DISCAS, INC.
Filing Type: 10QSB
Description: Quarterly Report
Filing Date: April 17, 2001
Period End: July 31, 1999
Primary Exchange: Boston Stock Exchange
Ticker: DSCS
Table of Contents
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10QSB
Consolidated Balance Sheet.....................................................3
Consolidated Statements of Operation...........................................4
Consolidated Statements of Cash Flows..........................................5
Notes to Consolidated Financial Statements.....................................6
Management's Discussion, Extraordinary Item....................................7
Results of Operations..........................................................8
Liquidity and Capital Resources................................................9
Management....................................................................10
Employment Agreements.........................................................11
Signatures....................................................................11
EX-27
Exhibit 27 Table..............................................................12
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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, 1999
-------------------------------------------------
[ ] 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 July 31, 1999 was 3,390,776.
Transitional Small Business Disclosure Format (check one)
|_| Yes |X| No
Page 2
DISCAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, April 30,
1999 1999
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 213,473 $ 60,055
Accounts receivable, net of allowance for
doubtful accounts of $51,415 468,027 671,399
Inventory, net of allowance for
obsolescence of $75,000 138,312 285,251
Prepaid expenses 2,664 --
---------- ----------
Total current assets 822,476 1,016,705
Property and equipment (net) 1,430,087 1,495,420
Other assets
Deposits and other assets 50,153 37,453
---------- ----------
$2,302,716 $2,549,578
========== ==========
LIABILITIES AND DEFICIENCY IN ASSETS
Current liabilities:
Accounts payable $ 1,177,551 $ 1,112,739
Accrued expenses 123,612 207,455
Line of credit 1,251,441 1,214,776
Obligations under capital leases 74,981 86,575
Note payable 220,333 237,983
----------- -----------
Total current liabilities 2,847,918 2,859,528
Related party loans 112,312 112,312
----------- -----------
Deficiency in assets:
Common stock, par value $.0001 per share:
authorized 20,000,000 shares, 3,390,776
shares issued and outstanding 339 339
Additional paid in capital 4,705,106 4,705,106
Accumulated deficit (5,362,959) (5,127,707)
----------- -----------
Total deficiency in assets (657,514) (422,262)
----------- -----------
$ 2,302,716 $ 2,549,578
=========== ===========
The accompanying notes are an integral part of these financial statements.
Page 3
DISCAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Three
Months ended Months ended
July 31, July 31,
1999 1998
Sales $ 657,013 $ 1,374,346
Cost of sales 573,685 1,104,025
----------- -----------
Gross profit 83,328 270,321
Selling, general and administrative expenses 294,873 293,669
----------- -----------
Loss from operations (211,545) (23,348)
----------- -----------
Other income (expense):
Gain on sale of fixed assets -- 18,000
Interest expense 23,707 (40,140)
----------- -----------
Net other expense (23,707) (22,140)
----------- -----------
Net loss $ (235,252) $ (45,488)
=========== ===========
Average number of shares outstanding 3,390,776 3,234,904
=========== ===========
Net loss per share (Basic and Diluted): $ (0.07) $ (0.01)
=========== ===========
The accompanying notes are an integral part of these financial statements
Page 4
DISCAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended July 31,
1999 1998
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(235,252) $ (45,488)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation expense 84,714 93,942
Interest expense 36,665 --
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable 203,372 (244,367)
Decrease in inventory 146,939 43,767
Increase in other assets (12,700) (26,523)
(Increase) Decrease in prepaid expenses (2,664) 10,662
Increase in accounts payable 79,485 51,703
Decrease in accrued expenses (98,517) (33,943)
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 202,042 (150,247)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on other asset -- (15,861)
Acquisition of property & equipment (19,380) (56,828)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (19,380) (72,689)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (19,102) (25,899)
Proceeds from common stock and warrants -- 100,000
Principal payments on obligations under capital leases (10,142) (19,197)
Principal payments on line of credit -- (100,000)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES (29,244) (45,096)
--------- ---------
NET INCREASE (DECREASE) IN CASH 153,418 (268,032)
CASH AND EQUIVALENTS, beginning of period 60,055 464,619
--------- ---------
CASH AND EQUIVALENTS, end of period $ 213,473 $ 196,587
========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ -- $ --
Interest capitalized $ 36,665 $ --
Issuance of common stock for
Services rendered $ -- $ 45,819
Issuance of warrants for
services rendered $ -- $ 10,000
The accompanying notes are an integral part of these financial statements.
Page 5
DISCAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999
1. Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for 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 1998 amounts have been reclassified to confirm to the 1999 presentation.
2. Reorganization subsequent to bankruptcy
On June 4, 1999, as a result of a decline in the Company's results of operations
reflecting, among other factors, the deterioration in demand and selling prices,
the Company filed A petition for reorganization under Chapter 11 of the United
States Bankruptcy Code and subsequently began operating its business as debtor
in possession under the supervision of the Bankruptcy Court.
3. Inventory
Inventory is stated at the lower of cost or market as determined by the average
cost method.
Inventories consist of the following:
July 31, April 30,
1999 1999
Finished goods $ 24,900 $ 53,832
Raw materials 113,412 231,419
--------- ---------
$ 138,312 $ 285,251
========= =========
4. 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.
Property and equipment consist of the following:
July 31, April 30,
1999 1999
Machinery and equipment $2,534,716 $2,515,335
Leasehold improvements 100,615 134,707
Office equipment 129,983 129,983
Vehicles 64,556 64,556
Furniture and fixtures 19,042 19,043
---------- ----------
Total property and equipment 2,848,912 2,863,624
Less: accumulated depreciation (1,418,825) (1,368,204)
---------- ----------
Net property and equipment $1,430,087 1,495,420
========== ==========
Page 6
5. Economic dependency
In the quarter ended July 31, 1999, two customers accounted for approximately
19% of sales (11% and 8%, respectively).
DISCAS, INC JULY 31, 1999 10-QSB
MANAGEMENT'S DISCUSSION and
ANALYSIS of FINANCIAL CONDITION and
RESULTS of OPERATIONS
EXTRAORDINARY ITEM
On May 26, 1999, the Company's lending bank notified the company of its election
to exercise its rights and remedies as a secured party under certain loan
agreements, to take possession of its collateral at the Waterbury, Connecticut
plant and headquarters of Discas, Inc. The decline in the Company's results of
operations reflecting, among other factors, the deterioration in demand and
selling prices was cited along with the uncertainty of adequate working capital
resources and future operating profits.
On May 28, 1999 the Board of Directors of Discas, Inc. authorized the President
of the Company to secure immediate legal advise, and, if so advised, to file a
voluntary petition for reorganization pursuant to Chapter 11 of the United
States Bankruptcy Code. On June 4, 1999 the Company filed for Chapter 11
reorganization in New Haven, Connecticut bankruptcy court. Management was
advised by counsel that this action was necessary in order to prevent a complete
and immediate shut-down of the company, which would not be in the best interests
of the unsecured creditors, stockholders and customers who rely on Discas as
their sole source of specialty rubber compounds for military and aerospace
applications, or proprietary horticulture containers specified for use in
automatic planting systems.
The Company began operating its business as debtor in possession under the
supervision of the Bankruptcy Court in June, 1999. The Company has met all
requirements, including preservation of secured party collateral, to operate the
Company as debtor in possession through the period ended July 31, 1999. There
can no assurance that the Company will be able to continue to meet requirements
to operate as debtor in possession in the future. The Company will continue to
file motions and financial and operating reports with the Bankruptcy Court, U.S.
Trustee and other parties as required.
Page 7
The Company has initiated a revised business plan to further consolidate
operations and significantly reduce variable costs and fixed overhead with the
objective of returning the Company to profitability as soon as possible. The
Company currently has sub-contracted production of more than a dozen Christie
containers with local custom molders in order to maintain critical supply
continuity following the recent shutdown of the New Jersey molding plant. The
revised business plan calls for reductions in non-production personnel and
relocation of Christie container production from sub-contractors to the
Company's Waterbury, Connecticut plant. The Company will utilize leased molding
equipment and other molding equipment previously held in Waterbury storage,
which are currently being installed for August, 1999 start-up. Higher profit
margins from container sales are anticipated when in-house molding begins.
RESULTS OF OPERATIONS
Due to the Chapter 11 filing and motions contested by the secured lender, the
Company was not able to secure funding approval from the Bankruptcy Court for a
complete audit of the fiscal year ended April, 1999 results. A partial funding
approval was obtained to have current auditors complete an audit of inventory as
of July 31, 1999. The accompanying unaudited condensed financial statements have
been prepared in accordance with the instructions for 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 period are not necessarily indicative of the
results expected for the full year.
THREE-MONTH PERIODS ENDING JULY 31, 1999 and 1998
Sales decreased by $717,333, or approximately 52.2%, to $657,013 for the three
month period ended July 31, 1999, as compared to $1,374,346 for the three month
period ended July 31, 1998.The reduction in sales is attributed to the shutdown
of the New Jersey molding plant in April, 1999, which was in full production in
the quarter ended July, 1998, as well as the Company's decision to exit the
commodity recycled plastics market. Additional sales were lost during the
quarter ended July 31, 1999 due to delays in production start-up at three
sub-contractors molding facilities. Lower sales also resulted from severe
working capital restraints associated with operating the business as debtor in
possession. Inventory levels were minimized causing some loss in seasonal orders
due to missed delivery dates.
Cost of goods sold decreased by $530,340, or approximately 48%, to $573,685 for
the three-month period ended July 31, 1999, as compared to $1,104,025 for the
three-month period ended July 31, 1998. The decrease in cost of goods sold was
attributed to the reduced sales volume. Cost of goods sold as a percentage of
sales was approximately 87.3% for the three-month period ended July 31, 1999,
including higher than standard costs due to the use of sub-contractors during
this transition period. This compares with the cost of goods sold as a
percentage of sales of approximately 80.3% for the three-month period ended July
31, 1998.
Gross profits decreased by $186,993 to $83,328 for the three months ended July
31, 1999, as compared with a gross profit of $270,321 for the three month period
ended July 31, 1998. The decrease in gross profit is attributable to the
decrease in sales for the period as well as higher COGS associated with the use
of sub-contractor manufacturing.
Selling, general and administrative costs increased by $1,204to $211,545 for the
three month period ended July 31, 1999, as compared to a loss of $23,348 for the
three month period ended July 31, 1998. The operating loss increase was
attributable to the reduced sales level without an accompanying proportional
reduction in SG&A costs, as described above.
Page 8
Net loss increased by $189,764 of approximately 417%, to $235,252 for the three
month period ended July 31, 1999, as compared to a net loss of $45,488 for the
three month period ended July 31, 1998. The net loss for the period ended July
31, 1999 included a $75,000 adjustment for inventory obsolescence.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR PROVISION" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
When used in this report, the words "believe," "plan," "anticipates," "expects"
and similar expressions are intended to identify "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are subject to certain risks and uncertainties, including those discussed below,
that could cause actual results to differ materially from those stated. All of
these forward-looking statements are based on estimates and assumptions made by
management of the Company, which although believed to be reasonable, are
inherently uncertain and difficult to predict. There can be no assurance that
the benefits or results anticipated in these forward-looking statements will be
achieved. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations for the three-month period ended July 31, 1999 produced
severely depressed results primarily due to the gap in production and sales
associated with the closing of the New Jersey molding plant and the disruption
in operations caused by the calling of the lender loans and subsequent Chapter
11 filing by the Company. Management's activities in June and July of 1999 were
concentrated on efforts to meet requirements and present and support motions to
the Bankruptcy Court to allow the Company to operate as debtor in possession
until a plan of reorganization could be developed. Results were also negatively
impacted by the installation and start-up costs in July, 1999 of molding
machines at the Company's Waterbury plant.
High account receivable collections and low cash payments while operating under
the supervision of the Bankruptcy Court during the three-month period ended July
31, 1999 resulted in an increase in cash from $60,055 on April 30, 1999 to
$213,473 on July 31, 1999.
The Company has not been successful to date in obtaining financing for its
operations and it is doubtful that traditional lenders will agree to provide
alternate financing while the company is in Chapter 11. There can be no
assurance that the Company will produce enough profits and working capital to
continue operations as debtor in possession or otherwise. Management's primary
short term goal is to stabilize operations to the extent necessary to continue
operating as debtor in possession by meeting all financial and legal
requirements of the Bankruptcy Court and secured lender.
Management believes that a consolidated molding operation combined with the
small but profitable specialty rubber compounds business can be a profitable
entity if run efficiently at the Waterbury, Connecticut facility. A tentative
plan of reorganization is being developed to determine the feasibility of such
an operating plan under the current Company legal structure.
Page 9
As disclosed in Form 10-KSB of fiscal year ended April 31, 1999, Discas
securities were moved from the NASDAQ SmallCap Market to the OTC Bulletin Board
on February 9, 1999. On February 24, 1999, the Company submitted a request for
review of the Qualifications Hearing Panel decision. The Company is awaiting the
Review Panel's response. There is no assurance that Discas securities will be
reinstated for NASDAQ listing, which could adversely impact the Company's
ability to raise additional equity capital. Additionally, the lack of approval
by the Bankruptcy Court and secured lender to appropriate funds for a full audit
for the fiscal year ended April 30, 1999 may eventually jeopardize trading of
Discas, Inc. common stock on both the OTC and SmallCap markets. Management will
file requests for extensions for audited reports until the matter of auditor
funding is resolved. There is no assurance that trading of the Company's common
stock will continue if audited reports are not submitted in a timely manner.
MANAGEMENT
The directors and executive officers of the company are follows:
Name Age Position
- ---- --- --------
Patrick A. DePaolo, Sr. 58 Chairman of the Board of Directors
Chief Executive Officer, President
and Chief Financial Officer
Thomas R. Tomaszek 48 Director
John Carroll 54 Director
Patrick A. DePaolo, Chairman of the Board of Directors, President, CEO
and CFO. Prior to founding Discas in 1985, Mr. DePaolo worked at Uniroyal
Chemical Corp. for 11 years where he has overall responsibility for the
development and marketing of thermoplastic elastomers. In 1974, he established
Prolastomer, Inc, ("Prolastomer") to develop compounds for footwear, sporting
goods and automotive applications. Mr. DePaolo has extensive management
experience in the field of plastics compounding and processing and considered a
leading technical expert in developing new applications for scrap polymers. He
has degrees in Chemical Engineering (B.S.) from the University of Massachusetts
at Amherst and Polymer Chemistry (M.S.) from Southern Connecticut State
University and has published articles and text book chapters in the field of
polymer chemistry. Mr. DePaolo has extensive business experience and has founded
or been a partner in several plastics companies including J-Von, Bailey III,
Inc., Prolastomer, and NexVal Plastics. Of these, only J-Von remains in
existence, and the Company conducts a substantial amount of business with J-Von.
See "Certain Transactions" and "Risk Factors - Possible Conflicts of Interest."
Thomas R. Tomaszek, Director. Mr. Tomaszek has over 20 years management
experience in plastics, recycling equipment, design, and operations. In addition
to his experience in equipment and facility development, Mr. Tomaszek has held
senior marketing positions with 3 plastics manufacturing firms, Rapid Granulator
Company, Nelmor Company and Eaglebrook-East. He was also manager of
manufacturing operations of Plastics Again, a Genpak and Mobil Corporation joint
venture polystyrene recycling facility and, more recently, from post-consumer
polyethylene film and plastic bottle recycling plant. From 1993 to 1996 he was
Vice President and General Manager of operations at SBU Operations, a recycling
equipment manufacturing subsidiary of DelCorp., Inc. Mr. Tomaszek joined Discas
in April, 1996.
John Carroll, Director. Mr. Carroll became a Director of the Company in
November, 1996. Mr. Carroll is the founder, Chairman of the Board and Chief
Executive Officer of Newgrange Co., a holding company created in 1990, which
controls various commercial entities, several of which are in the polymer
industry. Prior to founding Newgrange Co., Mr. Carroll served as Chief Financial
Officer of Leach and Garner Manufacturing Co., and worked at Arthur D. Little
for 12 years as a consultant. Mr. Carroll received an M.B.A. from the Graduate
School of Business of Columbia University. Mr. Carroll is currently managing
member of J-Von, and a director of Chesterton Co., Leach and Gardner
Manufacturing and ATP, Inc. See "Certain Transactions."
Page 10
Employment Agreements
Mr. DePaolo serves Chairman of the Board, Chief Executive Officer and
President of the Company pursuant to a five year Employment Agreement commencing
August 1, 1997 and ending on July 31, 2002. Pursuant to the Agreement, Mr.
DePaolo will receive a salary of $175,000 per year during the first 3 years,
with scheduled raises thereafter. The Agreement contains a noncompetition
provision and provides for payment of a bonus in amounts to be determined by the
Board of Directors based upon specified performance criteria. The Agreement
further provides for such other fringe benefits as are customary for a Chief
Executive Officer in the industry in which the Company operates. The Agreement
also provides that if Mr. DePaolo is terminated without cause (as defined in the
Agreement) then the Company will continue to pay Mr. DePaolo his scheduled
salary through the remaining term of the Agreement, without setoff for new
employment by Mr. DePaolo.
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: April 10, 2001 By /s/ Patrick A. DePaolo, Sr.
------------------------------------
Patrick A. DePaolo, Sr.
Chairman, President and CEO
Page 11