FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ctober 31, 1997
------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
001-13207
Commission file number 000-22827
DISCAS, INC.
................................................................................
(Exact name of small business issuer as specified in its charter)
DELAWARE 06-1175400
................................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
567-1 South Leonard Street, Waterbury, Connecticut 06708
................................................................................
(Address of principal executive offices) (Zip Code)
203-753-5147
................................................................................
(Issuer's telephone number)
................................................................................
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
l934 during the preceding 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.
|X| Yes |_| No
The number of shares outstanding of the issuer's single class of common
stock as of December 1, 1997 was 3,214,500.
Transitional Small Business Disclosure Format (check one)
|_| Yes |X| No
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISCAS, INC.
CONSOLIDATED BALANCE SHEET
October 31, April 30,
1997 1997
(unaudited) (audited)
ASSETS
Current assets:
Cash and equivalents $1,759,267 $ 173,100
Accounts receivable 1,151,491 1,244,554
Inventory 1,130,256 1,016,519
Prepaid expenses 280,793 15,599
---------- ----------
Total current assets 4,321,807 2,449,772
---------- ----------
Property and equipment (net) 2,204,905 1,846,615
Other assets 259,561 1,248,602
---------- ----------
$6,786,273 $5,544,989
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 932,952 $1,280,710
Accrued expenses 91,792 174,629
Line of credit - 490,000
Current portion of capital leases 22,667 30,416
Current portion of long-term debt 169,142 383,069
---------- ----------
Total current liabilities 1,216,553 2,358,824
---------- ----------
Line of credit 1,283,119 -
Capital leases, excluding current portion 41,863 48,101
Other Long-term debt, excluding current portion 540,008 2,162,777
Related party loans 123,734 123,734
Stockholders' equity:
Common stock, par value $.0001 per share:
Authorized 20,000,000 shares
Outstanding 3,214,500 and 2,254,500 shares, respectively 321 225
Additional paid in capital 4,481,008 822,677
Retained earnings (accumulated deficit) (900,333) 28,651
----------- ----------
Total stockholders' equity 3,580,996 851,553
---------- ----------
$6,786,273 $5,544,989
========== ==========
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISCAS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Three months ended Six months ended
October 31, October 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Sales $1,495,093 $1,094,867 $3,375,967 $2,054,136
Cost of sales 1,350,870 827,150 2,679,986 1,565,182
----------- ----------- ----------- -----------
Gross Profit 144,223 267,717 695,981 488,954
Selling, general and administrative expenses 573,165 187,309 1,063,061 419,580
----------- ----------- ----------- -----------
Income (loss) from operations (428,942) 80,408 (367,080) 69,374
Other expense:
Amortization of deferred financing costs (58,768) - (145,000) -
Interest expense (53,877) (18,961) (129,441) (39,850)
Other expense - - - (8,243)
----------- ----------- ----------- -----------
Net other expense (112,645) (18,961) (274,441) (48,093)
----------- ----------- ----------- -----------
Minority interest - 8,479 - 36,705
----------- ----------- ----------- -----------
Income (loss) before extraordinary item (541,587) 69,926 (641,521) 57,986
Extraordinary item - loss on extinguishment of debt (287,463) - (287,463) -
----------- ----------- ----------- -----------
Net income (loss) $ (829,050) $ 69,926 $ (928,984) $ 57,986
=========== ========== =========== ==========
Average number of shares outstanding 3,106,141 2,093,588 2,797,446 2,093,588
========= ========= ========= =========
Net income (loss) per share - primary
Income (loss) before extraordinary item (.18) .03 (.23) .03
Extraordinary item - loss on extinguishment of debt (.09) - (.10) -
------ ---- ------ ----
Net income (loss) $(.27) $.03 $(.33) $.03
====== ==== ====== ====
Income (loss) per share - fully diluted
Income (loss) before extraordinary item (.18) .03 (.23) .03
Extraordinary item - loss on extinguishment of debt (.09) - (.10) -
------ ---- ------ ----
Net income (loss) $(.27) $.03 $(.33) $.03
====== ==== ====== ====
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Additional Retained earnings
Number Common paid-in (accumulated
of shares stock capital deficit) Total
April 30, 1997 2,254,500 $225 $822,677 $28,651 $851,553
Net loss - - - (928,984) (928,984)
Sale of common stock
and warrants 800,000 80 2,650,473 - 2,650,553
Sale of underwriter over
allotment warrants - - 7,874 - 7,874
Issuance of common stock for
convertible promissory note 160,000 16 999,984 - 1,000,000
--------- ---- ---------- ---------- ----------
October 31, 1997 3,214,500 $321 $4,481,008 $(900,333) $3,580,996
========= ==== ========== ========== ==========
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISCAS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Six months ended
October 31,
1997 1996
------------ ------------
Cash flows from operating activities:
Cash received from customers $ 3,439,030 $1,686,134
Cash paid to suppliers and employees (4,330,833) (1,663,542)
Interest paid (129,441) (39,850)
------------ ------------
Net cash provided (used) by operating activities (1,021,244) (17,258)
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (525,903) (1,545)
------------ ------------
Net cash used by investing activities (525,903) (1,545)
------------ ------------
Cash flows from financing activities:
Net proceeds from offering of stock 3,190,878 -
Principal payments on long-term debt (836,696) (51,664)
Proceeds from long-term debt - 200,000
Principal payments on capital leases (13,987) (82,772)
Proceeds from credit line 793,119 -
Payments of offering costs - (38,379)
------------ ------------
Net cash provided by financing activities 3,133,314 27,185
------------ ------------
Net increase in cash 1,586,167 8,382
Cash and equivalents at beginning of period 173,100 183,546
------------ ------------
Cash and equivalents at end of period $ 1,759,267 $ 191,928
=========== ===========
Reconciliation of net loss to cash provided (used) by
operating activities:
Net income (loss) $ (928,984) $ 57,986
------------ ------------
Items which did not (provide) use cash:
Depreciation and amortization 174,780 65,744
Minority interest - (36,705)
Amortization of deferred financing costs 145,000 -
Extraordinary item 287,463 -
Working capital changes which provided (used) cash:
Accounts receivable 63,063 (359,759)
Inventory (113,737) 88,517
Other assets 46,960 (38,986)
Prepaid expenses (265,194) (6,616)
Accounts payable (347,758) 227,239
Accrued expenses (82,837) (14,678)
------------ ------------
Net cash provided (used) by operating activities $(1,021,244) $ (17,258)
============ ============
Schedule of non-cash investing and financing activities:
Financed acquisitions $ - $1,567,904
========== ==========
Acquisition of minority interest $ - $ 172,402
========== ==========
Deferred financing costs $ - $ 608,500
========== ==========
Exchange of convertible debt for stock $1,000,000 $ -
========== ==========
PART I - FINANCIAL INFORMATION
DISCAS, INC.
October 31, 1997
Item 1. Financial Statements - Notes
1. Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and in the opinion
of the Company include all adjustments necessary to present fairly the results
of operations, financial position and changes in cash flow.
The results of operations for the interim periods are not necessarily indicative
of the results expected for the full year.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted for periods ending
after December 15, 1997. Earlier application is not permitted. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. Implementation of these new requirements would
not have a material effect on the calculation of primary earnings or diluted
earnings per share for the three and six month periods ended October 31, 1997
and 1996.
2. Inventories
Inventories consist of the following:
October 31, 1997 April 30, 1997
---------------- --------------
Finished goods $ 511,105 $ 212,148
Raw materials and supplies 619,151 804,371
---------- ----------
$1,130,256 $1,016,519
---------- ----------
3. Property and equipment
Property and equipment consist of the following:
October 31, 1997 April 30, 1997
---------------- --------------
Machinery and equipment $2,958,888 $2,436,533
Leasehold improvements 64,966 63,843
Office equipment 74,922 68,402
Vehicles 59,673 58,206
Furniture and fixtures 16,230 22,098
---------- ----------
Total property and equipment 3,174,679 2,649,082
Less: accumulated depreciation 969,774 802,467
---------- ----------
Net property and equipment $2,204,905 $1,846,615
========== ==========
PART I - FINANCIAL INFORMATION
DISCAS, INC.
October 31, 1997
Item 1. Financial Statements - Notes (Cont'd)
4. Prepaid expenses
Prepaid expenses consist of the following:
October 31, 1997 April 30, 1997
---------------- --------------
Consulting agreements $198,192 $ -
Rent 59,263 -
Other 23,338 15,599
-------- -------
$280,793 $15,599
======== =======
5. Other assets
Other assets consist of the following:
October 31, 1997 April 30, 1997
---------------- --------------
Deferred offering costs $ - $ 532,148
Deferred financing costs, net - 432,463
Goodwill, net 208,607 216,077
Security deposits 31,911 32,310
Other 19,043 35,604
-------- ----------
$259,561 $1,248,602
======== ==========
6. Economic dependency
In the six month period ended October 31, 1997, two customers accounted for
approximately 29% of sales (15% and 14%, respectively); in the six month period
ended October 31, 1996, three customers accounted for approximately 57% of sales
(27%, 18% and 12%, respectively).
7. Initial public offering
During August 1997 (effective date August 14 - file number 333-26543), the
Company concluded an initial public offering of 800,000 units of its common
stock and warrants ($5.00 per share and $.10 per warrant) for total gross
proceeds of $4,080,000 and, subsequently, the sale of 102,000 underwriter over
allotment warrants for $7,874. The managing underwriters of the offering were
Roan Capital Partners L.P. and Merit Capital Associates, Inc. The following
estimated costs were deducted or paid from the proceeds:
Underwriters' commissions $408,000
Underwriters' expenses 82,400
Underwriters' legal fees 45,648
Accounting and audit fees 60,000
Legal fees 155,022
Printing costs 60,000
Other consulting fees, stock exchange and miscellaneous expenses 79,531
--------
$890,601
========
Item 1. Financial Statements - Notes (Cont'd)
In addition, the Company had previously paid $538,846 of $606,942 of deferred
offering costs related to the initial public offering. Such amounts had been
recorded as deferred assets on the consolidated balance sheet.
Accordingly, as a result of the foregoing, common stock was increased by $80 and
additional paid in capital was increased by $2,650,473.
The Company also:
Paid off its bridge loan ($360,000) and related accrued interest
($13,583).
Converted its $1,000,000 convertible promissory note payable into 160,000
shares of its common stock; this resulted in an increase of $16 in common
stock and an increase of $999,984 to additional paid in capital.
Paid $85,300 to its principal underwriter, Roan Capital Partners L.P., for
a two year consulting agreement. Such amount will be amortized on a pro
rata basis over the two year period ending September 30, 1999.
Acquired machinery and equipment at a cost of approximately $304,000.
Added approximately $2,434,000 to its working capital.
8. Extraordinary item
The extraordinary loss of $287,463 resulted from the extinguishment of debt of
$375,000. The debt was issued in connection with a stockholder transaction in
the fiscal year ended April 30, 1997 as the Company was preparing for its
initial public offering.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company produces proprietary plastic and rubber compounds using a variety of
recycled and prime (virgin) materials. The Company has extensive expertise in
polymer technology, and has commercialized proprietary formulations used in the
manufacturing of products in the footwear, aeronautic, military, automotive and
consumer products sectors. During November 1996, the Company acquired the assets
of a plastic container manufacturer in New Jersey, Christie Enterprises, Inc.
(the "Christie Acquisition").
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. The Company cautions readers that forward looking
statements, including without limitation, those relating to the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, and income, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements.
The results of operations in the second quarter have been adversely affected by
a sharp drop in the commodity price of virgin polypropylene, which significantly
impacted margins for the Company's commodity grades of recycled polypropylene.
While polypropylene demand has grown steadily, the supply/demand relationship
has been cyclical and the present oversupply is severe by historical standards.
While management believes that market conditions will improve by the end of the
fiscal year, it is entirely possible that prices for the Company's commodity
plastic products will not increase or may decrease further. The Company has
taken certain steps which are intended to improve its margins even if the
downturn in the market for polypropylene is prolonged, including acquiring
certain end-product lines which would benefit from the lower raw material costs,
acquiring a processing facility in North Carolina in order to lower the
Company's production costs and by adding a production line in its Connecticut
facility which will alleviate problems associated with the Company's limited
compounding production capacity. Such completed actions, and possible
acquisitions which may be undertaken in the future, could in themselves have
adverse effects on the Company's performance. Such acquisitions also have the
effect of utilizing the Company's cash resources for acquisition costs and
working capital, which removes such cash resources from availability for other
purposes in the future.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
Results of Operations
Three Month Periods Ended October 31, 1997 and 1996
Sales increased by $400,226, or approximately 37%, to $1,495,093 for the three
month period ended October 31, 1997, as compared to $1,094,867 for the three
month period ended October 31, 1996. The 1997 sales include $805,185 related to
the Christie Acquisition. In the three month period ended October 31, 1996, the
Company made sales to the Christie predecessor company of $179,107.
Cost of goods sold increased by $523,720, or approximately 63%, to $1,350,870
for the three month period ended October 31, 1997, compared to $827,150 for the
three month period ended October 31, 1996. The increase in cost of goods sold
was attributable to increased sales volume, due to the Christie Acquisition.
Cost of goods sold as a percentage of sales was 90.3% for the three month period
ended October 31, 1997 as compared to 75.5% in 1996. The increase in cost of
sales as a percent of sales is related to the margin reduction in products sold
because of the excess supply of virgin plastic raw material, the normal slowdown
in sales experienced in August because of customer plant shutdowns, a
non-recurring inventory adjustment of approximately $68,000 and employee
training costs associated with the new production line which commenced
operations on December 1.
The imbalance in raw material supply and demand led to both significant
reductions in selling price of recycled polypropylene material (beginning late
September 1997) and depressed sales levels that resulted in significant
reductions in the Company's expected sales for the quarter. Although the price
of polypropylene feedstocks of raw material used by the Company also dropped,
the decrease was not enough to allow the Company to maintain the gross margins
achieved in the quarter ended July 31, 1997 or in the quarter ended October 31,
1996. Even though this type of imbalance of virgin plastic raw material had been
previously experienced, this cycle has been unusually severe. The Company
believes this situation could exist for the balance of its fiscal year and
management has responded to the current market conditions by taking the
following actions:
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
The acquisition of the assets of the AKD division of Ash-Kourt Fabrics,
Inc. and establishment of a manufacturing operation in Statesville, North
Carolina in October 1997. This strategic expansion will provide the Company
access to a supply of lower cost raw materials and will substantially
reduce transportation costs. This step is also expected to increase the
Company's customer base and eliminate bottlenecks in the preprocessing of
feedstocks.
The acquisition of a nursery container product line of Union Products,
Inc. and initiation of discussions with other plastic processors and
manufacturers to increase the Company's customer base in order to exploit
the opportunities associated with the Company's vertical integration
consolidation strategy. As the Company implements this part of its
strategy, it will have significantly expanded its capacity for the
production of fabricated products and should allow the Company to hedge its
operating performance during periods of raw material supply imbalance.
The vertical integration of the Statesville, North Carolina operation to
include the manufacture, warehousing and distribution of plastic end-user
products for the Company's customers located in the Southeast.
Installation of another production line at its Waterbury, Connecticut
facility. This will allow the Company to: (i) aggressively respond to new
sales opportunities, (ii) pursue higher margin sales, and (iii) increase
production efficiencies.
The acquisition of the AKD assets, the installation of additional production
capacity and the employee training program should allow the Company to both
approximately double its production capacity for materials processing and
enhance operating efficiencies.
The Company expects to achieve the full benefits of the foregoing actions in its
fiscal year commencing May 1, 1998.
Gross profit decreased by $123,494, or approximately 46.1%, to $144,223 for the
three month period ended October 31, 1997, as compared to $267,717 for the three
month period ended October 31, 1996. Such decrease is due to the matters
discussed above.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
Selling, general and administrative costs increased by $385,856, or
approximately 206%, to $573,165 for the three month period ended October 31,
1997 as compared to $187,309 for the three month period ended October 31, 1996.
The increase is attributable to the hiring of additional personnel and the
associated costs for employee benefit programs, consulting expenses, travel and
marketing expenses and additional facilities costs as the Company continued to
implement its strategy for growth. It is expected that these costs will be
reduced as a percentage of sales as the Company continues its sales growth.
Selling, general and administrative costs related to the Christie Acquisition
amounted to approximately $184,000 for the three month period ended October 31,
1997.
Operating income decreased by $509,350 to a loss of $428,942 for the current
three month period ended October 31, 1997 as compared to income of $80,408 from
the three month period ended October 31, 1996.
Deferred financing charges of $58,768 were amortized in the three month period
ended October 31, 1997 (none in fiscal 1996) and this noncash charge is included
in interest expense. In addition, the related debt was extinguished in October
1997 and the remaining unamortized deferred financing charges ($287,463) were
expensed.
Net loss increased by $898,976 to $829,050 for the three month period ended
October 31, 1997 as compared to income of $69,926 for the three month period
ended October 31, 1996. The increase was primarily attributable to the downturn
in the industry and the charges and other interest costs incurred to continue
the implementation of the Company's growth strategy.
Six Month Periods Ended October 31, 1997 and 1996
Sales increased by $1,321,831, or approximately 64.3%, to $3,375,967 for the six
month period ended October 31, 1997, as compared to $2,054,136 for the six month
period ended October 31, 1996. The 1997 sales include $1,784,910 related to the
Christie Acquisition. In the six months ended October 31, 1996, the Company made
sales to the Christie predecessor company of $423,782.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
Cost of goods sold increased by $1,114,804, or approximately 71.2%, to
$2,679,986 for the six month period ended October 31, 1997, compared to
$1,565,182 for the six month period ended October 31, 1996. The increase in cost
of goods sold was attributable to increased sales volume, due to the Christie
Acquisition. Cost of goods sold as a percentage of sales was 79.4% for the six
month period ended October 31, 1997 as compared to 76.2% in 1996. Cost of sales
as a percent of sales increased because of excess supplies of virgin plastic raw
materials and its pressure on selling prices and the corresponding sales levels
during the current quarter, a non-recurring inventory adjustment and employee
training expenses. This negative situation more than offset the improved margins
experienced by the Company in the quarter ended July 31, 1997. Those benefits
related primarily to reductions in the cost of raw materials because of the
effect of buying larger quantities of raw materials.
Gross profit increased by $207,027, or approximately 42.3%, to $695,981 for the
six month period ended October 31, 1997, as compared to $488,954 for the six
month period ended October 31, 1996. Such increase was primarily attributable to
the net impact of increases in sales volume and reductions in raw material costs
which were offset by the negative effect of the excess in virgin raw material
supplies, the non-recurring inventory adjustment and employee training expenses.
Selling, general and administrative costs increased by $643,481, or
approximately 153.4%, to $1,063,061 for the six month period ended October 31,
1997 as compared to $419,580 for the six month period ended October 31, 1996.
The increase is attributable to the hiring of additional personnel and the
associated costs for employee benefit programs, consulting expenses, travel and
marketing expenses and additional facilities costs as the Company continued to
implement its strategy for growth. Management has made the decision to
accelerate the building of management infrastructure so that the Company will be
both prepared to respond to future opportunities and quickly respond to changes
in the market. Selling, general and administrative costs related to the Christie
Acquisition amounted to approximately $321,000 for the six month period ended
October 31, 1997.
Operating income decreased by $436,454 to a loss of $367,080 for the current six
month period ended October 31, 1997 as compared to income of $69,374 from the
six month period ended October 31, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
Deferred financing charges of $145,000 were amortized in the six month period
ended October 31, 1997 (none in fiscal 1996) and this noncash charge is included
in interest expense. In addition, the related debt was extinguished in October
1997 and the remaining unamortized deferred financing charges ($287,463) were
expensed.
Net loss increased by $986,970 to $928,984 for the six month period ended
October 31, 1997 as compared to income of $57,986 for the six month period ended
October 31, 1996. The increase was primarily attributable to the raw material
supply imbalance mentioned above, the increase in selling, general and
administrative costs and to the amortization of deferred financing charges and
other interest costs incurred to continue the implementation of the Company's
growth strategy.
Liquidity and Capital Resources
Financial Condition
During August 1997, the Company concluded the initial public offering of its
common stock and warrants. As described in Note 7 to the interim financial
statements included in Item 1 to this report, this has significantly improved
the Company's working capital position.
During September 1997, the Company expanded its bank revolving line of credit
facility from $700,000 to $1,500,000, under substantially the same terms and
conditions.
Unless the raw material imbalance and the associated pricing pressures described
above continue for an extended period, the proceeds from the initial public
offering, the expanded credit facility and expected cash flow from operations
are expected to provide sufficient funds for the Company to meet its working
capital, capital expenditure and debt service requirement needs at least through
the fiscal year ending April 30, 1999. Additional funds may be required if the
Company is successful in expanding its business through internal growth and/or
acquisitions of businesses in related industries.
Accordingly, the Company believes it has the financial resources to operate
effectively during the current industry downturn. As the raw material supply
imbalance noted above is corrected, the Company believes it is positioned to use
its financial resources to improve operating results.
PART II - OTHER INFORMATION
DISCAS, INC.
October 31, 1997
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
On November 4, 1997, the Company filed a Current Report on Form 8-K ,
Item 2, to report the acquisition of the operating assets of the AKD Division of
Ash-Kourt Fabrics, Inc. and the establishment of a manufacturing operation in
Statesville, North Carolina. The Company also reported the acquisition of the
nursery container product line of Union Products, Inc.
SIGNATURES
Pursuant to the requirements 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:
DISCAS, INC.
Registrant
Date: December 15, 1997 By /s/ Ronald P. Pettirossi
Ronald P. Pettirossi
Chief Financial Officer