DISCAS INC.
Filing Type: 10QSB
Description: Quarterly Report
Filing Date: April 17, 2001
Period End: October 31, 1999
Primary Exchange: Boston Stock Exchange
Ticker: DSCS
Table of Contents
- --------------------------------------------------------------------------------
10-QSB
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....................................................................12
EX-27
Exhibit 27 Table..............................................................13
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 October 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 October 1999 was 3,390,776.
Transitional Small Business Disclosure Format (check one)
|_| Yes |X| No
Page 2
DISCAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, APRIL 30,
1999 1999
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 57,590 $ 60,055
Accounts receivable, net of allowance for
doubtful accounts of $51,415 461,711 671,399
Inventory, net of allowance for
obsolescence of $75,000 203,176 285,251
Prepaid expenses 29,852 --
----------- -----------
Total current assets 752,329 1,016,705
Property and equipment (net) 1,360,686 1,495,420
Other assets
Deposits and other assets 50,153 37,453
----------- -----------
$ 2,163,168 $ 2,549,578
=========== ===========
LIABILITIES AND DEFICIENCY IN ASSETS
Current liabilities:
Accounts payable $ 1,161,845 $ 1,112,739
Accrued expenses 142,362 207,455
Line of credit 1,212,644 1,214,776
Obligations under capital leases 63,524 86,575
Note payable 212,841 237,983
----------- -----------
Total current liabilities 2,793,216 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 (5,447,805) (5,127,707)
----------- -----------
Total deficiency in assets (742,360) (422,262)
----------- -----------
$ 2,163,168 $ 2,549,578
=========== ===========
The accompanying notes are an integral part of these financial statements.
Page 3
DISCAS, INC. AND SUBSIDUARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Three Nine Nine
Months ended Months ended Months ended Months ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
Sales $ 834,034 $ 1,229,330 $ 1,491,051 $ 2,568,950
Cost of Sales $ 585,107 $ 953,963 $ 1,158,792 $ 2,041,403
------------ ------------ ----------- -----------
Gross profit $ 248,931 $ 275,367 $ 332,259 $ 527,547
Selling, general and administration
Expenses $ 293,770 $ 381,197 $ 588,643 $ 675,052
------------ ------------ ----------- -----------
Loss from operations $ (44,839) $ (105,830) $ (256,384) $ (147,505)
------------ ------------ ----------- -----------
Other income (expense) :
Gain on sale of fixed assets - 25,006 - 43,006
Interest expense $ (40,007) $ (28,881) $ (63,717) $ (69,022)
------------ ------------ ----------- -----------
Net other income (expense) $ (40,007) $ (3,875) $ (63,717) $ (26,016)
------------ ------------ ----------- -----------
(Loss) before extraordinary item $ (84,846) $ (109,705) $ (320,097) $ (173,521)
------------ ------------ ----------- -----------
Extraordinary item:
Forgiveness of debt $ - $ 123,844 $ - $ 123,844
------------ ------------ ----------- -----------
Net income (loss) $ (84,846) $ 14,139 $ (320,097) $ (49,677)
============ ============ =========== ===========
Average number of shares outstanding 3,390,776 3,260,776 3,390,776 3,247,840
============ ============ =========== ===========
Net loss per share (Basic and Diluted) :
Loss before extraordinary items (0.03) (0.03) (0.09) (0.05)
Extraordinary item:
Forgiveness of debt 0.00 0.03 0.00 0.03
------------ ------------ ----------- -----------
Net loss $ (0.03) $ (0.00) $ (0.09) $ (0.02)
============ ============ =========== ===========
The accompanying notes are an integral part of these financial statements
Page 4
DISCAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended October 31,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (320,097) $ (49,677)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation expense 163,906 181,240
Interest expense 76,672 --
Extraordinary item - forgiveness of debt -- (123,844)
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable 209,688 (57,222)
Decrease (Increase) in inventory 82,075 (21,582)
Increase in other assets (12,700) (64,722)
Increase in prepaid expenses (29,852) (16,023)
Increase in accounts payable 63,779 53,717
Decrease in accrued expenses (79,767) (27,651)
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 153,704 (125,764)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on other asset -- (79,978)
Acquisition of property & equipment (29,172) (75,255)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (29,172) (155,233)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (34,086) (62,210)
Principal payments on obligations under capital leases (11,457) (36,881)
Other -- 71,578
Principal payments on line of credit (81,454) (100,000)
Proceeds from line of credit -- 100,000
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (126,997) (27,513)
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (2,465) (308,510)
CASH AND EQUIVALENTS, beginning of period 60,055 464,619
--------- ---------
CASH AND EQUIVALENTS, end of period $ 57,590 $ 156,109
========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ -- $ --
Interest capitalized $ 76,672 $ --
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
October 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:
October 31, April 30,
1999 1999
Finished goods $ 65,100 $ 53,832
Raw materials 138,076 231,419
--------- --------
$ 203,176 $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:
October 31, April 30,
1999 1999
Machinery and equipment $2,544,507 $2,515,335
Leasehold improvements 134,707 134,707
Office equipment 129,983 129,983
Vehicles 64,556 64,556
Furniture and fixtures 19,043 19,043
---------- ----------
Total property and equipment 2,892,796 2,863,624
Less: accumulated depreciation (1,532,110) (1,368,204)
---------- ----------
Net property and equipment $1,360,686 $1,495,420
========== ==========
Page 6
5. Economic dependency
In the quarter ended October 31, 1999, two customers accounted for approximately
31% of sales (18% and 13%, respectively).
DISCAS, INC. OCTOBER 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 for Discas, Inc.
On June 4, 1999 the Company filed for Chapter 11 reorganization in the 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 unsecured creditors,
stockholders and customers who rely on Discas as their sole source of supply of
various proprietary compounds and horticultural containers.
DISCAS, INC. produces plastic horticultural containers, specialty rubber
compounds and recycled plastics compounds using a variety of prime and recycled
materials. The Company has utilized its extensive experience in polymer
technology to produce proprietary formulations used in the manufacturing of
products in the horticulture, packaging, footwear, aeronautic, automotive and
consumer product sectors.
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 October 31, 1999. There
can be no assurances 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
During the three-month period ended October 31, 1999 the Company completed a
plan to consolidate operations at its Waterbury, Connecticut plant by relocating
previously sub-contracted container molds to this plant and starting up four
leased molding machines and one molding machine which the Company had stored at
the plant in anticipation of eventual use. Although these machines were started
up during a slow sales season for horticultural containers, their use is
expected to reduce cost of goods compared with sub-manufacturing costs, and help
return the Company to profitability when higher sales levels are achieved. The
Company's profitability during the three-month period ended October 31, 1999 was
adversely impacted by significant price increases for sub-contractor molding
services, due to inexperience and subsequent inefficiencies in running
specialized Christie molds.
Efforts to obtain new financing during the three-month period ended October 31,
1999 failed and the Board of Directors concluded that absent new financing, the
Company would not be able to meet the financial requirements to continue
operating as debtor in possession when the slower winter sales season arrived,
typically in the December to February period. Management was directed to present
an alternate plan to prevent involuntary loss of debtor in possession status and
likely total liquidation of Company assets, including any potential future value
to stockholders derived from the public company trading status of Discas, Inc.
Management has developed an Alternate Plan based on an offer from NEWCO, a joint
venture between First Day Corporation, one of the sub-contractor custom molders,
and Pastanch, LLC the lessor of molding equipment used by the Company in its
Waterbury plant, to purchase the Christie product line molds and business
assets. NEWCO has offered to name the Company exclusive sales agent for a
minimum of two years. The secured lender holds the molds as collateral and has
joined the discussions pursuant to a proposal by the Company in its Alternate
Plan to voluntarily surrender its assets and abandon efforts to continue
operating the Company as debtor in possession by December 31,1999.
In return, the Company would be allowed to continue as a public entity and would
restructure as a marketing and technical services business with no hard assets.
The proposed plan would allow the stockholders of the Company to retain an
equity interest in a publicly traded company with potential future value.
RESULTS OF OPERATIONS
Due to the Chapter 11 filing and motions contested by the secured lender, the
Company has not secured funding approval from the Bankruptcy Court for a
complete audit of the fiscal year ended April, 1999 results. 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 included 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 OCTOBER 31, 1999 AND 1998
Sales decreased by $395,292, or approximately 32.1%, to $834,038 for the
three-month period ended October 31, 1999, as compared to $1,229,330 for the
three-month period ended October 31, 1998. The reduction in sales is
attributable to the shutdown of the New Jersey molding plant in April, 1999,
start-up delays in production at the Waterbury, Connecticut molding plant and
the Company's decision to exit the commodity recycled plastics market. Lower
sales also resulted from working capital restraints associated with operating
the business as debtor in possession. Inventory levels were minimized causing
some loss in seasonal sales orders due to missed delivery dates.
Cost of goods sold decreased by $368,856, or approximately 38.1%, to $585,107
for the three-month period ended October 31, 1999, as compared to $953,963 for
the three-month period ended October 31, 1998. The decrease in cost of goods
sold was attributed to the reduced sales volume and higher manufacturing margins
resulting form in-house processing versus sub-contractor costs.
Page 8
Cost of goods sold as a percentage of sales was approximately 70% for the
three-month period ended October 31, 1999. This compares with the cost of goods
sold as percentage of sales of approximately 77.6% for the three-month period
ended October 31, 1998.
Gross profits decreased by $26,436 to $248,931 for the three-month period ended
October 31, 1999, as compared with a gross profit of $275,367 for the
Three-month period ended October 31, 1998.
Gross profit as a percent increased to 29.8% for the three-month period ended
October 31,1999, as compared with gross profit of 22.4% for the three-month
period ended October 31, 1998.
Selling, general and administrative costs decreased by $87,427 or approximately
22.9%, to $293,770 for the three-month period ended October 31, 1999 as compared
to $381,197 for the three-month period ended October 31, 1998.
Operating loss decreased by $60,991 or approximately 57.6%, to $44,839 for the
three-month period ended October 31, 1999, as compared to a loss of $105,830 for
the three-month period ended October 31, 1998. The operating loss decrease was
attributable to reduced manufacturing costs and reduced SG&A costs.
Net loss decreased by $24,859 or approximately 22.7%, to $84,846 for the
three-month period ended October 31, 1999, as compared to a net loss of
$109,705, before an extraordinary credit for forgiveness of debt, for the
three-month period ended October 31, 1998.
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 October 1999 produced
marginally improved results compared with the previous quarter. Management's
activities in this quarter were concentrated in efforts to meet requirements of
the Bankruptcy Court to allow the Company to continue operating as debtor in
possession, and to develop a Plan of Reorganization for presentation in
November, 1999. The company met all requirements to continue operating as debtor
in possession for the period ended October 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 profits and working capital to continued operations as debtor in
possession or otherwise. Management's primary short term goal has been to
stabilize operations to the extent necessary to continue operating as debtor in
possession.
Page 9
Management believes that this task will be difficult to accomplish during the
upcoming slow winter sales season due to reduced projected sales to offset
overhead. A tentative Plan of Reorganization has been developed to preserve
stockholder equity, which would potentially be wiped out if the Company is
forced into liquidation for the benefit of the secured lender. As disclosed in
the 10-KSB for the fiscal year ended April 30, 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 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.
There are no assurances that the Company's Plan of Reorganization will be
approved or that a modified Plan will preserve the equity interests and trading
status of Discas, Inc. common stock for current stockholders.
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."
Page 10
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."
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.
Page 11
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 CEO and CFO
Page 12