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 July 31, 1998
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[ ] 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 registrant 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
................................................................................
(Registrant's telephone number, including area code)
................................................................................
(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 September 1, 1998 was 3,260,776.
Transitional Small Business Disclosure Format (check one)
|_| Yes |X| No
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISCAS, INC.
CONSOLIDATED BALANCE SHEET
July 31, April 30,
1998 1998
---------- ----------
(unaudited) (audited)
ASSETS
Current assets:
Cash and equivalents $ 196,587 $ 464,619
Accounts receivable 1,153,663 909,296
Inventory 933,200 976,967
Other current assets 46,206 56,868
---------- ----------
Total current assets 2,329,656 2,407,750
---------- ----------
Property and equipment (net) 2,403,873 2,434,584
Other assets 287,018 260,495
---------- ----------
$5,020,547 $5,102,829
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 928,223 $ 895,978
Accrued expenses 13,200 92,962
Line of credit 1,173,023 1,273,023
Current portion of capital leases 34,774 35,885
Current portion of long-term debt 419,452 425,335
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Total current liabilities 2,568,672 2,723,183
---------- ----------
Capital leases, excluding current portion 65,768 83,854
Long-term debt, excluding current portion 167,872 187,888
Related party loans 236,156 236,156
Stockholders' equity:
Common stock, par value $.0001 per share:
Authorized 20,000,000 shares
Outstanding 3,260,776 shares 326 321
Additional paid in capital 4,615,119 4,459,305
Accumulated deficit (2,633,366) (2,587,878)
---------- ----------
Total stockholders' equity 1,982,079 1,871,748
---------- ----------
$5,020,547 $5,102,829
========== ==========
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISCAS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Three months ended
July 31,
--------------------------
1998 1997
----------- -----------
Sales $1,374,346 $1,880,874
Cost of sales 1,104,025 1,417,110
----------- -----------
Gross Profit 270,321 463,764
Selling, general and administrative expenses 293,669 401,902
----------- -----------
Income (loss) from operations (23,348) 61,862
Other income (expense):
Gain on sale of fixed assets 18,000 -
Other income - 8,255
Interest expense (40,140) (83,819)
Amortization of deferred financing costs - (86,232)
----------- -----------
Net other expense (22,140) (161,796)
----------- -----------
Net loss $ (45,488) $ (99,934)
============ ============
Average number of shares outstanding 3,234,904 2,488,750
Net loss per share - basic and diluted $(.01) $(.03)
====== ======
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DISCAS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Three months ended
July 31,
------------------------------------
1998 1997
----------- ------------
Cash flows from operating activities:
Cash received from customers $ 1,133,576 $ 2,025,661
Cash paid to suppliers and employees (1,243,683) (1,832,988)
Interest paid (40,140) (62,743)
----------- -----------
Net cash provided (used) by operating activities (150,247) 129,930
----------- -----------
Cash flows from investing activities:
Payments on other assets (15,861) (84,901)
Purchases of fixed assets (56,828) (176,731)
----------- -----------
Net cash used by investing activities (72,689) (261,632)
----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt (25,899) (52,245)
Principal payments on capital leases (19,197) (9,034)
Proceeds from (payments on) credit line (100,000) 22,075
Proceeds from issuance of common stock and warrants 100,000 -
----------- -----------
Net cash used by financing activities (45,096) (39,204)
----------- -----------
Net increase (decrease) in cash (268,032) (170,906)
Cash and equivalents at beginning of period 464,619 173,100
----------- -----------
Cash and equivalents at end of period $ 196,587 $ 2,194
=========== ===========
Reconciliation of net loss to cash provided (used) by
operating activities:
Net loss $ (45,488) $ (99,934)
----------- -----------
Items which did not (provide) use cash:
Depreciation and amortization 93,942 86,693
Interest - 25,000
Deferred financing costs - 86,232
Working capital changes which provided (used) cash:
Accounts receivable (244,367) 144,787
Inventory 43,767 (112,991)
Other assets (26,523) 9,174
Prepaid expenses 10,662 13,200
Accounts payable 51,703 (24,149)
Accrued expenses (33,943) 1,918
----------- -----------
Net cash provided (used) by operating activities $ (150,247) $ 129,930
============ ===========
Noncash investing and financing activities:
Issuance of common stock in lieu of cash $ 45,819
===========
Issuance of warrants in lieu of cash $ 10,000
===========
PART I - FINANCIAL INFORMATION
DISCAS, INC.
July 31, 1998
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. All adjustments are
of a normal and recurring nature.
The results of operations for the interim periods are not necessarily indicative
of the results expected for the full year.
Certain 1997 amounts have been reclassified to conform to the 1998 presentation.
2. Inventories
Inventories are stated at the lower of cost or market as determined by the
average cost method.
Inventories consist of the following:
July 31, 1998 April 30, 1998
------------- --------------
Finished goods $477,363 $306,707
Raw materials and supplies 455,837 670,260
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$933,200 $976,967
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3. Property and equipment
Property and equipment are stated at cost and are depreciated over their useful
lives of 7-10 years. Depreciation is computed by using the straight-line method
for financial reporting purposes and straight-line and accelerated methods for
income tax purposes. Maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and betterments that extend the useful lives of
the assets are capitalized. The cost and related accumulated depreciation of
property and equipment retired or disposed of are removed from the accounts and
the resulting gains or losses are reflected in income.
Item 1. Financial Statements - Notes (Cont'd)
Property and equipment consist of the following:
July 31, 1998 April 30, 1998
------------- --------------
Machinery and equipment $3,398,746 $3,310,406
Leasehold improvements 86,091 86,091
Office equipment 146,589 144,424
Vehicles 26,282 64,556
Furniture and fixtures 17,465 29,868
---------- ----------
Total property and equipment 3,675,173 3,635,345
Less: accumulated depreciation (1,271,300) (1,200,761)
---------- ----------
Net property and equipment $2,403,873 $2,434,584
========== ==========
4. Other assets
Other assets consist of the following:
July 31, 1998 April 30, 1998
------------- --------------
Goodwill, net $197,402 $201,137
Security deposits 59,358 59,358
Other 30,258 -
-------- --------
$287,018 $260,495
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5. Economic dependency
In the quarter ended July 31, 1997, two customers accounted for approximately
31% of sales (17% and 14%, respectively).
6. Stockholders' equity
During the quarter ended July 31, 1998, warrants to acquire 40,000 shares of the
Company's common stock at $2.50 per share were exercised and 13,576 shares of
common stock were issued to satisfy obligations of the Company.
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 experience in
polymer technology, and has commercialized proprietary formulations used in the
manufacturing of plastics 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 this report 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,
certain of which are described herein, that could cause actual results to differ
materially from those indicated in the forward looking statements.
The Company sustained substantial losses from late 1997 through early 1998
predominantly as a result of a persistent negative supply/demand relationship in
the polypropylene industry which has been caused, in part, by over capacity, the
economic conditions in Asia and reduced prices for crude oil. These conditions
were most heavily felt in the Company's commodity compounding business beginning
in the Company's fiscal third quarter which, in many instances, produced
variable production costs which exceeded the product's related selling price.
The Company also built up its commodity compounding production capabilities by
acquiring equipment, hiring production personnel and establishing a
manufacturing facility in Statesville, North Carolina. When it became evident
that the industry downturn would persist for an extended period of time, the
Company had to radically change its strategic direction, at least for the short
term. Accordingly, the Company:
* reduced the production labor costs at its Waterbury, Connecticut plant
* suspended operations and sub-let a significant portion of the Statesville,
North Carolina facility
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
* implemented across the board reductions in management, sales and
administrative costs, including cut backs in personnel levels and costs
* instituted stringent cash preservation controls
* initiated discussions with other companies concerning merger, joint
venture and other consolidation opportunities.
As a result, the Company believes it is positioned to withstand the industry
downturn, if it can identify a new primary lender and actively participate in
the anticipated further consolidation of this industry.
The Consolidated Financial Statements of the Company as of and for the quarter
ended July 31, 1998 filed as part of this Form 10-QSB have been prepared in
accordance with generally accepted accounting principles applicable to a company
on a "going concern" basis, which except as otherwise noted, contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business; however, as a result of operating losses and current economic
conditions, such realization of assets and liquidation of liabilities are
subject to significant uncertainties. The Company's ability to continue as a
going concern is dependent on its ability to achieve profitable operations and
to restructure its bank debt. The Company is currently in default on its
existing bank debt and is in the process of finding another lending source.
However, no assurance can be given that another lending source will be found.
The Company expects to have a Year 2000 compliant computer system fully
operational by early 1999. The Company does not expect this project to have a
significant effect on operations and further expenditures are anticipated to be
immaterial (approximately $72,000 spent in fiscal 1998).
Discussions concerning the previously announced intent to merge with Futuramik
Industries, Inc. have ended. However, Discas and Futuramik are currently in
discussions to utilize Futuramik's injection molding operations to manufacture a
portion of the Christie product line under financial arrangements beneficial to
both parties.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
Results of Operations
Quarters Ended July 31, 1998 and 1997
Sales decreased by $506,528, or approximately 26.9%, to $1,374,346 for the
quarter ended July 31, 1998, as compared to $1,880,874 for the quarter ended
July 31, 1997. The reduction in sales is attributable to the Company's decision
to reduce its commodity compounding business as well as the conditions mentioned
above.
Cost of goods sold decreased by $313,085, or approximately 22.1%, to $1,104,025
for the quarter ended July 31, 1998, compared to $1,417,110 for the quarter
ended July 31, 1997. The decrease in cost of goods sold was attributable to
decreased sales volume. Cost of goods sold as a percentage of sales was 80.3%
for the quarter ended July 31, 1998 as compared to 75.3% in 1997.
Gross profit decreased by $193,443, or approximately 41.2%, to $270,321 for the
quarter ended July 31, 1998, as compared to $463,764 for the quarter ended July
31, 1997. Such decrease was primarily attributable to the decrease in sales
volume.
Selling, general and administrative costs decreased by $108,233, or
approximately 26.9%, to $293,669 for the quarter ended July 31, 1998 as compared
to $401,902 for the quarter ended July 31, 1997. The decrease in selling,
general and administrative costs is due to steps taken by the Company to
restructure its operations as a result of the industry downturn.
Operating income decreased by $85,210 to a loss of $23,348 for the current
quarter as compared to operating profit of $61,862 for the quarter ended July
31, 1997.
Deferred financing charges of $86,232 were amortized in the quarter ended July
31, 1997 (none in fiscal 1998) and this noncash charge is included in other
income (expense).
Net loss decreased by $54,446 to $45,488 for the quarter ended July 31, 1998 as
compared to a loss of $99,934 for the quarter ended July 31, 1997. The decrease
was primarily attributable to the elimination of amortization of deferred
financing charges.
Because of both a significant restructuring of operations and reduction in work
force, the results of operations for the quarter ended July 31, 1998 is
significantly improved as compared to the quarters ended October 31, 1997,
January 31 and April 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
Liquidity and Capital Resources
Financial Condition
The Company's operations for the year ended April 30, 1998 produced severely
depressed results because of a persistent negative supply/demand relationship in
the polypropylene industry which has been caused, in part, by over capacity, the
economic conditions in Asia and reduced prices for crude oil. As a result of
these conditions, the operations of the Company resulted in the Company being in
violation of certain financial covenants under its debt agreement with a
commercial bank and the Company's working capital position has eroded to a
significant degree. The Company's primary lender entered into a forbearance
agreement with the Company which requires that a new primary lender be in place
by October 30, 1998. The Company is presently negotiating with a new potential
lender. If a satisfactory arrangement is not consummated, this situation raises
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Cash and cash equivalents at July 31, 1998 amount to $196,587 and the Company
may realize another $150,000 in cash resulting from the exercise of outstanding
warrants to purchase common stock of the Company. If the warrants are exercised
and a new lender is found, management believes the Company can continue as a
going concern because it has significantly restructured its operations and made
significant reductions in its work force. As noted above, the results of
operations for the quarter ended July 31, 1998 are significantly improved over
the quarters ended October 31, 1997, January 31, 1998 and April 30, 1998. The
Company believes it is positioned to show continuing improvements from its
operations although it cannot predict with certainty when, if ever, profitable
operations will be achieved.
As disclosed in the Company's Form 10-KSB filed for the fiscal year ended April
30, 1998, the Company did not meet the minimum tangible net worth requirement of
$2,000,000 for listing on the NASDAQ SmallCap Market. The Company submitted its
plan to meet such requirement to NASDAQ on September 4, 1998. If the plan is not
approved by NASDAQ or the Company is not able to achieve an appropriate level of
income from operations over the long term, the Company's common stock and
warrants could be de-listed and trading would then only be available on the OTC
electronic bulletin board or the "pink sheets." If the Company is de-listed, its
ability to raise additional equity capital will be adversely impacted.
PART II - OTHER INFORMATION
DISCAS, INC.
July 31, 1998
Item 5. Other Information.
Discussions concerning the previously announced intent to merge with
Futuramik Industries, Inc. have ended. However, Discas and Futuramik are
currently in discussions to utilize Futuramik's injection molding operations to
manufacture a portion of the Christie product line under financial arrangements
beneficial to both parties.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Item Number
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 31, 1998, the Company filed a Current Report on Form
8-K to report that it had signed a letter of intent to merge with Futuramik
Industries, Inc. of Hartford, Connecticut.
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: September 14, 1998 By /s/ Ronald P. Pettirossi
Ronald P. Pettirossi
Chief Financial Officer