by numerous
factors, including the ability of the Company to successfully expand its
products and services and/or to negotiate the acquisition of another business
enterprise, the development and implementation of sales and marketing
programs, competitive factors and the ability of the Company to control costs.
As a result of these factors, the forecast of future business operations is
subject to numerous uncertainties. There can be no assurance that revenue
growth or profitability on a quarterly or annual basis will be attained. The
Company therefore is subject to all the risks incident to a business with a
limited history of operations including, among others, the possibility of
unforeseen expenses, difficulties, complications and delays, and it may be
difficult or impossible to obtain additional financing if required for the
Company's business.
DEPENDENCE ON GENERATING ADDITIONAL REVENUES AND NO ASSURANCE OF MARKET
ACCEPTANCE:
The Company's core business involves the duplication of software
produced by third parties on media discs and services for printing and
decoration of software media storage discs. Notwithstanding continued growth
in demand for software media storage products, the Company's core business is
in a mature industry with limited capital entry requirements in which the
Company and its competitors hold no significant patent rights, and the
industry is characterized by intense competition and narrow gross profit
margins. Improved cash flows will be dependent on increasing sales, and there
can be no assurance that sales levels for software duplication and related
services will increase.
Management's plan contemplates expansion of the Company's products and
services by internal development and/or obtaining rights to distribute other
products, seeking negotiations for the acquisition of another business
enterprise and the development and implementation of sales and marketing
programs. The Company believes that its future growth and profitability will
depend upon expanding its products and services and market acceptance of such
additional products and services. Market acceptance of new products and
services requires substantial time and effort and is subject to various risks.
There can be no assurance of market acceptance of new products and services or
that sales levels will be increased.
NEED FOR ADDITIONAL FINANCING:
Management anticipates the Company may be required to seek additional
equity financing in the future to sustain its operations, to support the
introduction of new products or services and/or to finance the acquisition of
another business if a suitable acquisition candidate is identified. The
Company's actual future capital requirements will depend on numerous factors,
including, but not limited to, the Company's progress in generating increased
revenues from the introduction of new products and services, the cost of
marketing and advertising programs, management's ability to control costs,
inventory requirements, competing technological and market developments and
the cost of obtaining additional rights to additional products for
distribution. If the Company generates revenue increases, it may require
additional working capital to support increases in manufacturing capacity and
for additional capital required to finance receivable and inventory increases.
No assurance can be given that additional financing will be forthcoming or, if
available, would be sufficient to satisfy the Company's future operating
requirements. The Company has no commitment to obtain additional funds and
there can be no assurance it will be successful in the event management
determines the Company should initiate efforts to obtain additional financing.
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Because of the Company's limited capital, it also may undertake
additional equity offerings whenever conditions are favorable, even if it does
not have an immediate need for additional capital at that time. There can be
no assurance that the Company will be able to obtain additional financing when
needed, or that any such financing, if available, will be obtainable on
reasonable terms. Any such additional financing may result in significant
dilution to existing stockholders. If adequate funds are not available, the
Company may be required to accept unfavorable alternatives, including the
delay, reduction or elimination of product introductions and expansion,
marketing and advertising and other operating expenses.
DEPENDENCE ON KEY PERSONNEL: The success of the Company is substantially
dependent on the services of its officers, key employees and professional
consultants. The Company is dependent in particular upon the services of
Ronald H. Cole, its President and Chief Executive Officer. The Company also
relies, and for the foreseeable future will rely, on independent advisors and
consultants to provide certain services to the Company. There can be no
assurance that such services will continue to be available to the Company on a
timely basis when needed, or that the Company could find qualified
replacements. The Company's operations therefore are dependent upon a limited
number of key employees and consultants and the loss of the services of these
or other key personnel could have a material adverse effect upon the Company.
The Company does not maintain key man insurance on the lives of its executive
officers and key consultants.
CONFLICTS OF INTEREST: The Company in the past has engaged in a number of
material transactions with its directors and executive officers and/or their
affiliates, and may engage in such transactions in the future. All such
transactions have been in the past, and will be in the future, approved by a
majority of the Company's disinterested directors.
COMPETITION: The business in which the Company is engaged is characterized by
intense competition, especially as to price. The Company competes with much
larger, well-established companies that have greater financial, technical,
manufacturing, marketing and research and development resources as well as a
wide variety of companies comparable in size to the Company.
RISK OF TECHNOLOGICAL CHANGE: The technologies relating to computer data
storage devices have undergone, and continues to experience, rapid and
significant change. The Company's success will depend on its ability to
maintain a competitive position with respect to its products and services and
to attract and retain qualified personnel. There can be no assurance that
future technological developments will not render products and services of the
Company uneconomical or obsolete.
NO SIGNIFICANT PROPRIETARY RIGHTS: The Company does not hold any patents or
significant proprietary rights as to any of its products. Accordingly, the
Company relies upon trade secrets to protect limited proprietary information
and customer data. There can be no assurance that trade secrecy obligations
will be honored or that others have or will not independently develop similar
or superior information.
DILUTIVE EFFECT OF OUTSTANDING SECURITIES OR SECURITIES TO BE ISSUED; POSSIBLE
RISK OF MARKET OVERHANG:
The Company has reserved shares of its Common Stock for issuance upon
exercise of outstanding warrants and upon exercise of conversion rights for
outstanding shares of convertible preferred stock. Outstanding warrrants
include up to 112,350 shares exercisable at $.01 per share, up to 1,000,000
shares exercisable at $.10 per share and up to 2,010,000 shares exercisable at
$.25 per share, In addition, it is anticipated that the Company may issue
additional Common Stock, warrants or other securities convertible or
exercisable into Common Stock in connection with management's plan to seek the
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acquisition of another business in the computer software and service industry
and/or for future equity financings. Exercise of warrants, the conversion of
preferred stock or the future issuance of equity securities could involve
significant dilution to holders of the Company's Common Stock. Holders of
convertible securities and warrants are likely to exercise them when, in all
likelihood, the Company could obtain additional capital on terms more
favorable than those provided by the convertible securities or warrants.
Shares issued upon exercise of warrants or conversion rights or future
issuance of securities, as well as restricted shares previously issued by the
Company in private placement transactions, may become available for public
sale under the provisions of Rule 144 of the Securities Act of 1933 or if the
Company elects to register its securities under the Securities Act of 1933.
As such, there may be a significant market overhang with respect to the
Company's Common Stock in the public market from time to time in the future,
and the existence thereof may have a depressive effect upon the market price
for the Company's Common Stock and securities convertible into Common Stock.
UNDETERMINED EFFECT OF BLANK CHECK PREFERRED STOCK AND AUTHORIZED COMMON
STOCK; POSSIBLE CHANGE IN CONTROL: The Company's articles of incorporation
authorize the issuance of up to 50 million shares of "blank check preferred
stock" with such rights, preferences, privileges and limitations as may be
determined from time to time by the Board of Directors, and up to 50 million
shares of Common Stock. Accordingly, the Board has the power without prior
shareholder approval to issue additional shares of common stock and/or one or
more series of preferred stock with such rates of dividends, redemption
provisions, liquidation preferences, voting rights, conversion privileges and
any other characteristics as the Board may deem necessary. Any such
additional issuances of common stock and/or preferred stock may result in
substantial and material dilution to existing holders of the Company's
securities. In addition, the existence of a substantial amount of authorized
and unissued common stock and blank check preferred stock could discourage,
delay or prevent a takeover of the Company if any such transaction were to be
proposed. In view of the Company's current financial condition, the
acquisition of another business by the Company or additional financing
transactions may involve the issuance of additional equity securities that
could be significantly dilutive to the interests of current stockholders
and/or may result in a change in control of the Company.
VOLATILITY OF MARKET PRICE FOR COMMON STOCK: The Company's Common Stock is
publicly traded in the over-the-counter market and quoted on the NASD
Electronic Bulletin Board under the trading symbol "BDPC". There has been
significant volatility in the market price of securities relating to the
computer industry generally and for the Company's Common Stock specifically.
Factors such as quarterly variations in operating results, trading volume,
general market trends, announcements of technological innovations or new
commercial products, announcements by competitors and general market
conditions may have a significant effect on the market price of the Company's
Common Stock.
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