<PAGE> 1
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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
[ ] Transition Report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended: March 31, 1996.
Commission File No. 33-31068
BROWN DISC PRODUCTS COMPANY, INC.
- -----------------------------------------------------------------
(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 May 14,
1996: 3,768,071 shares.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
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<PAGE>
<PAGE> 2
BROWN DISC PRODUCTS COMPANY, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Page
Number
Part I - FINANCIAL INFORMATION .......................... 3
Item 1. Financial Statements:
Balance Sheets at March 31, 1996
and June 30, 1995 ............................ 3
Statements of Operations
for the Three Months and Nine Months
ended March 31, 1996 and 1995 ................ 5
Statements of Cash Flows for the
Nine Months ended March 31, 1996
and 1995 ..................................... 6
Statement of Changes in Stockholders' Equity
for the Nine Months ended March 31, 1996 ..... 7
Notes to Unaudited Financial Statements
at March 31, 1996 ............................ 8
Item 2. Management's Discussion and Analysis or
Plan of Operation:
Management's Discussion and Analysis of
Financial Condition and Results of Operations .. 12
Part II - Other Information .............................. 17
Item 2. Changes in Securities ................. 17
Item 5. Other Information ..................... 19
Item 6. Exhibits and Reports on Form 8-K ...... 23
Signatures ................................................ 24
</TABLE>
<PAGE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
BROWN DISC PRODUCTS COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents ......... $ 2,726 $ 3,890
Accounts receivable -- net of
allowance for doubtful accounts
of $7,904 at March 31, 1996 and
$6,904 at June 30, 1995 ......... 129,014 137,196
Inventory ......................... 174,041 197,498
Other ............................. -- 19,280
----------- -----------
Total Current Assets ................ 305,781 357,864
----------- -----------
Property, Plant and Equipment:
Property, plant & equipment,
at cost ......................... 1,558,081 1,554,758
Less accumulated depreciation ..... (1,344,053) (1,311,443)
----------- -----------
Property, Plant & Equipment, net .... 214,028 243,315
----------- -----------
Other Assets ........................ 6,271 7,979
----------- -----------
Total Assets ........................ $ 526,080 $ 609,158
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<PAGE> 4
BROWN DISC PRODUCTS COMPANY, INC.
BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable .................. $ 262,426 $ 409,843
Accrued liabilities ............... 184,568 35,312
Notes payable ..................... 363,804 754,648
----------- -----------
Total Current Liabilities ........... 810,798 1,199,803
----------- -----------
Redeemable Preferred Stock:
Series A Redeemable Preferred
stock, no par value,
63,000 shares authorized,
12,613 shares outstanding at
at March 31, 1996 and
62,256 at June 30, 1995 ......... 133,067 647,462
----------- -----------
Stockholders' Equity (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; 44,000 shares
outstanding at March 31, 1996 . 218,820 --
Common stock, at stated value,
50,000,000 shares authorized,
3,518,071 shares outstanding
at December 31, 1995 and
2,751,641 at June 30, 1995 ..... 657,110 93,180
Additional paid-in capital ........ 652,826 550,392
Accumulated deficit ............... (1,946,541) (1,881,679)
----------- -----------
Total Stockholders' Equity
(Deficiency) ...................... (417,785) (1,238,107)
----------- -----------
Total Liabilities and
Stockholders' Equity .............. $ 526,080 $ 609,158
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<PAGE> 5
BROWN DISC PRODUCTS COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
March 31, March 31,
------------------------ ----------------------
1996 1995 1996 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales ...................... $ 291,438 $ 411,129 $ 924,833 $ 1,350,878
Cost of Sales .................. 211,251 278,415 727,795 937,255
----------- ----------- ---------- ----------
Gross Margin ................... 80,187 132,714 197,038 413,623
----------- ----------- ---------- ----------
Operating Costs and Expenses:
General and administrative ... 142,360 78,315 327,370 246,925
Selling ...................... 33,569 39,003 107,441 157,409
----------- ----------- ---------- ----------
Total Operating Costs
and Expenses ................. 175,929 117,318 434,811 404,334
----------- ----------- ---------- ----------
Operating Income (Loss)......... (95,742) 15,396 (237,773) 9,289
----------- ----------- ---------- ----------
Other Income (Expense):
Forgiveness of indebtedness .. -- -- 189,889 --
Interest expense ............. (6,088) (21,633) (16,096) (61,380)
Other income (expense), net .. (882) 1,567 (882) 1,146
----------- ----------- ---------- ----------
Total Other Income (Expense) ... (6,970) (20,066) 172,911 (60,234)
----------- ----------- ---------- ----------
Net Income (Loss)............... (102,712) (4,670) (64,862) (50,945)
Net Increase (Decrease) in
Carrying Value of
Redeemable Preferred Stock.... (630) 17,966
----------- ----------- ---------- ----------
Net Income (Loss) Attributable
to Common and Common
Equivalent Shares ............ $ (103,342) $ (4,670) $ (46,896) $ (50,945)
=========== =========== ========== ==========
Net Loss Per Common and
Common Equivalent Share ...... $ (0.03) $ (0.00) $ (0.02) $ (0.02)
=========== =========== ========== ==========
Weighted Average Common and
Common Equivalent Shares ..... 3,565,873 2,751,641 2,767,459 2,751,641
=========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.<PAGE>
<PAGE> 6
BROWN DISC PRODUCTS COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months ended March 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................... $ (64,862) $ (50,945)
Adjustments to reconcile net loss
to net cash and cash equivalents
provided by operating activities:
Depreciation .................... 32,610 32,806
Changes in operating assets
and liabilities:
Accounts receivable ........... 8,182 80,693
Inventory ..................... 23,457 2,887
Other assets .................. 20,988 (2,592)
Accounts payable .............. 48,538 23,139
Accrued liabilities ........... 149,256 (37,972)
----------- -----------
Net Cash Provided By (Used In)
Operating Activities ............. 218,169 48,016
----------- -----------
INVESTING ACTIVITIES:
Purchases of equipment .............. (3,323) (10,038)
----------- -----------
Net Cash Provided By (Used In)
Investing Activities ............. (3,323) (10,038)
----------- -----------
FINANCING ACTIVITIES:
Cash payments for debt
settlements and repayment
of notes payables ................. (442,861) (61,151)
Proceeds from issuance
of notes payable .................. 197,920 --
Net gain on debt
forgiveness transactions .......... (189,889) --
Issuance of Series B preferred
stock ............................. 218,820 --
----------- -----------
Net Cash Provided By (Used In)
Financing Activities ............. (216,010) (61,151)
----------- -----------
Net Increase (Decrease) in Cash ..... (1,164) (23,173)
Cash, Beginning of Period ........... 3,890 23,083
----------- -----------
Cash, End of Period ................. $ 2,726 $ (90)
=========== ===========
Supplemental disclosures
of cash flow information:
Cash paid during the period for:
Interest ...................... $ 18,759 $ 62,914
Income taxes .................. $ -0- $ -0-
=========== ===========
</TABLE>
NOTE: The Company issued common stock purchase warrants valued at
$84,468 and issued common stock valued at $67,500 as non-
cash settlements of indebtedness during the nine months
ended March 31, 1996. In addition, 49,643 shares of Series
A redeemable preferred stock were converted into 496,430
shares of common stock valued at $496,430 during the nine
months ended March 31, 1996. No cash was exchanged in these
transactions.
See accompanying notes to financial statements.<PAGE>
<PAGE> 7
BROWN DISC PRODUCTS COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Series B Total
Common Stock Preferred stock Additional Stockholders'
-------------------- ----------------- Paid-in Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
--------- --------- ------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances
at June 30,
1995 ....... 2,751,641 $ 93,180 -- -- $ 550,392 $(1,881,679) $(1,238,107)
Common stock
issued for
debt
settlements. 270,000 67,500 -- -- -- -- 67,500
Warrants
exercisable
at $.01
issued for
debt
settlements. -- -- -- -- 84,468 -- 84,468
Common stock
issued upon
conversion of
redeemable
preferred
stock....... 496,430 496,430 -- -- -- -- 496,430
Issuance of
Series B
preferred
stock, net
of offering
costs
(Note 1).... -- -- 44,000 $ 218,820 -- -- 218,820
Net decrease
in carrying
value of
redeemable
preferred
stock....... -- -- -- -- 17,966 -- 17,966
Net loss
for the
nine months
ended
March 31,
1996........ -- -- -- -- -- (64,862) (64,862)
--------- -------- ------- --------- ---------- ----------- -----------
Balances at
March 31,
1996........ 3,518,071 $657,110 44,000 $ 218,820 $ 652,826 $(1,946,541) $ (417,785)
========= ======== ======= ========= ========== =========== ===========
</TABLE>
NOTE (1) An additional $30,000 in proceeds from the sale of 6,000
shares of Series B convertible preferred stock were refunded
to an investor and subsequently accepted by the Company in
May 1996.
See accompanying notes to financial statements.
<PAGE>
<PAGE> 8
BROWN DISC PRODUCTS COMPANY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1. BASIS OF PRESENTATION; UNAUDITED INTERIM STATEMENTS
The accompanying unaudited financial statements at March 31, 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 March 31, 1996 and for the three months and nine
months periods ended March 31, 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.
In reviewing interim financial statements for the prior period of
nine months ended March 31, 1995, readers should note that the Company
subsequently recorded a nonrecurring inventory write-down of $121,000
at June 30, 1995.
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, 1995 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; TRANSACTIONS
TO COMPROMISE DEBT OBLIGATIONS
The accompanying financial statements have been prepared assuming
a going-concern basis, which contemplates the realization of assets
and the liquidation of liabilities in the normal course of business.
However, the Company has sustained substantial and continuing
operating losses since inception and has continued to incur losses
from operations since emerging from Chapter 11 reorganization
proceedings in May 1993. The Company's liabilities of $811,000 at
March 31, 1996 exceeded its total assets of $526,000 at that date. It
had a negative working capital at March 31, 1996 of $505,000 resulting
from an excess of $811,000 in current liabilities compared to current
assets of $306,000 at March 31, 1996. In addition, the Company is in
default on approximately $287,000 of notes payable which are <PAGE>
<PAGE> 9
collateralized by certain assets of the Company. These factors, among
others, may 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 or the amount and classification
of recorded liabilities that might be necessary should the Company be
unable to continue as a going concern.
Unsecured borrowings of $50,000 in September 1995 from a director
of the Company and $20,000 in November 1995 from a director and
officer were obtained to sustain operations. The Company elected a
new chief executive officer and added its new chief executive officer
and three other new members to its board of directors in September
1995.
Since September 1995, the Company (i) completed an offering to
raise $250,000 in additional capital through the issuance of a new
series of Series B convertible preferred stock, of which approximately
$219,000 in net proceeds were received prior to March 31, 1996 (see
Item 2 in Part II of this Report); (ii) negotiated the settlement and
compromise of $442,000 in secured debt and $196,000 in unsecured debt
(which included $250,000 in cash payments, the issuance of 270,000
shares of common stock and 361,950 common stock warrants and $190,000
in debt forgiveness); (iii) exchanged 496,430 shares of common stock
for 49,643 shares of redeemable Series A convertible preferred stock
by improving the terms of conversion for a limited exchange offer
period (see Note 3 below); and (iv) negotiated a settlement of
obligations to two former officers and directors who resigned as of
February 12, 1996 (see Note 7 below). The Company is engaged in
continuing negotiations to settle and compromise its remaining secured
debt, to acquire an additional business and to obtain additional
equity financing. There can be no assurances at present concerning
the ultimate outcome or success of transactions in negotiation.
As a result of the above transactions, the Company's debt
obligations were reduced by a gross amount of approximately $638,000
during the nine months ended March 31, 1996 for a net debt reduction
of approximately $391,000. The Company recorded $67,500 for the value
of 270,000 restricted shares of common stock, or $0.25 per share, and
$84,468 for the value of 351,950 Class C warrants, or $0.24 per
warrant, as costs of issuing securities in compromise of trade debt
obligations. For the nine months ended March 31, 1996, the Company
recognized a net non-recurring gain of $190,000 for debt forgiveness
relating to debt compromise transactions.
Current management is also reassessing the Company's existing
products, services and business strategy. In view of the Company's
limited resources and historical operating losses, this strategy
anticipates the acquisition of additional assets or business
operations in exchange for a controlling interest in the Company via
the issuance of additional equity securities. Any such transaction is
expected to involve substantial dilution to the equity interests of
the Company's stockholders and may involve a further change in control
of the Company.
<PAGE>
<PAGE> 10
NOTE 3 -- CONVERSION OF REDEEMABLE PREFERRED STOCK
During the quarter ended December 31, 1995, holders of 49,643
shares of redeemable Series A preferred stock elected to accept the
Company's offer of exchanging Series A preferred for common stock at
an improved conversion ratio, and such Series A preferred shares were
converted into 496,430 shares of the Company's common stock, thus
leaving a balance of 12,613 Series A Preferred shares outstanding at
March 31, 1996. The 496,430 shares of common stock issued upon
conversion of Series A preferred were recorded at the $496,430 stated
value of Series A preferred shares so retired, or $10 per share. The
carrying value of Series A preferred was reduced by its $496,430
stated value plus a net amount of $18,596 (accounting for a difference
between stated value of $10 per share and the mandatory redemption
price of $11 per share in 1998) to reflect the retirement of 49,643
Series A preferred shares.
NOTE 4 -- INVENTORIES
Inventories consist of the following at March 31, 1996 and June
30, 1995:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
------------ ------------
<S> <C> <C>
Raw materials ................... $ 93,608 $ 83,668
Work-in-process ................. 34,342 17,869
Finished goods .................. 46,091 95,961
------------ ------------
Total Inventories ........... $ 174,041 $ 197,498
============ ============
</TABLE>
All inventories are pledged as collateral for certain notes
payable to financial institutions. See Note 4 of the Notes to
Financial Statements included in the Company's Report on Form 10-KSB
for the fiscal year ended June 30, 1995. As discussed in Note 2
above, subsequent to June 30, 1995 the Company compromised and settled
its debt obligations to a bank that were included as part of its
collateralized note obligations at June 30, 1995, and is currently
involved in negotiations with another financial institution holding
approximately $287,000 of past-due collateralized note obligations.
NOTE 5. EARNINGS PER SHARE
Net income per common and common equivalent 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.
<PAGE>
<PAGE> 11
NOTE 6. CHANGE IN CONTROL; ADDITIONAL BORROWINGS AND ISSUANCE OF
COMMON STOCK PURCHASE WARRANTS
On September 7, 1995, the Company received an unsecured loan from
a newly-elected director of $50,000 to provide for short-term working
capital requirements. This loan bears interest at 10.04% per annum.
Interest only is payable monthly until December 7, 1995, at which time
principal and interest are payable in twelve equal monthly
installments of $2,308.17 each from December 7, 1995 through November
7, 1996 with a balloon payment of $26,249 due in December 1996. In
consideration of this loan, the Company issued Class B common stock
purchase warrants covering 1,000,000 shares of the Company's Common
Stock at an exercise price of $0.10 per share expiring on September 7,
2000.
Concurrent with the above loan, and as conditions to this
financing, the Company elected a new Chief Executive Officer. The
Board of Directors was expanded from three to seven members, and its
new Chief Executive Officer and three other individuals designated by
him were elected directors of the Company. In consideration of the
individuals' consent to be elected directors of the Company, and for
their assistance in seeking additional capital for the Company and
participating in negotiations to compromise and restructure the
Company's secured debt obligations, on September 7, 1995 the Company
issued Class A common stock purchase warrants to its new directors
covering a total of 3,000,000 shares of the Company's Common Stock at
an exercise price of $0.25 per share expiring on September 7, 2000.
The Company's new Chief Executive Officer also received
irrevocable two-year proxies from certain principal stockholders
covering 1,449,410 shares of the Company's Common Stock, or 51.5% of
the outstanding voting capital stock. Subsequent to September 1995,
the proxies as to 85,000 of such shares have been released.
In November 1995, R. Eugene Rider, then a director and President
of the Company, advanced $20,000 as a short-term loan to the Company.
NOTE 7: SETTLEMENT AND SEVERANCE PAY AGREEMENT WITH FORMER OFFICERS
The Company was a party to an employment agreement with R. Eugene
Rider, its former President, for a term expiring on June 30, 1999.
The Company has negotiated a settlement of all claims of Mr. Rider and
his spouse, Eva Forsberg-Rider, the Company's former Secretary-
Treasurer. The settlement agreement provides, among other provisions,
for the issuance of 250,000 shares of the Company's Common Stock to a
trust for the benefit of Mr. Rider, payment of $60,000 at the rate of
$1,000 per month, 5% of any proceeds realized by the Company from any
future equity financing, recapitalization, sale of equipment, merger
or acquisition transaction up to a maximum payment to Mr. Rider of
$200,000, and payment in installments of $6,400 in wages and $20,000
for repayment of an unsecured note obligation. Under the settlement
agreement, Mr. Rider and Mrs. Rider resigned as officers and directors
of the Company effective as of February 12, 1996 pursuant to their
retirement. The expense of the settlement has been accrued as of
March 31, 1996 in the accompanying financial statements.<PAGE>
<PAGE> 12
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 and, in the
opinion of its management, has been undercapitalized since inception
notwithstanding an initial public offering in 1989 that generated
$408,000 in net proceeds to the Company. 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 current sales trend is unfavorable. Revenues for
the nine months ended March 31, 1996 of $925,000 reflect a continuing
sales decline compared to $1,351,000 in net sales for the comparable
prior year's nine months ended March 31, 1995. As a result of
declining revenues, losses from operations for the most recent nine
months ended March 31, 1996 were $47,000 after a non-recurring
$190,000 gain on debt forgiveness compared to losses from operations
of $51,000 for the nine months ended March 31, 1995 in which no
unusual gains were realized. For the most recent full fiscal year
ended June 30, 1995, the Company incurred a net loss of $372,000 on
revenues of $1,669,000 compared to a net loss of $124,000 on revenues
of $2,693,000 for the prior fiscal year ended June 30, 1994.
At March 31, 1996, the Company had total liabilities of
approximately $811,000 (after giving effect to debt settlements which
contributed to a $391,000 net reduction in debt for the nine months
then ended), redeemable Series A preferred stock of $133,000 requiring
mandatory redemption from future net income (after giving effect to
the conversion of $515,000 in redeemable preferred stock into common
stock), an accumulated deficit from operations since inception in 1987
of $1,947,000, and a deficiency in total stockholders' equity of
$418,000.
The Company had minimal cash resources and a deficiency in
working capital of $505,000 at March 31, 1996. Current liabilities at
March 31, 1996 include approximately $287,000 of long-term debt due a
secured lender that has been in default since approximately June 1995.
As discussed in Note 2 of the Notes to Financial Statements elsewhere
herein, the Company successfully settled and compromised certain other
past-due secured debt and trade obligations in the current fiscal year
and is currently negotiating with holders of its remaining secured
debt and certain other trade obligations in an effort to obtain
further debt settlements and compromises.
<PAGE>
<PAGE> 13
Increases in revenues are required for the Company to absorb
existing overhead levels. In view of historical losses from
operations, continuing unfavorable sales trends, negative 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, 1995
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 IN NOTE 2 OF THE NOTES TO
FINANCIAL STATEMENTS INCLUDED ELSEWHERE HEREIN.
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 results of continuing negotiations to obtain
additional compromises of outstanding debt obligations, the Company's
ability to raise additional equity capital, development and
implementation of new sales and marketing programs, 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.
The Company's core business originally involved 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 for growth was focused on the
magnetic media industry and complementary markets, specifically
software duplication and allied printing and customization services.
In view of declining sales trends and gross margin deterioration,
current management is focusing its efforts primarily on the
acquisition of another business enterprise in the computer software
and service industry and does not intend to expand the Company's
activities in software duplication and allied services.
Negotiations for an acquisition are pending, but there can be no
assurance that such transaction or any other acquisition will be
successfully completed. In view of the Company's current financial
condition, an acquisition transaction is expected to involve the
issuance of additional equity securities that may be significantly
dilutive to the interests of current stockholders and a further change
in control of the Company. Management intends to monitor the
progress of the Company's business and reserves the right to redeploy
its assets if satisfactory progress is not achieved. <PAGE>
<PAGE> 14
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE NINE MONTHS
ENDED MARCH 31, 1995
REVENUES: Revenues for the nine months ended March 31, 1996
were $925,000, a decline of $426,000, or approximately 31.5%, from
$1,351,000 in revenues for the comparable nine month period ended
March 31, 1995. The decline in sales was attributable to changes in
the Company's customer base, the complete elimination of bulk diskette
sales and a severe downturn in orders for software duplication and
packaging. Revenues for the quarter ended March 31, 1995 of $291,000
represented a $23,000 decrease compared to $314,000 in revenues for
the immediately preceding quarter ended December 31, 1995 and a
decline of $120,000, or 29.2%, from net sales of $411,000 in the
comparable quarter ended March 31, 1995 of the prior year. Since the
software duplication business has become extremely competitive in
recent years, former management was endeavoring to focus on added
value services and products where higher gross margins were expected
to be available. This program has been largely unsuccessful, and
current management is seeking to retain as much of the Company's
customer base as possible while seeking the acquisition of another
business enterprise in the computer software and service industry.
COST OF SALES: Cost of sales for the nine months ended March 31,
1996 were $728,000, or 78.7% of net sales, resulting in a gross profit
of $197,000, or 21.3% of net sales, compared to a gross profit of
$414,000, or 30.6%, in the nine months ended March 31, 1995. Gross
profit margins in the most recent quarter ended March 31, 1996 were
27.5% (i.e., a gross profit of $80,000 on net sales of $291,000). Due
to the decline in net sales, the Company has been unable to absorb
fixed expenses or to achieve a level of improved operating
efficiencies. In view of its high level of fixed overhead costs
relative to sales volumes, 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 nine months ended March 31,
1996 were $435,000, of which approximately $108,000 were selling and
marketing expenses and $327,000 were general and administrative costs.
These levels were reduced from the comparable prior year period of
nine months ended March 31, 1995, when selling, general and
administrative expenses were $404,000 consisting of $157,000 in
selling and marketing expenses and $247,000 of general and
administrative costs. 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.
General and administrative expenses increased by $80,000 in the nine
months ended March 31, 1996 compared to the comparable period of the
prior year primarily as a result of operating expenses incurred in
raising additional capital and negotiating debt settlements.
<PAGE>
<PAGE> 15
INTEREST EXPENSE: Interest expense in the nine months ended
March 31, 1996 was $16,000, compared to $61,000 for the nine months
ended March 31, 1995. The reduction in interest expense is due to
debt settlements resulting in reduced debt service obligations.
OTHER INCOME: During the nine months ended March 31, 1996, the
Company recognized a net non-recurring gain of $190,000 for debt
forgiveness relating to debt compromise transactions. During this
period, the Company's net debt obligations were reduced by
approximately $390,000 principally as a result of debt compromises
discussed elsewhere in this Report. The Company is involved in
continuing negotiations with the holder of approximately $287,000 in
secured debt that has been in default since approximately June 1995
and with certain other creditors.
OPERATING RESULTS: Net losses for the nine months ended March
31, 1996 was $47,000, after a gain for non-recurring debt forgiveness
of $190,000 which partially offset operating losses of $238,000 and
interest expense of $16,000. Before giving effect to debt
forgiveness, net loss for the nine months ended March 31, 1996 would
have been $237,000 compared to a net loss for the comparable nine
months ended March 31, 1995 of $51,000.
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 1996, the Company had minimal cash resources,
current assets of $306,000 and current liabilities of $811,000
resulting in a negative working capital of $505,000 compared to a
negative working capital of $842,000 at the prior fiscal year-end on
June 30, 1995. The reduction in the amount of the Company's negative
working capital position from June 30, 1995 to March 31, 1996 is
primarily due to net debt forgiveness of $190,000 recorded during the
quarter ended December 31, 1995, as discussed elsewhere in this
Report. Certain trade payable reductions were financed in part by the
issuance of 270,000 shares of common stock, 351,950 Class C common
stock purchase warrants exercisable at $0.01 per share and 10,000
Class A common stock purchase warrants exercisable at $0.25 per share.
The Company recorded $67,500 for the value of 270,000 restricted
shares of common stock, or $0.25 per share, and $84,468 for the value
of 391,950 Class C warrants, or $0.24 per warrant, as costs of issuing
securities in compromise of trade debt obligations.
During the nine months ended March 31, 1996, the Company received
$219,000 in net proceeds from the sale of a new issue of 10% Series B
convertible preferred stock and applied these and other cash
resources aggregating $250,000 to reduce its short-term debt under
debt compromise agreements. The Company is involved in continuing
negotiations with the holder of approximately $287,000 in secured debt
that is in default and with other trade creditors to seek additional
debt settlements and compromises which may involve the issuance of
additional equity securities.
<PAGE>
<PAGE> 16
The Company's management anticipates that the Company will incur
losses from operations for the foreseeable future due to its
unfavorable sales trend, low gross margins and the current level of
fixed expenses for facilities, manufacturing overhead, selling,
general and administrative expenses and interest costs. 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, such as expanded sales and marketing programs and/or the
acquisition of another business to expand the Company's products and
services. There can be no assurance that adequate financing will be
obtained to support planned expansion.
During the nine months ended March 31, 1996, capital asset
additions were $3,000. The Company has no current material
obligations or commitments for additional capital expenditures during
the current fiscal year and will be unable to finance material capital
asset additions unless additional equity capital is obtained. During
the past five 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 $2,000,000 of net operating loss
carryforwards available as of June 30, 1995 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.
<PAGE>
<PAGE> 17
BROWN DISC PRODUCTS COMPANY, INC.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
SALE OF SERIES B CONVERTIBLE PREFERRED STOCK
The Company completed a private placement offering of 50,000
shares of a new series of Series B convertible preferred stock
("Series B Preferred"), of which net proceeds of approximately
$219,000 for 44,000 shares were received before March 31, 1996. An
additional $30,000 in proceeds from the sale of 6,000 shares of Series
B convertible preferred stock were refunded to an investor and
subsequently accepted by the Company in May 1996. Series B Preferred
shares are entitled to a 10% annual dividend payable in cash or in
Common Stock and are convertible into Common Stock at $0.50 per share.
CONVERSION OF SERIES A REDEEMABLE PREFERRED SHARES INTO COMMON STOCK
At June 30, 1995, the Company had 62,256 shares of Series A
Redeemable Preferred Stock ("Series A Preferred") outstanding as a
result of its 1993 reorganization plan under Chapter 11 of the U.S.
Bankruptcy Code. All of these Series A Preferred shares were issued
as of May 5, 1993 in exchange for unsecured debt of the Company at a
rate of one share of Series A Preferred for $10 of allowed pre-
petition unsecured creditor claims. The Company has a mandatory
obligation in each of the fiscal years through 1994 through June 30,
1998 to redeem shares of its Redeemable Series A Preferred Stock
("Series A Preferred") from 50% of the Company's net income after
taxes and debt service at a redemption price of $11.00 per share and
without any interest or dividends. Since the Company incurred net
losses from operations in the fiscal years ended June 30, 1994 and
1995, no mandatory redemption payments on Series A Preferred have been
paid. The liquidation preference for Series A Preferred shares is
$11.00 per share.
Terms of the Series A Preferred not redeemed from net income of
the Company provide that Series A Preferred shares may be converted
after June 30, 1998 into Common Stock at a conversion ratio of five
(5) shares of Common Stock for each share of Series A Preferred if
less than 31,128 Series A Preferred shares are then outstanding.
Conversion rights after June 30, 1998 are subject to the condition
that all (but not less than all) of the Series A Preferred then
outstanding elect to convert into Common Stock. The Company, at its
option, may waive the condition that all holders elect to convert into
Common Stock if any of them desire to do so after June 30, 1998, but
the Company is not required to waive that condition.
As part of management's strategic plan to recapitalize the
Company, during the quarter ended December 31, 1995, the Company
offered to exchange ten (10) shares of Common Stock for each
outstanding share of Series A Preferred. The primary purpose of the
exchange offer was to recapitalize the Company's balance sheet by
<PAGE>
<PAGE> 18
substituting Common Stock for redeemable Series A Preferred shares and
to relieve the Company of constraints upon its cash redemption
obligations should the Company becomes profitable in the future. The
holders of 49,643 shares of Series A Preferred elected to accept the
Company's exchange offer and such shares were converted into 496,430
shares of the Company's common stock, thus leaving a balance of 12,613
Series A Preferred shares outstanding at March 31, 1996.
ISSUANCE OF COMMON STOCK AND WARRANTS FOR DEBT SETTLEMENTS
During the quarter ended December 31, 1995, the Company issued
270,000 shares of common stock as part of the consideration for
settling a past due trade obligation. Reference is made to the
discussion under Item 5 below concerning common stock purchase
warrants issued during the nine months ended March 31, 1996. See
also Note 2 of the Notes to Financial Statements included elsewhere
herein.
COMMON STOCK PURCHASE WARRANTS
As of March 31, 1996, the Company has reserved for issuance up to
4,361,950 shares of Common Stock for issuance upon exercise of
outstanding warrants issued from September to December 1995.
Class A Common Stock purchase warrants to purchase up to an
aggregate of 3,010,000 shares of common stock include 3,000,000 Class
A warrants issued on September 7, 1995 to newly elected directors of
the Company and 10,000 Class A warrants issued in connection with
settling certain trade debts. Class A warrants are exercisable at
$0.25 per share until expiration on September 7, 2000, and are not
subject to redemption by the Company.
Class B Common Stock purchase warrants to purchase up to an
aggregate of 1,000,000 shares of common stock were issued on September
7, 1995 in consideration of a $50,000 unsecured loan to the Company by
a newly-elected director. Class B warrants are exercisable at $0.10
per share until expiration on September 7, 2000, and are not subject
to redemption by the Company.
Class C Common Stock purchase warrants to purchase up to an
aggregate of 351,950 shares of common stock were issued in December
1995 in connection with settling certain unsecured trade debts. Class
C warrants are exercisable at $0.01 per share until the Class B
warrants expire at various dates from December 15, 2000 to January 15,
2001, and are not subject to redemption by the Company.
<PAGE>
<PAGE> 19
The holders of the warrants do not have any of the rights or
privileges of stockholders of the Company, including voting rights and
rights to receive dividends, prior to exercise of the warrants. The
exercise price of the warrants and the number of warrants are subject
to anti-dilution adjustment to protect against stock dividends, stock
splits, mergers, acquisitions, recapitalizations or similar events.
Investors in the Company should note that for the term of the
warrants, the holder or holders thereof are given, at nominal cost,
the opportunity to profit from a rise in the market price of the
Common Stock subject to the warrants with a resulting dilution in the
interests of other stockholders. At any time when the holders of the
warrants might be expected to exercise the same, the Company would in
all likelihood be able to obtain additional equity capital on terms
more favorable than those provided in the warrants.
ITEM 5. OTHER INFORMATION.
SETTLEMENT WITH FORMER OFFICERS AND DIRECTORS; CHANGES IN EXECUTIVE
OFFICERS AND DIRECTORS
The Company was a party to an employment agreement with R. Eugene
Rider, its former President, for a term expiring on June 30, 1999.
Under a Settlement Agreement and General Release dated as of April 24,
1996 ("Settlement Agreement"), the Company has negotiated a settlement
of all employment and other claims of Mr. Rider and his spouse, Eva-
Forsberg-Rider, the Company's former Secretary-Treasurer.
The Settlement Agreement provides, among other things, for the
issuance of 250,000 shares of the Company's Common Stock to a trust
for the benefit of Mr. and Mrs. Rider, payment of $60,000 at the rate
of $1,000 per month (the unpaid portion of which may be paid in Common
Stock at the Company's option in the event of a subsequent merger of
the Company with another entity), 5% of any proceeds realized by the
Company from any future equity financing, recapitalization, sale of
equipment, merger or acquisition transaction up to a maximum payment
to Mr. Rider of $200,000, and payment in installments of $6,400 in
wages and $20,000 for repayment of an unsecured note obligation.
Under the Settlement Agreement, Mr. Rider and Mrs. Rider resigned as
officers and directors of the Company effective as of February 12,
1996 pursuant to their retirement. The expense of the Settlement
Agreement has been accrued as of March 31, 1996 in the Company's
financial statements.
Effective February 13, 1996, Ronald H. Cole was appointed to
assume the duties of President and to act as the Company's Chief
Financial Officer in addition to his existing position and duties as
the Company's Chairman and Chief Executive Officer. Daryl M.
Silversparre, a director, was elected corporate Secretary.
<PAGE>
<PAGE> 20
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995
(the "Act"). The Act became law in late December 1995 and, except
for the Congressional Conference Report, no official interpretation
of the Act's provisions have been published. Many of the following
factors have been discussed in other sections of this Report and in
previous filings of the Company with the Securities and Exchange
Commission ("SEC"). The Company sets forth the following important
risk factors that could cause the Company's actual results to differ
materially from results projected in forward looking statements made
by, or on behalf of, the Company, if any:
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 loss of his or her investment.
Investors should carefully consider the following risk factors
associated with an investment in the Company's securities.
ACCUMULATED DEFICIT, LIMITED WORKING CAPITAL, DEFICIT NET WORTH
AND OPERATING LOSSES; AUDITOR'S QUALIFICATION. The Company commenced
operations in September 1987, has been undercapitalized since
inception, has not operated on a profitable basis and was required to
seek the protection of Chapter 11 of the U.S. Bankruptcy Act in 1992
to restructure and extend payment terms of its secured and unsecured
debt obligations. At March 31, 1996, the Company had an accumulated
deficit from operations since inception in 1987 of $1,947,000 and a
$418,000 deficit in its common stockholders' equity. Total
liabilities at March 31, 1996 were $811,000, and there were also
outstanding redeemable Series A preferred stock of $133,000 which
requires mandatory redemption from future net income. The Company had
minimal cash resources and a deficiency in working capital of $505,000
at March 31, 1996. Current liabilities at March 31, 1996 include
$287,000 of long-term debt due a secured lender that has been in
default since approximately June 1995. The Company is negotiating
with holders of its secured debt in an effort to obtain compromises
and a settlement of these obligations, but such efforts are expected
to require additional equity financing as to which there can be no
assurances.
Although increases in revenues are required for the Company to
absorb existing overhead, in view of historical losses from
operations, negative working capital and 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. Revenues and gross profit
margins in recent periods have been declining. THE REPORT OF STOCKMAN
KAST RYAN & SCRUGGS ON THE FINANCIAL STATEMENTS OF THE COMPANY FOR THE
FISCAL YEAR ENDED JUNE 30, 1995 CONTAINS A PARAGRAPH EXPRESSING
SUBSTANTIAL DOUBT CONCERNING THE ABILITY OF THE COMPANY TO CONTINUE AS
A GOING CONCERN.<PAGE>
<PAGE> 21
Results of operations in the future will be influenced by
numerous factors, including the ability of the Company to successfully
negotiate compromises and settlement of its secured debt obligations,
its ability to raise additional equity capital and to negotiate the
acquisition of another business enterprise, development and
implementation of sales and marketing programs, competition, and the
ability of the Company to control costs. There can be no assurance
that revenue growth or profitability on a quarterly or annual basis
will be attained.
An investment in the Company's securities should therefore be
considered as a venture capital investment and subject to
substantially all of the risks typical for a small business enterprise
without a profitable history of operations. Prospective investors
should consider the frequency with which small businesses of this type
encounter unforeseen expenses, difficulties, complications and delays,
and such other factors as intense competition in the industry in which
the Company operates.
REQUIREMENT FOR ADDITIONAL FINANCING: The Company's ability to
negotiate debt compromises, to negotiate the acquisition of another
business and its future prospects will be dependent, among other
things, upon the Company's ability to obtain additional equity
financing and, ultimately, upon its ability to generate sufficient
revenues and cash flow to sustain operations on a consistent basis.
Even if such transactions are successful and the Company generates
revenue increases, it may require additional working capital to
support increases in manufacturing capacity and to carry additional
investment required to finance receivables 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.
DEPENDENCE ON PRESIDENT: Ronald H. Cole, the Company's Chief
Executive Officer, is primarily responsible for management of day-to-
day operations, negotiating compromise arrangements with secured
creditors, raising additional capital and negotiating the acquisition
by the Company of another business enterprise. The loss of services
of Mr. Cole might significantly adversely impact the Company and its
future prospects.
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 or by all of the directors.
<PAGE>
<PAGE> 22
UNDETERMINED EFFECT OF BLANK CHECK PREFERRED STOCK AND DILUTION
FROM ADDITIONAL ISSUANCES OF CAPITAL STOCK; RISKS OF DILUTION AND
CHANGE IN CONTROL: The Company's articles of incorporation authorize
the issuance of up to 50,000,000 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 of the
Company and up to 50,000,000 shares of Common Stock. Accordingly, the
Board of Directors has the power without prior stockholder approval to
issue additional 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. Such additional issuances of blank check
preferred stock could adversely affect the holders of the Company's
outstanding shares of capital stock. In addition, the blank check
preferred stock and the large amount of authorized and unissued Common
Stock could discourage, delay or prevent a takeover of the Company.
Negotiations for the acquisition by the Company of another business
are pending, but there can be no assurance that such transaction or
any other acquisition will be successfully completed. In view of the
Company's current financial condition, acquisition transactions are
expected to involve the issuance of additional equity securities that
would be significantly dilutive to the interests of current
stockholders and result in a change in control of the Company.
DEPENDENCE ON ADDITIONAL REVENUES: 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 continuing growth in demand for
software media 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 therefore is characterized by intense competition and narrow
gross profit margins. Although improved cash flow will be dependent
on increasing sales, there can be no assurance that sales levels for
software duplication and related services will increase.
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.
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.
<PAGE>
<PAGE> 23
POSSIBLE 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 software industry
generally and for the Company's Common Stock specifically.
Announcements by the Company or third parties concerning new
developments or other material events may have a significant impact on
the market price of the Company's Common Stock.
DILUTIVE EFFECT ON COMMON STOCK OF OUTSTANDING WARRANTS AND
SECURITIES TO BE ISSUED: The Company has reserved shares of its
Common Stock for issuance upon exercise of outstanding warrants. 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 debt restructuring, a program to
seek the acquisition of another business in the computer software and
service industry and/or for future equity financings. Exercise of
warrants and future issuances of equity securities could involve
significant dilution to holders of Common Stock. Holders of
convertible securities, warrants and options 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, options and warrants. In addition, such securities 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. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibit
No. Description
- ------ ------------
10.13 Settlement Agreement and General Release dated as of April
24, 1996 among the Registrant, Ronald H. Cole, R. Eugene
Rider and Eva Forsberg-Rider.
27 Financial Data Schedule at March 31, 1996.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
1996.
<PAGE>
<PAGE> 24
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 14, 1996
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
<PAGE> 1
SETTLEMENT AGREEMENT AND GENERAL RELEASE
THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE ("Agreement") is
entered into this 24th day of April, 1996, by and between BROWN DISC
PRODUCTS, INC. ("BROWN DISC"); RONALD H. COLE ("COLE"); and R. EUGENE
RIDER and EVA FORSBERG-RIDER (collectively referred to as the
"RIDERS").
RECITALS
A. Brown Disc is a Colorado corporation, whose Chairman is
Ronald H. Cole. The Riders are now and have been shareholders of
Brown Disc. The Riders have also served as officers and directors of
Brown Disc during time periods relevant to this Agreement. In
addition, R. Eugene Rider has a written employment agreement with
Brown Disc dated July 1, 1989 and renewed to run through June 30, 1999
(the "Employment Agreement").
B. Various disputes have arisen between the parties to this
Agreement involving claims and assertions as more fully set forth in
the Verified Complaint and Jury Demand submitted to Brown Disc and
Cote on April 23, 1996 (the "Complaint"). The parties have now agreed
to settle their disputes in this Agreement rather than proceed to
litigation, it being their intention to finally resolve and to fully
and completely release each other from all claims and demands that
they have or may have pursuant to the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants,
conditions, payments and promises in this Agreement, the parties
hereto agree as follows:
1. PAYMENT OF PAST WAGES AND ON NOTE: Brown Disc shall pay,
and Cole agrees to cause Brown Disc to pay to the Riders the
following:
a. To R. Eugene Rider, as past wages due, but unpaid, the
sum of $6,400.00 less applicable federal and state employment related
taxes, payable by a payment of one-half thereof on or before August 1,
1996 and the remaining one-half on or before September 1, 1996.
b. To the Riders, the sum of $20,000.00, in full
satisfaction of all sums due under a promissory note made by Brown
Disc and payable to the Riders in the principal amount of $20,000.00,
payable without interest as follows: $5,000.00 by May 15, 1996;
$5,000.00 by July 1, 1996; $5,000.00 by September 1, 1996; and
$5,000.00 by November 1, 1996. At the time the promissory note is
paid in full, the Riders will mark the note paid and deliver its
original to Brown Disc.
<PAGE> 2
2. PAYMENTS ATTRIBUTABLE TO EMPLOYMENT AGREEMENT: As payment
for all sums due or to become due under the Employment Agreement,
Brown Disc shall pay and Cole agrees to cause Brown Disc to pay to R.
Eugene Rider the sum of $1,000.00 each month for sixty (60) months,
commencing October 1, 1996 and ending on September 1, 2001. If at any
time hereafter, Brown Disc merges with any other entity, Brown Disc or
its successor as the case may be may satisfy all remaining obligations
under this paragraph 2 by a one time payment in kind of readily
marketable Brown Disc stock or publicly traded and unrestricted stock
in the successor having a fair market value equal to the then total
remaining balance of the monthly payments. In any event, Brown Disc
shall have the right, at any time, to pay such remaining balance
without penalty.
3. PAYMENTS FOR COMPENSATORY DAMAGES: In consideration for
the release of the non-employment claims, personal injury, emotional
distress, pain and suffering, past and future medical expenses and
damage and injury to their reputation detailed in the Complaint, Brown
Disc and Cole shall cause to be issued to the Riders as joint tenants,
250,000 shares of stock in Brown Disc, which stock shall be held in
trust; the trust shall have an independent trustee and the Riders
shall be the sole beneficiaries of the trust. The trust instrument
shall provide that the shares of stock shall be delivered to the
Riders on May 5, 1998 and that 50,000 of the trust's shares per month,
commencing on the date of this Settlement Agreement and continuing on
the same day of each subsequent month, for a period of 5 months, will
become subject to an irrevocable proxy in the form of the proxies
given by the Riders to Cole which proxy shall expire on September 7,
1997. Brown Disc shall register the 250,000 shares pursuant to an S-8
registration, which registration shall become effective no later than
June 5, 1998.
Furthermore, as additional compensation for non-employment claims
as described in the preceding paragraph, the Riders shall receive a
sum equal to five percent (5%) of the proceeds realized by Brown Disc
from any future equity financing, recapitalization, or sale of
equipment up to a maximum payment to the Riders of $200,000.00. The
Riders shall receive five percent (5 %) of the cash equivalent value
of non-cash proceeds resulting from the disposition of existing
equipment and cash proceeds resulting from any acquisition or merger
transaction. Brown Disc and Cole agree to keep the Riders fully
advised of any merger, acquisition, recapitalization or other
transaction which generates an obligation to pay the aforesaid sums to
the Riders at the time such transaction is consummated.
4. ACKNOWLEDGEMENT AND RELEASE OF IRREVOCABLE PROXIES: The
irrevocable proxies previously given by the Riders to Cole shall
remain in full force and effect during the remaining term of the
irrevocable proxies, all prior defects therein being hereby waived,
SAVE AND EXCEPT that 50,000 shares per month shall be released and
without further effect or restriction from the irrevocable proxies
given by the Riders to Cole, which 50,000 share releases shall first
occur concurrently with the date of this Settlement Agreement and
General Release, and shall continue on the same date of each
subsequent month for a period of 5 months until 250,000 shares are so
released, and that the irrevocable proxies given by Angenette Rider to
Cole shall
<PAGE> 3
be released and without further effect or restriction concurrently
with the date of this Settlement Agreement and General Release.
5. RELEASE FROM GUARANTEES: Brown Disc and Cole shall use
their best efforts hereafter to obtain the complete release of the
Riders from any and all Brown Disc debt that the Riders have
guaranteed. Until Brown Disc obtains the Riders' complete release
from all guaranteed debt, Brown Disc and Cole shall provide the Riders
evidence of all payments on debt guaranteed by the Riders as made, all
notices from the creditors of such debt as given and the remaining
outstanding balance of such debt by the tenth (10th) of each month
that the Riders remain as guarantors on the debt and shall provide
copies of any public announcements as and when released to the public.
6. RETIREMENT AND RESIGNATION: R. Eugene Rider acknowledges
and agrees that he has and shall be considered to have retired from
his employment with Brown Disc and permanently severed such employment
as of February 12, 1996. The Riders agree that they will not apply
for or otherwise seek re-employment with Brown Disc or any of its
successors at any time, and that Brown Disc has no obligation,
contractual or otherwise, to rehire, re-employ, recall, or hire them
in the future. The Riders specifically waive all claims for back pay,
future pay, or any other form of compensation, except as specifically
set forth in this Agreement.
The Riders resign as directors and officers of Brown Disc
effective February 12, 1996.
Brown Disc agrees that it will report to the Securities and
Exchange Commission on Form 10-QSB for the quarter ending March 31,
1996 and in the annual report for the year ending June 30, 1996 R.
Eugene Rider's severance from employment as a retirement from the
employment on February 12, 1996 and in no other manner.
7. RIDERS' REPRESENTATIONS: The Riders represent that they
have not filed any claims, complaints, charges, or lawsuits against
Brown Disc, Cole, its employees, or agents with any governmental
agency or any court, except for a claim for unemployment compensation,
and that they will not do so at any time hereafter for any matter,
claim, or incident known or unknown which occurred or arose out of
occurrences on or prior to the date of the retirement; provided,
however, this shall not limit the Riders from filing a claim or
lawsuit for the sole purpose of reinforcing their rights under this
Settlement Agreement and General Release.
8. MUTUAL RELEASE:
a. RELEASE BY THE RIDERS: In consideration of the promises of
Brown Disc and Cole as set forth in this Settlement Agreement and
General Release, the Riders, on their own behalf and on behalf of
their heirs, executors, and administrators, intending to be legally
bound,
<PAGE> 4
hereby irrevocably and unconditionally release Ronald H. Cole and
Brown Disc, its shareholders, agents, directors, officers, employees,
representatives, attorneys, subsidiaries, affiliates, and successors
(hereinafter referred to collectively as "Releasees") from any and all
causes of action, suits, claims, and demands whatsoever which the
Riders had, have or may have against Releasees of any nature
whatsoever, relating in any way to their relationship as directors,
officers and employees of Brown Disc or their severance of employment
with Brown Disc, including any claims under any federal, state, or
local laws, including Title VII of the Civil Rights Act of 1964, as
amended, Section 2000e, the Age Discrimination in Employment Act, as
amended, 29 U.S.C. Section 621-634 (1991), any common law claims,
defamation claims, fraud claims, negligence claims or interference
with contract claims, and all claims for counsel fees and costs. The
Riders do not waive rights or claims that may arise after the date
this Agreement is executed. The Riders further promise that neither
they, nor any person, organization, or other entity acting on their
behalf, will file, charge, claim, sue, cause, or permit to be filed,
charged, or claimed or brought, any action for damages or other relief
against Releasees involving any matter occurring in the past up to the
date of the execution of this Settlement Agreement and General Release
relating in any way to their employment by Brown Disc or the severance
of their employment or involving any continuing effects of actions or
practices which arose prior to the date of this Settlement Agreement
and General Release, or involving any matter based upon any claims,
causes of actions, damages, or liabilities which are the subject of
this Settlement Agreement and General Release.
b. RELEASE BY BROWN DISC: In consideration of the promises of
the Riders in this Settlement Agreement and General Release, Brown
Disc and Cole, on their own behalf and on behalf of Brown Disc's
stockholders, directors, officers, employees, agents, representatives,
attorneys, intending to be legally bound, hereby irrevocably and
unconditionally release the Riders and each of them, as well as their
heirs, executors, personal representative, and attorneys (hereafter
referred to as the "Releasees") from any and all causes of action,
suits, claims, and demands whatsoever which Brown Disc or Cole had,
has or may have against the Releasees of any nature whatsoever,
relating in any way to their relationship as directors, officers and
employees of Brown Disc or their severance of employment with Brown
Disc, including any claims under any federal, state, or local laws,
including any common law claims, breach of fiduciary duty claims,
fraud claims, negligence claims, claims of theft, misappropriation of
corporate property or opportunity or similar claims, and all claims
for counsel fees and costs. Brown Disc and Code do not waive rights
or claims that may arise after the date this Agreement is executed.
Brown Disc and Cole further promise that neither they, nor any person,
organization, or other entity acting on their behalf, will file,
charge, claim, sue, cause, or permit to be filed, charged, or claimed
or brought, any action for damages or other relief against Releasees
involving any matter occurring in the past up to the date of the
execution of this Settlement Agreement and General Release relating in
any way to the Riders' employment by Brown Disc or the severance of
their employment or involving any continuing effects of actions or
practices which arose prior to the date of this Settlement Agreement
and General Release, or involving any matter based upon any claims,
causes of actions, damages, or liabilities which are the subject of
this Settlement Agreement and General Release.
<PAGE> 5
9. INDEMNITY: In the event the Riders incur losses, costs,
damages, or expense, including without limitation, attorneys' fees
arising out of a claim against them while serving in their official
capacity and during the course of discharging their duties as an
officer or director of Brown Disc, Brown Disc agrees to indemnify and
hold the Riders and their estate harmless from any and all losses,
costs, damages, or expenses, including without limitation, attorneys'
fees, incurred by the Riders to the same extent that Brown Disc
indemnifies its other officers and directors.
10. MISCELLANEOUS PROVISIONS
a. This Agreement contains the complete agreement between
the parties and as of the effective date hereof shall supersede all
other agreement, either written or oral between the parties. The
parties agree that neither has made any representations or agreements
whether past, present or future except as are specifically set forth
in this Agreement. Each party acknowledges that it has relied on the
advice of its counsel and on its own judgment in entering into this
Agreement.
b. Any modification of this Agreement or additional
obligations assumed by either party in connection with this Agreement
shall be binding only if evidenced in writing, signed by each party or
an authorized representative of each party.
c. Invalidity of any portion of this Agreement will not
and shall not be deemed to effect the validity of any other provision.
In the event that any provision of this Agreement is held invalid, the
parties agree that the remaining provisions shall be deemed to be in
full force and effect as if they had been executed by both panics
subsequent to the expungement of the invalid provision.
d. It is the intention of the parties that this Agreement
and performance under this Agreement and all suits or other special
proceedings under the Agreement be construed in accordance with and
under and pursuant to the laws of the State of Colorado and that, in
any action, special proceeding or other proceeding that may be brought
arising out of or in connection with or by reason of this Agreement,
the laws of the State of Colorado shall be applicable and shall govern
to the exclusion of laws of any other forum, without regard to the
jurisdiction in which any action or special proceeding may be
instituted. Venue for any such action shall be in El Paso County,
Colorado.
e. In the event of any dispute between the parties
concerning this Agreement, or in the event of any action to enforce
this Agreement or to collect damages on account of any breach of the
obligations provided for herein, the prevailing party shall be
entitled to recover
<PAGE> 6
from the other party, all costs and expenses, including reasonable
attorneys' fees, incurred in such litigation as well as all additional
costs of collecting any judgment rendered in such action.
f. The failure of either party to this Agreement to insist
upon the performance of any of the terms and conditions of this
Agreement or the waiver of any breach of any terms and conditions of
this Agreement shall not bc construed as thereafter waiving any such
terms and conditions, but the same shall continue and remain in full
force and effect as if no such forbearance or waiver had occurred.
g. The covenants, agreements and obligations contained
herein shall extend to, bind and inure to the benefit not only of the
parties hereto but also their respective personal representatives,
heirs, successors and assigns, and succeeding entities (whether by
merger, acquisition, reorganization or otherwise).
h. Each party enters into this Agreement in good faith and
for the express purpose of acting in a manner that will result in the
complete performance of all the terms of this Agreement by its
parties. Any breach of this covenant of good faith shall be a breach
of this Agreement.
<TABLE>
<S> <C>
BROWN DISC PRODUCTS, INC.
By: /s/ RONALD H. COLE /s/ R. EUGENE RIDER
-------------------------- ----------------------------
Title: Chairman & CEO R. EUGENE RIDER
/s/ RONALD H. COLE /s/ EVA FORSBERG-RIDER
- ----------------------------- ----------------------------
RONALD H. COLE EVA FORSBERG-RIDER
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<CIK> 0000855373
<NAME> BROWN DISC PRODUCTS COMPANY, INC.
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> Jun-30-1996
<PERIOD-START> Jul-01-1995
<PERIOD-END> Mar-31-1996
<PERIOD-TYPE> 9-MOS
<CASH> 2,726
<SECURITIES> 0
<RECEIVABLES> 136,918
<ALLOWANCES> 7,904
<INVENTORY> 174,041
<CURRENT-ASSETS> 305,781
<PP&E> 1,558,081
<DEPRECIATION> 1,344,053
<TOTAL-ASSETS> 526,080
<CURRENT-LIABILITIES> 810,798
<BONDS> 0
133,067
218,820
<COMMON> 657,110
<OTHER-SE> (1,293,715)
<TOTAL-LIABILITY-AND-EQUITY> 526,080
<SALES> 924,833
<TOTAL-REVENUES> 924,833
<CGS> 727,795
<TOTAL-COSTS> 434,811
<OTHER-EXPENSES> (189,007)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,096
<INCOME-PRETAX> 46,896
<INCOME-TAX> 0
<INCOME-CONTINUING> 46,896
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,896
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
