<PAGE>
PROSPECTUS
Pursuant to rule 424(b)(3)
Registration No. 333-26543
DISCAS, INC.
800,000 SHARES OF COMMON STOCK AND
800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Discas, Inc., a Delaware corporation (the "Company"), hereby offers
800,000 shares of common stock (the "Common Stock"), par value $.0001 per
share (the "Shares"), and 800,000 Redeemable Common Stock Purchase Warrants
("Warrants"). The Shares and Warrants are being offered and sold separately
and will be separately transferable immediately upon issuance. Each Warrant
entitles the registered holder thereof to purchase, at any time over a
four-year period commencing 13 months from the date of this Prospectus, one
share of Common Stock at a price of $6.25 (the "Warrant Exercise Price"). The
Warrant Exercise Price is subject to anti-dilution adjustments under certain
circumstances. The Warrants are subject to redemption by the Company at $.10
per Warrant on 30 days' written notice commencing 13 months after the date of
this Prospectus, provided that the average closing bid price of the Common
Stock for 20 consecutive trading days, ending not more than fifteen days prior
to the date on which the Company gives notice, exceeds 150% ($9.375 per share)
of the current Warrant Exercise Price.
Prior to this offering, there has been no public market for the
Common Stock or the Warrants, and there can be no assurance that such a market
will develop after the completion of this offering, or if developed, that it
will be sustained. For information regarding the factors considered in
determining the initial public offering price of the Common Stock, see "Risk
Factors" and "Underwriting." The initial public offering price is $5.00 per
share of Common Stock and $.10 per Warrant. The Common Stock and the Warrants
have been approved for listing upon notice of issuance on The NASDAQ SmallCap
Market under the symbols "DSCS" and "DSCSW", respectively and on the Boston
Stock Exchange under the symbols "DSS" and "DSSW", respectively.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" (PAGE 6) AND
"DILUTION" (PAGE 16) FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
6
<PAGE>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT AND COMPANY(2)(3)
COMMISSIONS(1)
Common Stock $5.00 $0.50 $4.50
Warrant $.10 $.01 $.09
Total(3) $4,080,000 $408,080 $3,671,920
(1) In addition, the Company has agreed to pay Roan Capital Partners L.P.
and Merit Capital Associates, Inc. (the "Underwriters") a non-accountable
expense allowance equal to 3% of the gross proceeds of this offering, and
80,000 Underwriters' Warrants to purchase 80,000 shares of Common Stock
and 80,000 Warrants, exercisable for a price of $8.25 per share of
Common Stock and $.165 per Warrant. The Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. For indemnification
arrangements with the Underwriters and additional compensation payable to
the Underwriters, see "Underwriting."
(2) Before deducting estimated offering expenses of $558,000, including the
Underwriters' 3% non-accountable expense allowance of $122,400 and
Underwriters' consulting fee of $85,300, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an aggregate
of 120,000 additional shares of Common Stock and 120,000 additional
Warrants upon the same terms and conditions set forth above, solely to
cover over-allotments, if any (the "Over-allotment Option"). If such
Over-allotment Option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $4,692,000,
$469,200 and $4,222,800, respectively.
The shares of Common Stock and the Warrants are being offered by the
several Underwriters, subject to prior sale, when, as and if accepted by them,
and subject to certain conditions. It is expected that certificates for the
shares of Common Stock and the Warrants offered hereby will be available for
delivery on or about August 21, 1997 at the offices of Roan Capital Partners
L.P., 40 East 52nd Street, Tenth Floor, New York, New York 10022.
ROAN CAPITAL PARTNERS L.P. MERIT CAPITAL ASSOCIATES, INC.
The date of this Prospectus is August 14, 1997
7
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
SHARES OF COMMON STOCK OR THE WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF
THE SHARES OF COMMON STOCK OR THE WARRANTS TO STABILIZE THEIR MARKET PRICES OR
PURCHASES OF THE COMMON STOCK OR THE WARRANTS TO COVER SOME OR ALL OF A SHORT
POSITION IN THE COMMON STOCK OR WARRANTS MAINTAINED BY THE UNDERWRITERS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The registration statement of which this Prospectus is a part also
covers the offering for resale by certain securityholders (the "Selling
Securityholders") of 800,000 bridge warrants (the "Selling Securityholder
Warrants"), which are identical to the Warrants being offered by the Company
herein, and the Common Stock issuable upon the exercise of the Selling
Securityholder Warrants. See "Concurrent Offering." The Selling Securityholder
Warrants and the Common Stock underlying such Selling Securityholder Warrants
are sometimes collectively referred to as the "Selling Securityholder
Securities." The Selling Securityholder Warrants are issuable to the Selling
Securityholders upon the closing of this offering upon the automatic
conversion of warrants (the "Bridge Warrants") acquired by them in the
Company's private placement in April 1997 (the "Bridge Financing"). See "Use
of Proceeds." Sales of the Selling Securityholder Warrants or the underlying
Common Stock, or the potential of such sales, may have an adverse effect on
the market price of the securities offered hereby. The Selling Securityholder
Securities may not be sold for a period of two years from the date of this
Prospectus (or earlier, commencing 13 months from the date of this Prospectus,
with the prior approval of Roan Capital Partners L.P.).
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information
and financial statements (including the notes thereto) appearing elsewhere in
this Prospectus. Except as otherwise noted, all information in this Prospectus
reflects a 1.35-for-1 split of the Common Stock of the Company effected on
December 31, 1996, and assumes no exercise of the Underwriters' Over-allotment
Option to purchase an additional 120,000 shares of Common Stock and 120,000
Warrants from the Company. Investors should consider carefully the information
set forth in this Prospectus under the heading "Risk Factors."
THE COMPANY
Discas, Inc. ("Discas" or the "Company"), based in Waterbury,
Connecticut, 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. In November 1996, the Company
acquired a manufacturer of plastic containers in New Jersey as part of its
strategy to vertically integrate its operations from raw material supply
through end product manufacturing. See "Business -- Expansion Strategy."
Historically, the Company's core business focused on the development
and marketing of niche synthetic rubber compounds such as thermoplastic
elastomers ("TPE"). In addition, Discas provides contract testing and research
services for industrial accounts, which has resulted in the development of new
materials and market applications. In recent years, Discas has extended this
technology to industrial-source scrap polymer feedstock to produce marketable
value-added plastic compounds, and management is now focused on increasing
growth in plastics through market penetration and acquisitions. See "Business
- -- Expansion Strategy."
Discas is currently using industrial scrap material to manufacture
high quality recycled polypropylene-based compounds that are used by
manufacturers in place of more expensive virgin plastics. The Company secures
its feedstock from industrial waste streams as well as limited amounts of
feedstock from post-consumer waste streams and works closely with several
regional firms that collect and process industrial scrap material for reuse.
Discas has the technological capability to modify this feedstock into
higher-value material and management believes that it can lead an industry
consolidation by continuing to build on established supplier and customer
relationships.
The Company was organized under the laws of Delaware on December 11,
1985. Its principal business address is 567-1 South Leonard Street, Waterbury,
Connecticut 06708 and its telephone number is (203) 753-5147.
8
<PAGE>
THE OFFERING
SECURITIES BEING OFFERED
800,000 shares of Common Stock, par value $.0001 per share, and 800,000
Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant entitles
the holder thereof to purchase one share of Common Stock of the Company at a
Warrant Exercise Price of $6.25 per share at any time over a four year period
commencing 13 months from the date of this Prospectus. The Warrants may be
redeemed by the Company commencing 13 months from the date of this Prospectus
at a price of $.10 per Warrant on 30 days' written notice, provided the
average closing bid price of the Common Stock for 20 consecutive trading days,
ending not more than 15 days prior to the date on which the Company gives
notice, exceeds 150% ($9.375 per share) of the current Warrant Exercise Price.
The Shares and the Warrants are being offered and sold separately and will be
separately transferable immediately upon issuance. See "Description of
Securities."
SECURITIES OFFERED CONCURRENTLY BY SELLING SECURITYHOLDERS
800,000 Selling Securityholder Warrants and 800,000 shares of Common Stock
issuable upon the exercise of the Selling Securityholder Warrants. See
"Concurrent Offering." All of such Selling Securityholder Securities are
subject to a two-year "lockup" agreement in favor of Roan Capital Partners
L.P.
COMMON STOCK OUTSTANDING BEFORE
THE OFFERING
2,254,500 shares of Common Stock(1)
COMMON STOCK TO BE OUTSTANDING
AFTER OFFERING
3,214,500 shares of Common Stock(2)
USE OF PROCEEDS
The Company intends to utilize the net proceeds from this offering, estimated
at approximately $3,114,000, for repayment of $370,000 in Bridge Financing
debt, capital expenditures, working capital, future acquisitions and general
corporate purposes including sales and marketing. See "Use of Proceeds."
RISK FACTORS
The securities offered hereby involve a high degree of risk and immediate
substantial dilution. See "Risk Factors" and "Dilution."
PROPOSED NASDAQ SMALLCAP
MARKET SYMBOLS
Common Stock "DSCS"
Warrants "DSCSW"
PROPOSED BOSTON STOCK
EXCHANGE MARKET SYMBOLS
Common Stock "DSS"
Warrants "DSSW"
(1) Does not include (i) shares issuable upon exercise of outstanding warrants
held by Mr. Patrick A. DePaolo and Mantis V, L.L.C. to purchase 50,000 and
85,000 shares of Common Stock, respectively, at a price per share equal to
$2.25, (ii) shares issuable upon exercise of outstanding Selling
Securityholder Warrants to purchase an aggregate of 800,000 shares of Common
Stock at a price per share equal to $6.25 or (iii) 160,000 shares of Common
Stock into which a $1,000,000 note payable to Christie Enterprises, Inc. is
automatically convertible upon the closing of this offering.
9
<PAGE>
(2) Does not include (i) shares issuable upon exercise of outstanding warrants
held by Mr. Patrick A. DePaolo and Mantis V, L.L.C. to purchase 50,000 and
85,000 shares of Common Stock, respectively, at a price per share equal to
$2.25, (ii) shares issuable upon exercise of outstanding Selling
Securityholder Warrants to purchase an aggregate of 800,000 shares of Common
Stock at a price per share equal to $6.25 or (iii) up to an additional 240,000
shares issuable upon exercise of the Underwriters' Over-allotment Option and
underlying Warrants. Also does not include up to 160,000 shares of Common
Stock issuable upon exercise of the Underwriters' Warrants and underlying
Warrants. Includes 160,000 shares of Common Stock into which a $1,000,000 note
payable to Christie Enterprises, Inc. is automatically convertible upon the
closing of this offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Underwriting" and
"Description of Securities -- Underwriters' Warrants."
10
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction
with the consolidated financial statements of the Company and of Christie
Enterprises, Inc. and related notes thereto appearing elsewhere in this
Prospectus. The Company purchased substantially all of the assets of Christie
Enterprises, Inc. in November 1996. The audited financial statements of
Christie Enterprises, Inc. are included in "Financial Statements" elsewhere in
this Prospectus. The Consolidated Statement of Operations Data for the Company
for the year ended April 30, 1997 reflects the operations of the Company
including the former Christie Enterprises, Inc. lines of business from the
date of acquisition, and the Consolidated Balance Sheet Data at April 30, 1997
includes the purchased assets. All other periods shown reflect only the
operations of the Company. See the pro forma financial statements of the
Company and of Christie Enterprises, Inc. included in "Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
1997 1996
<S> <C> <C>
Consolidated Statement of Operations Data:
Sales $5,179,668 3,858,205
Cost of Sales 3,982,066 3,012,125
Gross Profit 1,197,602 846,080
Selling general and administrative expenses 1,300,859 710,302
Income (Loss) from Operations (103,257) 135,778
Net other income (expense)(1) (282,114) (56,363)
Minority interest 36,705 23,841
Earnings (Loss) before income taxes (348,666) 103,256
Income tax benefit 36,000 --
Net income (loss) $(312,666) 103,256
-------------------------------------
Pro forma net income (loss) per share(2) $(.13) $.04
Pro forma weighted average number of common 2,408,710 2,328,710(2)
and common equivalent shares outstanding
</TABLE>
APRIL 30, 1997
ACTUAL(3) AS ADJUSTED(4)
Consolidated Balance Sheet Data:
Working capital $ 90,948 3,204,948
Total assets 5,544,989 8,388,784
Total liabilities 4,693,436 3,693,436
Stockholders' equity 851,553 4,695,348
11
<PAGE>
(1) Includes a non-cash charge of $176,037 to interest expense in 1997 which
represents approximately eight months of amortization of deferred financing
costs (See Note 1(L) of Notes to the Company's audited financial
statements) in connection with the loans made to the Company by Mantis V,
L.L.C. Future amortization will approximate $29,000 per month through
July, 1998, or be expensed in full upon the early retirement of the loan.
(2) Does not include 160,000 shares of Common Stock into which a $1,000,000
note payable to Christie Enterprises, Inc. is convertible upon the
closing of this offering.
(3) Does not include (i) outstanding warrants held by Mr. Patrick A. DePaolo
and Mantis V, L.L.C. to purchase 50,000 and 85,000 shares of Common
Stock, respectively, at a price per share equal to $2.25, or (ii) 160,000
shares of Common Stock into which a $1,000,000 note payable to Christie
Enterprises, Inc. is convertible upon the closing of this offering.
(4) Includes 160,000 shares of Common Stock into which a $1,000,000 note
payable to Christie Enterprises, Inc. is convertible upon closing of this
offering, and the estimated net proceeds from this offering, but does not
include (i) outstanding warrants held by Mr. Patrick A. DePaolo and
Mantis V, L.L.C. to purchase 50,000 and 85,000 shares of Common Stock,
respectively, at a price per share equal to $2.25 or (ii) outstanding
Selling Securityholder Warrants to purchase an aggregate of 800,000
shares of Common Stock at a price per share equal to $6.25.
12
<PAGE>
RISK FACTORS
The securities offered hereby involve a high degree of risk,
including, but not limited to, the several factors described below. These
securities should be purchased only by persons who can afford a loss of their
entire investment. Investors should consider carefully the following risk
factors inherent in and affecting the business of the Company and this
offering in evaluating an investment in the securities offered hereby.
POSSIBLE NEED FOR ADDITIONAL FINANCING.
The Company is dependent on and intends to use the proceeds of this
offering to implement its plans for further growth and expansion of the
Company's business. Based on currently proposed plans and assumptions relating
to its operations, the Company anticipates that the proceeds of this offering,
together with projected cash flow from operations and available cash
resources, including its anticipated bank financing, will be sufficient to
satisfy its contemplated cash requirements for at least twelve months
following the consummation of this offering. In the event that the Company's
assumptions change or prove to be inaccurate or if the proceeds of this
offering, cash flow and available cash resources prove to be insufficient to
fund operations (due to unanticipated expenses, difficulties, problems or
otherwise including failure to obtain additional bank financing), the Company
may be required to seek additional financing or curtail its expansion
activities. The Company may in the future, depending upon the opportunities
available to it, determine to seek additional debt or equity financing to fund
the cost of continuing expansion. To the extent that the Company obtains
equity financing or finances an acquisition with equity securities, any such
issuance of equity securities could result in dilution to the interests of the
Company's stockholders. Additionally, to the extent that the Company incurs
additional indebtedness or issues debt securities in connection with an
acquisition, the Company will be subject to risks associated with incurring
substantial additional indebtedness including the possibility that cash flow
may be insufficient to pay principal and interest on any such indebtedness.
There can be no assurance that additional financing will be available to the
Company on acceptable terms, or at all. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity, Capital Resources and Other Matters."
EXPANSION STRATEGY; UNSPECIFIED ACQUISITIONS.
Management believes that future net sales and profit growth are
substantially dependent upon its ability to expand beyond its existing
supplier and customer base by obtaining additional sources of supply and
customers, through a combination of acquisitions of businesses in the recycled
plastics industry, capital investment in additional processing machinery,
developing additional facilities in new market areas and marketing within its
existing service areas. The Company may, but is not required to, expend up to
the entire $2,000,000 of otherwise unallocated net offering proceeds for this
purpose. See "Use of Proceeds." This strategy entails the risks inherent in
assessing the value, strengths, weaknesses and potential profitability of
acquisition candidates and of new facilities as well as integrating the
operations of acquired companies and newly opened facilities. There can be no
assurance that acquisition opportunities will continue to be available, that
the Company will have access to the capital required to finance potential
acquisitions or open new facilities, that the Company will continue to acquire
businesses or that any business acquired or new facilities opened will be
integrated successfully into the Company's operations or prove profitable. The
Company may finance future acquisitions by using shares of the Company's
Common Stock for all or a portion of the consideration to be paid. Such future
issuances of Common Stock, if any, could result in substantial dilution to
existing stockholders, depending upon the terms of the particular acquisition
or acquisitions. Further, stockholders will generally not have any right to
vote upon any such acquisitions unless a vote is required under Delaware law
or under proposed Nasdaq Stock Market rules which have not yet been approved
by the Securities and Exchange Commission (the "Commission"). If the Company
does not have sufficient cash resources, its growth could be limited, unless
it is able to obtain additional capital through subsequent debt or equity
financings. There can be no assurance that the Company will be able to obtain
such financing or that, if available, such financing will be on terms
acceptable to the Company. As a result, there can be no assurance that the
Company will be able to successfully implement its acquisition strategy. The
Company does not currently have any plans, proposals, arrangements or
understandings with respect to any particular acquisitions. See "Business --
Expansion Strategy."
11
<PAGE>
NO LONG-TERM AGREEMENTS WITH SUPPLIERS OR CUSTOMERS AND DEPENDENCE ON
SIGNIFICANT SUPPLIERS AND CUSTOMERS.
The Company is dependent on third party relationships with several
suppliers of scrap polymer feedstocks, the raw materials necessary to the
business of the Company. The Company does not presently have any long term
agreements with these suppliers and does not anticipate the execution of any
long term agreements in the future. The two largest suppliers, Ash-Kourt
Industries, Inc. and Borden, Inc., currently provide approximately 40% of the
Company's feedstock. The Company's existing operations and plans for future
growth anticipate the continued existence of these relationships. There can be
no assurance, however, that these relationships will be preserved. The Company
believes that it has alternative sources of supply available to it in the
event that its requirements change or its current suppliers are unable or
unwilling to fulfill the Company's needs. Nevertheless, there can be no
assurance that alternative suppliers will be available upon terms comparable
to the Company's existing arrangements.
The Company also does not presently have any long term agreements
with its customers and does not anticipate the execution of any long term
agreements in the future. Although the Company's two largest customers
accounted for approximately 74% of the Company's sales in fiscal 1996, the
Company has subsequently diversified its customer base such that in fiscal
1997, the Company's two largest customers accounted for approximately 32% of
sales and no other customer accounted for more than 10% of sales. The
Company's existing operations and plans for future growth anticipate the
continued existence of relationships with its current customers. There can be
no assurance, however, that these relationships will be preserved. See
"Business - Product Lines, Customers and Suppliers."
COMPETITION.
The compounding of polymers is a highly competitive industry. The
Company's prime and recycled products compete with a variety of polymer
materials from other companies, many of which are larger, better financed
manufacturers of prime compounds. The Company must competitively price its
products against both prime and recycled compounds if it is to successfully
build its sales volume. While the Company believes that its technical
expertise, modern facility and advanced quality control are attractive
features to potential customers, there can be no assurance that the Company
can capture adequate competitive contracts to sustain profitability, or that
other companies will not provide superior products in both price and quality.
See "Business - Competition."
RAW MATERIALS AVAILABILITY AND COMMODITY PRICING.
The scrap and prime (virgin) polymer feedstocks used by the Company
as a raw material are subject to substantial price fluctuations. Prices for
scrap feedstocks generally conform to fluctuations in prices for virgin
material, but usually remain below virgin material prices. While the Company
expects that there will continue to be an abundance of industrial scrap
polymer feedstock for use in the production of its compounds, there can be no
assurance that adequate quantities will be available or that prices the
Company may be required to pay for raw materials will allow the Company to
operate at a profit. The Company does not have any long-term contracts with
either suppliers or customers. See "Business - Product Lines, Customers and
Suppliers."
RELIANCE ON TRADE SECRETS, EVOLVING TECHNOLOGY AND COMPETITION; ABSENCE OF
PATENT PROTECTION.
The Company holds no patents to its processes nor has it applied for
any patents, although it attempts to keep proprietary the processes and
formulations it uses through confidentiality agreements with employees and
third parties. However, there can be no assurance that competitors will not
develop processes or products of comparable efficiency and quality.
Furthermore, rapid technological development may result in the Company's
processes or systems becoming obsolete. Technological competition from other
companies is expected to increase, and many of these potential competitors
have substantially greater capital resources, research and development
capabilities and marketing resources than the Company. The Company has
registered trademarks for certain of its products, but in the opinion of
management, such trademarks are not material to the Company's business as a
whole. See "Business - Competition."
14
<PAGE>
SUBSTANTIAL PORTION OF PROCEEDS ALLOCATED FOR REPAYMENT OF INDEBTEDNESS.
Approximately 12% ($370,000) of the estimated net proceeds from the
sale of the Common Stock and the Warrants has been allocated for repayment of
principal and accrued interest on the Bridge Financing subordinated notes to
the lenders of the Bridge Financing, none of whom are officers, directors or
affiliates of the Company. See "Use of Proceeds."
SUBSTANTIAL PORTION OF PROCEEDS ALLOCATED TO UNSPECIFIED GENERAL CORPORATE AND
WORKING CAPITAL PURPOSES.
Approximately 63% ($1,958,700) of the estimated net proceeds from the sale of
the Common Stock and the Warrants has been allocated to general corporate and
working capital purposes, including inventory purchases, acquisitions, sales
and marketing. Proceeds allocated to general corporate and working capital
purposes may be utilized in the discretion of the Board of Directors. As a
result, investors will not know in advance how such net proceeds will be
utilized by the Company. See "Use of Proceeds" and "Business - Expansion
Strategy." Additionally, in the event the Underwriters' Over-allotment Option
is exercised or to the extent the Warrants are exercised, the Company will
realize additional net proceeds, which will be added to working capital.
Notwithstanding its plan to develop its business as described in this
Prospectus, future events, including the problems, expenses, difficulties,
complications and delays frequently encountered by businesses, as well as
changes in the economic climate or changes in government regulations, may make
the reallocation of funds necessary or desirable. Any such reallocation will
be at the discretion of the Board of Directors. See "Use of Proceeds."
DEFERRED FINANCING COSTS.
The Company incurred deferred financing costs in connection with the
loans made to the Company by Mantis V, L.L.C. in September and December 1996.
Such costs are charged against income over the term of such loan. Such costs
amounted to $176,037 in the year ended April 30, 1997 and will equal
approximately $29,000 per month through the term of such loans in July, 1998,
or will be expensed upon earlier prepayment of such loans. Such charges are
non-cash items, and are determined by measuring the fair market value of the
270,000 shares of the Company's Common Stock at September, 1996 issued in
connection with the loan made by Mantis V, L.L.C.
DEPENDENCE UPON KEY PERSONNEL.
The success of the Company is substantially dependent upon the
efforts of its founder, Chairman of the Board, Chief Executive Officer and
President, Mr. Patrick A. DePaolo, Sr. The loss of the services of Mr.
DePaolo, or the inability to attract and retain other qualified personnel, may
adversely affect the Company's business. There is no assurance that the
Company will successfully recruit or retain personnel of the requisite caliber
or in adequate numbers to enable it to execute its business growth strategy.
The Company has a five year employment agreement with Mr. DePaolo. The Company
has a $500,000 key man life insurance policy on Mr. DePaolo. See "Management."
POSSIBLE CONFLICTS OF INTEREST.
Patrick A. DePaolo, Sr., the Company's Chairman of the Board, Chief
Executive Officer and President, and John Carroll, a director, are both
members of J-Von Group, L.L.C. ("J-Von"), a manufacturer of thermoplastic
elastomer compounds ("TPE") for the footwear and industrial markets. J-Von is
both a significant customer for the Company's raw materials and a significant
supplier of finished compounds to the Company. Further, Mr. DePaolo has
executed a non-competition agreement with J-Von whereby J-Von and Mr. DePaolo
have agreed not to sell certain specified TPE compounds to specified customers
of the other. Mr. Carroll is also a principal of several other businesses in
the plastics fabrication industry. Mr. DePaolo's employment agreement with the
Company requires that Mr. DePaolo not engage in any activities competitive
with those of the Company during the term of his employment. See "Certain
Transactions" and "Management." The Company has adopted a policy that all
future transactions, including loans, between the Company and its officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will
continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and be made for bona fide business
purposes.
ENVIRONMENTAL REGULATION.
15
<PAGE>
Federal, state and local environmental laws and regulations apply to
the activities of the Company and to the products it intends to produce.
Violations of statutes, regulations or environmental permit requirements, even
if unintentional, can result in significant fines, costs, revocation of
required licenses or permits or requirements for remedial work. The Company's
present and planned activities are, or may become, subject to regulation under
various federal, state and local environmental laws and regulations, including
laws and regulations that may be adopted in the future. Such regulations may
materially adversely affect the Company's existing or planned operations. Any
failure of the Company to comply with the requirements of these environmental
laws and regulations, even if unintentional, could give rise to liabilities,
penalties or fines which could have a material adverse effect on the business
or financial condition of the Company. See "Business -- Environmental and
Other Governmental Regulation."
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS.
The election of directors of the Company is controlled solely by the
Company's founder, Chairman of the Board, Chief Executive Officer and
President, Mr. Patrick A. DePaolo, Sr., who owns or has voting rights with
respect to 93.9% of the outstanding voting stock prior to this offering and
will continue to beneficially own or vote 66.3% of the outstanding voting
stock following completion of this offering. See "Principal Stockholders."
LIMITED EXPERIENCE OF UNDERWRITERS.
Roan Capital Partners L.P., including its predecessor, has been in
existence since 1993 and is principally engaged in retail brokerage, market
making activities and various corporate finance projects. Although certain
officers of Roan have corporate finance experience from previous employment,
Roan has not acted as an underwriter or placement agent of any public
offerings of securities to date. Merit Capital Associates, Inc. has
acted as underwriter for one public offering. No assurance can be given
that the Underwriters' lack of experience as underwriters will not
adversely affect this offering and the subsequent development of a liquid
public trading market in the Common Stock. See "Risk Factors -- No Assurance
of Public Market; Arbitrary Determination of Offering Price."
GENERAL ECONOMIC CONDITIONS.
The operations of the Company are subject to general economic
conditions which affect the plastics industry, particularly as a result of
fluctuating petroleum prices and the demand for virgin feedstock. Resin
prices, global competition and other economic factors affect the location and
quantity of goods produced, which consequently affect the availability and
price of recycled feedstock in North America. The Company may not have
sufficient capitalization to survive such economic exigencies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity, Capital Resources and Other Matters."
PRODUCTS LIABILITY AND OTHER CLAIMS.
The Company may be subject to substantial products liability costs if
claims arise out of problems associated with the products of the Company. The
Company will seek to maintain the products liability coverage it currently has
in place for the benefit of the Company to protect the Company against such
liabilities, but there can be no assurance that such arrangements can be made,
or if made, will be effective to insulate the assets of the Company from such
claims. The Company will attempt to maintain insurance against such
contingencies, in scope and amount which it believes to be adequate. However,
there can be no assurance that such product liability insurance will continue
to be available, or if available, that it will adequately insure against such
claim. See "Business."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM.
The Company's Common Stock and Warrants have been approved for
quotation on the NASDAQ SmallCap Market upon notice of issuance. In order to
continue to qualify for listing on the NASDAQ SmallCap Market, however, a
company must have, among other things, at least $2,000,000 in total assets,
$1,000,000 in capital and surplus and a minimum bid price for its common
stock of $1.00 per share. NASDAQ has recently proposed new maintenance criteria
which, if implemented, would eliminate certain market capitalization exceptions
to the $1.00 per share minimum bid price and require, among other things
(i) either at least $2,000,000 in net tangible assets, a $35,000,000 market
capitalization or net income of at least $500,000 in two of the three prior
years, (ii)
16
<PAGE>
at least 500,000 shares in the public float valued at $1,000,000 or more,
(iii) at least two active market makers, (iv) at least 300 holders of the
Company's Common Stock and (v) adherence to certain corporate governance
provisions. However, upon completion of the offering, if the Company is
thereafter unable to continue to satisfy the listing criteria under the NASDAQ
rules, any listed security will be subject to delisting. In such an event, the
Common Stock and the Warrants may not be eligible for continued listing on the
NASDAQ SmallCap Market. As a result of delisting, trading, if any, in the
securities would be conducted on the Boston Stock Exchange if the Company's
securities are then listed thereon, or on the over-the-counter market in what
are commonly referred to as the "pink sheets," or in the "OTC Bulletin Board."
If such result occurs, an investor may find it more difficult to dispose of,
or to obtain accurate quotations as to the prices of, the Common Stock and
Warrants.
SECURITIES SUBJECT TO "PENNY STOCK" RULES IF DELISTED FROM NASDAQ AND BOSTON
STOCK EXCHANGE; RISKS OF PENNY STOCKS.
If the Company's securities are not listed on the NASDAQ SmallCap
Market or on the Boston Stock Exchange, they are subject to Rule 15g-9 under
the Exchange Act that imposes additional sales practice requirements on
broker-dealers which sell such securities to persons other than established
customers and accredited investors (generally persons with net assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). If the Common Stock were delisted from the NASDAQ SmallCap
Market and the Boston Stock Exchange, and the Company's stock price should
fall below $5.00 per share and no other exclusion from the definition of
"penny stock" under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") were available, then the Company's Common Stock and Warrants
would be deemed "penny stock" and transactions in the Common Stock and
Warrants would be subject to the penny stock regulations which impose
significant sales practice requirements on broker-dealers, including (a)
delivering to customers the Commission's standardized disclosure statement
about "penny stocks", (b) providing to customers current bid and ask prices
for the stock, (c) disclosing to customers the broker-dealer's and sales
representative's compensation with respect to trades in the stock, and (d)
providing to customers monthly account statements reflecting the stock's then
current price. For transactions covered by this rule, the broker-dealer must
make a special suitability determination for the purchaser and have received
the purchaser's written consent to the transaction prior to purchase.
Consequently, the rule may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of stockholders to sell their
securities in the secondary market. The loss of continued listing on the
NASDAQ SmallCap Market may also cause a decline in share price, loss of news
coverage of the Company and difficulty in obtaining subsequent financing. The
foregoing penny stock restrictions will not apply to the Company's securities
if such securities are listed on the Nasdaq SmallCap Stock Market or on a
national securities exchange such as the Boston Stock Exchange.
POTENTIAL ADVERSE IMPACT OF PREFERRED STOCK ON RIGHTS OF HOLDERS OF
COMMON STOCK.
The Company is currently authorized to issue up to a total of
20,000,000 shares of Common Stock and 5,000,000 shares of preferred stock.
There are currently 2,254,500 shares of Common Stock outstanding and no
preferred stock outstanding.
The Company's Board of Directors is authorized to issue preferred
stock in one or more series and to fix the voting powers and the designations,
preferences and relative, participating, optional or other rights and
restrictions thereof. Accordingly, the Company may issue series of preferred
stock in the future that will have preference over the Common Stock with
respect to the payment of dividends and proceeds from the Company's
liquidation, dissolution or winding up or have voting or conversion rights
which could adversely effect the voting power and percentage ownership of the
holders of the Common Stock. The Company has no plans, arrangements,
understandings or commitments to issue any preferred stock. However, the
ability of the Company to issue such additional shares and the possible
exercise of the Warrants, the Selling Securityholder Warrants and the
Underwriters' Warrants may prove to be a hindrance to future financings by
the Company since the holders of such warrants may be expected to exercise
them at times when the Company would otherwise be able to obtain additional
equity capital on terms more favorable to the Company. Also, rights granted to
future holders of preferred stock could be used to restrict the Company's
ability to merge with, or sell its assets to, a third party, and the ability
of the Board of Directors to issue preferred stock could discourage, delay or
prevent a takeover of the Company, thereby preserving control of the Company
by the current stockholders. See "Description of Securities -- Preferred
Stock."
SHARES ELIGIBLE FOR FUTURE SALE.
17
<PAGE>
Upon the completion of this offering, the Company will have 3,214,500
shares of Common Stock outstanding. Of these shares, the 800,000 shares sold
by the Company in this offering will be freely-tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased by an "affiliate" of the Company (as defined in the Securities Act
and the rules and regulations thereunder) which will be subject to the
limitations of Rule 144 promulgated under the Securities Act. Of the remaining
2,414,500 shares, subject to the holders' compliance with the provisions of
Rule 144, (i) 34,504 shares beneficially owned by four non-affiliates of the
Company will become tradeable in August 1997, (ii) 364,500 shares beneficially
owned by Mantis V, L.L.C., an affiliate of the Company, will become tradeable
in September 1997, (iii) 160,000 shares of Common Stock issuable upon
conversion of a note in the principal amount of $1,000,000 payable to Christie
Enterprises, Inc. upon the closing of this offering will become tradeable in
November 1997 and (iv) 1,848,646 shares beneficially owned by Patrick A.
DePaolo, Sr., Steven DePaolo and a DePaolo family limited liability company,
all affiliates of the Company, are tradeable as of the date of this
Prospectus, although all of the aforementioned shares with the exception of
those set forth in (i) and (iii) will not be freely tradeable for two years
from the date of this Prospectus pursuant to "lock-up" agreements each
shareholder has entered into with Roan Capital Partners L.P., which lock-up
may not be waived for a period of 13 months from the date of this Prospectus as
to the shares listed in (ii) above. These securities were deemed to be
"restricted securities" at the time they were purchased, as that term is
defined under Rule 144 promulgated under the Securities Act, as such shares
were issued in private transactions not involving a public offering.
In general, under Rule 144 as recently modified (which modifications
became effective April 29, 1997), subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (or persons whose
shares are aggregated), who has beneficially owned the restricted shares of
Common Stock to be sold for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the total number of outstanding shares of the same class or, if the Common
Stock is quoted on an exchange or NASDAQ, the average weekly trading volume
during the four calendar weeks preceding the sale. A person who has not been
an affiliate of the Company for at least the three months immediately
preceding the sale and who has beneficially owned the shares of Common Stock
to be sold for at least two years is entitled to sell such shares under Rule
144 without regard to any of the limitations described above.
No prediction can be made as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market prices prevailing from time to time. The possibility that substantial
amounts of Common Stock may be sold in the public market in the future may
adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities. See "Shares Eligible for Future Sale."
NO ASSURANCE OF PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING PRICE.
Prior to this offering, there has been no public market for the
shares of Common Stock or the Warrants. The initial public offering price of
the Warrants and Shares and the exercise price and other terms of the Warrants
were established by negotiations between the Company and the Underwriters and
bear no relationship to such established valuation criteria such as assets,
book value or prospective earnings. Further, given the comparatively small
size of this offering, there can be no assurance that an active public market
for the Company's securities will ever develop.
IMMEDIATE SUBSTANTIAL DILUTION; DISPARITY OF CONSIDERATION.
This offering involves an immediate and substantial dilution of $3.74
per share (75%) between the pro forma net tangible book value per share after
the offering of $1.26 and the offering price of $5.00 per share of Common
Stock. The existing stockholders of the Company, including an affiliate of
certain of its executive officers and directors, acquired their shares of
Common Stock at prices substantially lower than the initial public offering
price and, accordingly, new investors will bear substantially all of the risks
inherent in an investment in the Company. See "Dilution."
ANTI-TAKEOVER PROVISIONS.
Certain provisions of Delaware law, the Amended and Restated
Certificate of Incorporation and the Company's By-laws, as amended (the
"By-laws"), could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. These provisions and the prohibition against certain
business combinations could have the effect of delaying, deferring or
preventing a change in control or the removal of existing management of the
Company. See "Description of Securities." Further, the non-competition
provisions of Mr.
18
<PAGE>
DePaolo's employment agreement will not apply if he is terminated following an
involuntary change in control as defined in Section 203 of the Delaware
General Corporation Law. See "Management-Employment Agreements."
LIMITED LIABILITY OF DIRECTORS.
As permitted by the Delaware Corporation Law, the Company's Amended
and Restated Certificate of Incorporation eliminates personal liability of a
director to the Company and its stockholders for monetary damages for breach
of fiduciary duty as a director except under certain circumstances.
Accordingly, except in certain circumstances, the Company's directors will not
be liable to the Company or its stockholders for breach of such duty. See
"Management -- Indemnification and Exculpation Provisions."
UNDERWRITERS' WARRANTS.
The Company has agreed to sell to the Underwriters, at a price of $10,
the right to purchase up to 80,000 shares of Common Stock and up to 80,000
Warrants (the "Underwriters' Warrants"). Such Warrants will be exercisable for
a four-year period commencing one year from the date of this Prospectus, at
exercise prices equal to 165% of the initial public offering prices of the
Common Stock and Warrants set forth on the cover page of this Prospectus.
For the life of the Underwriters' Warrants, the holders thereof are
given the opportunity to profit from a rise in the market price of the Common
Stock and Warrants, which may result in a dilution of the interests of other
stockholders. As a result, the Company may find it more difficult to raise
additional equity capital if it should be needed for its business while such
Warrants are outstanding. See "Underwriting."
POSSIBLE RESTRICTIONS ON MARKET-MAKING ACTIVITIES IN THE COMPANY'S SECURITIES.
The Underwriters have advised the Company that they intend to make a
market in the Company's securities. Regulation M, which was recently adopted
to replace Rule 10b-6 and certain other rules promulgated under the Exchange
Act, may prohibit the Underwriters from engaging in any market-making
activities regarding the Company's securities for a period from five days (or
such applicable period as Regulation M may provide) prior to any solicitation
by either of the Underwriters of the exercise of the Warrants until the later
of the termination of such solicitation activity or the termination (by waiver
or otherwise) of any right that either of the Underwriters may have to receive
a fee for the exercise of Warrants following such solicitation. As a result,
either or both of the Underwriters may be unable to provide a market for the
Company's securities during certain periods while the Warrants are exercisable.
In addition, under applicable rules and regulations under the Exchange Act,
any person engaged in the distribution of the Selling Securityholder Securities
may not simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period prior to the
commencement of such distribution. Accordingly, in the event either of the
Underwriters is engaged in a distribution of the Selling Securityholder
Securities, it will not be able to make a market in the Company's securities
during the applicable restrictive period. Any temporary cessation of such
market-making activities could have an adverse effect on the market price of
the Company's securities. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS.
The Warrants may be redeemed by the Company commencing 13 months from
the date of this Prospectus, at a redemption price of $.10 per Warrant upon
not less than 30 days' prior written notice provided the average closing bid
price of the Common Stock on NASDAQ (or the last sales price if traded on a
national securities exchange) for 20 consecutive trading days, ending not more
than 30 days prior to the date of the notice of redemption, exceeds 150% of
the current Warrant Exercise Price, subject to adjustment. Redemption of the
Warrants could force the holders to exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for the holders to do so, sell
the Warrants at the then current market price when they might otherwise wish
to hold the Warrants, or to accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities -- Warrants."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS.
19
<PAGE>
This Prospectus contains certain forward-looking statements regarding
the plans and objectives of management for future operations, including plans
and objectives relating to the development of the Company. The forward-looking
statements included herein are based on current expectations that involve
numerous risks and uncertainties. The Company's plans and objectives are based
on a successful execution of the Company's expansion strategy and assumptions
that the Company will be profitable, that the industry will not change
materially or adversely, and that there will be no unanticipated material
adverse change in the Company's operations or business. Assumptions relating
to the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that its
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this Prospectus will
prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, particularly in view of the
Company's recent and planned expansion, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
DIVIDENDS.
The Company has never paid cash dividends and it does not anticipate
that it will pay cash dividends on its Common Stock or alter its dividend
policy in the foreseeable future. The payment of dividends on the Common Stock
by the Company will depend on its earnings and financial condition and such
other factors as the Board of Directors of the Company may consider relevant.
The Company currently intends to retain its earnings to assist in financing
the development of its business. In addition, the Company's current senior
credit agreement prohibits the payment of cash dividends and the Company
expects that any new senior lender will similarly prohibit the payment of cash
dividends. Investors who anticipate the need for dividends on their
investments should refrain from purchasing any of the shares of Common Stock
and the Warrants offered hereby.
FOR ALL OF THE FOREGOING REASONS AND OTHERS SET FORTH IN THIS
PROSPECTUS, THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. ANY
PERSON CONSIDERING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY SHOULD BE
AWARE OF THESE AND OTHER FACTORS SET FORTH IN THIS PROSPECTUS. THESE
SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD A TOTAL LOSS OF
THEIR INVESTMENT IN THE COMPANY.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
shares of Common Stock and the Warrants offered hereby, after deducting
offering expenses payable by the Company, are estimated at approximately
$3,114,000. The Company presently intends to use the net proceeds over the 12
month period following this offering as follows:
APPROXIMATE
DOLLAR
APPLICATION OF PROCEEDS AMOUNT
Payment of consulting fee to Underwriters $85,300 (3%)
Repayment of Bridge Financing (1) 370,000 (12%)
Capital Expenditures (2) 700,000 (22%)
Working Capital (including acquisitions)(3) 1,958,700 (63%)
---------------
Total $3,114,000 (100%)
(1) Repayment of unsecured promissory notes totalling $360,000 issued to
Bridge Financing investors, plus accrued interest at the rate of 11% per
annum. All of such notes are due upon the earlier of the closing of this
offering or October 14, 1998. Approximately one-half of the net proceeds
from the sale of such notes and the simultaneous sale of 800,000 Warrants
for $40,000 (see "Interim Financing") were utilized for working capital
to support the Company's accounts receivable, and the balance was used to
pay certain of the expenses of conducting this offering. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity, Capital Resources and Other Matters."
(2) Includes extruders, densifiers, mixers and materials handling equipment.
(3) The Company purchases raw materials on an opportunistic basis and will
from time to time use a portion of the proceeds to purchase quantities of
feedstock materials. The Company has no agreement in principle with any
potential acquisition candidate and therefore cannot at this time
accurately state what percentage of the proceeds will be allocated to
acquisitions. See "Risk Factors -- Expansion Strategy; Unspecified
Acquisitions." A portion of working capital will be used to self-finance
accounts receivable (up to $500,000, assuming no increase in the Company's
existing credit facilities), and a further portion of approximately
$200,000-$300,000 will be utilized for additional sales and marketing
efforts, including the addition of sales personnel.
The allocation of the net proceeds of the offering set forth above
represents the Company's best estimate based upon its present plans. If any of
these plans change, the Company may find it necessary or advisable to
reallocate some of the proceeds within the above-described categories or to
other purposes.
Pending expenditure of the proceeds from the offering, the Company
may make temporary investments in insured interest bearing savings accounts,
insured certificates of deposit, or short term United States government
obligations. In the opinion of management, the above proceeds should be
sufficient for the Company's operations for at least the next 12 months from
the date of this offering.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common
Stock. The present policy of its Board of Directors is to retain earnings, if
any, for use in business operations, and the Company, therefore, does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Further, the Company's current senior credit agreement prohibits the
payment of cash dividends and management of the Company expects that any new
lender will prohibit the payment of cash dividends.
21
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Company as of April 30, 1997 and as adjusted on a pro forma basis to reflect:
(i) the conversion of the $1,000,000 convertible promissory note payable to
Christie Enterprises, Inc. into 160,000 shares of the Company's Common Stock
and (ii) the offering and the application of the net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction
with the historical and pro forma financial statements of the Company,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1997 APRIL 30, 1997
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Short-term debt, including current portion of Long-term debt $903,485 $903,485
------------------- ----------------------
Long-term debt, excluding current portion(1)(2) 2,210,878 850,878
Notes payable to related parties 123,734 123,734
Stockholders' equity:
Common Stock, $.0001 par value, 12,000,000 authorized, 225 321
2,254,500 shares issued and outstanding and 20,000,000
authorized and 3,214,500 shares issued and
outstanding proforma as adjusted (3)(4)(5)
Additional paid in capital 822,677 4,666,376
Accumulated deficit 28,651 28,651
Total stockholders' equity 851,553 4,695,348
Total capitalization $3,186,165 $5,669,960
------------------- ----------------------
</TABLE>
(1) For a description of the Company's long-term debt, see Note 9 to the
Company's consolidated financial statements.
(2) $1,000,000 in convertible promissory note payable will be converted into
160,000 shares of Common Stock upon closing of the offering.
(3) Assumes no exercise of the Underwriters' Over-allotment Option. If the
Underwriters' Over-Allotment Option is exercised in full, the adjusted
capitalization of the Company would be: Common Stock $333; Additional paid
in capital $5,198,804; Total stockholders' equity $5,227,788; Total
capitalization $6,202,400.
(4) Excludes shares issuable upon exercise of (i) the Underwriters'
Warrants to acquire up to 80,000 shares of Common Stock at a price of
$8.25 per share, and 80,000 Warrants at a price of $.165 per Warrant and
exercisable at $6.25 per share, (ii) the Underwriters' Over-Allotment
Option to purchase up to 120,000 additional shares of Common Stock and
120,000 additional Warrants, (iii) outstanding warrants held by Mr.
Patrick A. DePaolo, Sr. and Mantis V, L.L.C. to purchase 50,000 and 85,000
shares of Common Stock, respectively, at a price per share equal to $2.25
and (iv) outstanding Selling Securityholder Warrants granting holders the
right to purchase an aggregate of 800,000 shares of Common Stock at a
price per share equal to $6.25. See "Management," "Certain Transactions"
and "Underwriting."
(5) Excludes Common Stock reserved for issuance upon the exercise of
outstanding warrants or the Underwriters' Warrants. See
"Underwriting."
22
<PAGE>
DILUTION
The difference between the initial public offering price per share of
Common Stock and the pro forma net tangible book value per share after the
offering constitutes the dilution to investors in the offering. Pro forma net
tangible book value per share (after giving effect to pro forma adjustments)
is determined by dividing the pro forma net tangible book value of the Company
(total pro forma tangible assets less total liabilities) by the number of
outstanding shares of Common Stock.
The net tangible book value of the Company (total assets less total
liabilities and intangible assets) on April 30, 1997 was ($329,135) or ($.15)
per share of the outstanding 2,254,500 shares of the Company's Common Stock.
After (i) conversion of the $1,000,000 convertible promissory note
payable to Christie Enterprises, Inc. and after giving effect to (ii) the
anticipated expenses of the offering, the adjusted net tangible book value of
the Company at April 30, 1997 would have been $4,046,808 or $1.26 per share,
representing an immediate increase in net tangible book value of $1.41 to
existing stockholders and an immediate dilution of $3.74 to the purchasers of
Common Stock in the offering. The following table illustrates the per share
dilution to investors in the offering:
Initial public offering price per share (1) $5.00
Net tangible book value per share before the offering $(.15)
Increase per share attributable to conversion of
convertible promissory note payable .43
Increase per share attributable to the sale of
Common Stock in the offering (2) .98
Net tangible book value per share (2) 1.26
Dilution to new investors $3.74 (75%)
(1) Before deductions of underwriting discounts and estimated offering
expenses payable by the Company.
(2) After deduction of underwriting discounts and estimated offering expenses
payable by the Company, estimated at $704,057.
The following table sets forth as of April 30, 1997, the number of shares
of Common Stock issued by the Company, the total consideration to the Company
(excluding the non-cash effect of debt issue costs ($580,500), the
contribution of minority interest in excess of related book value ($126,128)
and without deduction of selling discounts and commissions or offering
expenses and assuming a value of $.10 per Warrant) and the average price per
share paid by existing stockholders and by the investors in the offering:
<TABLE>
<CAPTION>
AVERAGE
PRICE
SHARES ACQUIRED TOTAL CONSIDERATION PER SHARE
------------------------ ------------------------- ----------
NUMBER PERCENT AMOUNT PERCENT
- ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1) 2,414,500 75.1% $1,116,000 21.8% $.46
Investors in offering 800,000 24.9 4,000,000 78.2 $5.00
Total 3,214,500 100.0% $5,116,000 100.0% $1.59
</TABLE>
----------------------------------------------
(1) Total consideration from existing stockholders represents the total
amounts paid after conversion of the convertible promissory note payable
but before the offering and the Concurrent Offering.
23
<PAGE>
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.
On November 1, 1996, the Company acquired substantially all of the assets
of Christie Enterprises, Inc. (the "Christie Acquisition"), a plastic
container manufacturer in New Jersey, which was a customer of the Company. The
purpose of the purchase was to initiate the implementation of a strategy to
integrate into businesses where the Company believes it can increase its
margins. Although the Christie operations had a recent history of losses from
operations, the Company believes that economies associated with larger
quantity buying of raw material, expansion of the Christie customer base
through new marketing programs and other economies associated with the
Company's vertical integration strategy will allow the Christie operations
to be a source of both profits and positive cash flows to the Company. Since
completion of the Christie Acquisition, its customer base has been increased
by approximately 15% and the gross profit margin on Christie operations has
been increased to approximate that of the Company's other operations.
RESULTS OF OPERATIONS
Years Ended April 30, 1997 and 1996
Sales increased by $1,321,463, or approximately 34.3%, to $5,179,668 for the
year ended April 30, 1997, as compared to $3,858,205 for the year ended April
30, 1996. The 1997 sales include $1,212,477 related to the Christie
Acquisition since the November 1, 1996 date of acquisition (approximately
23.4% of 1997 sales). The accounts receivable turnover ratio was 6.0X in
fiscal 1997 and 6.5X in fiscal 1996. The decrease is attributable to the
seasonal nature and payment pattern associated with the nursery growing
container business acquired from Christie.
Cost of goods sold increased by $969,941, or approximately 32.2%, to
$3,982,066 for the year ended April 30, 1997, compared to $3,012,125 for the
year ended April 30, 1996. The increase in cost of goods sold was attributable
to increased sales volume, principally due to the Christie Acquisition; cost
of goods sold as a percentage of sales was 76.9% for the year ended April 30,
1997 as compared to 78.1% in 1996. The decrease in cost of sales as a percent
of sales is primarily due to reductions in the cost of raw material purchases
because of the effect of buying larger quantities of raw materials. The
inventory turnover ratio was 5.1X in fiscal 1997 and 5.5X in fiscal 1996. The
decrease is attributable to the need to build inventories prior to the
principal selling season of the Christie business. Gross profit increased by
$351,522, or approximately 41.5%, to $1,197,602 for the year ended April 30,
1997, as compared to $846,080 for the year ended April 30, 1996. Such increase
was primarily attributable to the increase in sales volume and reductions in
raw material costs.
Selling, general and administrative costs increased by $590,557, or
approximately 83.1%, to $1,300,859 for the year ended April 30, 1997 as
compared to $710,302 for the year ended April 30, 1996. Such increase is
attributable to the hiring of additional personnel and associated costs for
employee benefit programs, travel and marketing as the Company started to
implement its strategy for growth. In fiscal 1997 selling, general and
administrative costs related to the Christie Acquisition amounted to
approximately $308,000, costs for new product approvals and development of a
larger and more diversified customer base amounted to approximately $94,300
and facilities expense increased approximately $60,000 because of additional
space taken by the Company. Such costs may continue to increase in the future
as the Company continues to seek growth by acquisitions. For the year ended
April 30, 1997, two customers accounted for approximately 32% of sales while
in fiscal 1996 they accounted for approximately 74% of sales. No other
customer accounted for more than 10% of the Company's sales in fiscal 1997 or
1996.
Operating income decreased by $239,035 to a loss of $103,257 for the year
ended April 30, 1997 as compared to income of $135,778 for the year ended
April 30, 1996. The decrease was primarily attributable to the additional
personnel and associated costs for employee benefit programs, travel and
marketing incurred to commence the implementation of the growth strategy of
the Company.
Deferred financing costs of $176,037 (a non-cash charge to earnings) were
incurred in fiscal 1997 (none in fiscal 1996) as a result of the stock
issuance to Mantis V, L.L.C. in connection with its $375,000 loan to the
Company. See "Business- Expansion Strategy." The debt proceeds were used to
implement significant parts of the Company's vertical integration growth
strategy, including the expansion of management, the increase and
diversification of the Company's customer base, the consummation of the
Christie Acquisition and the recapitalization of the Company. In addition,
interest costs associated with bank borrowings and equipment financing
increased by $54,064, or approximately 61.9%, to $141,356 for the year ended
April 30, 1997 as compared to $87,292 for the year ended April 30, 1996.
<PAGE>
Income tax benefit amounted to $36,000 for the year ended April 30, 1997
as compared to no charge or benefit in 1996. The benefit is attributable to
the net loss incurred in 1997. There was no tax charge in 1996 because of the
effect of surtax exemptions and permanent tax differences.
24
<PAGE>
As a result of the foregoing, net loss amounted to $312,666 for the year
ended April 30, 1997 as compared to net income of $103,256 for the year ended
April 30, 1996.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
The Company's primary source of liquidity has been cash flow from
operations, supplemented by borrowings under its bank credit facilities.
Additional sources of liquidity have been equipment lease financing,
borrowings from stockholders and the issuance of a convertible promissory note
in connection with the Christie Acquisition.
The Company raised gross proceeds of $400,000 (net proceeds of $318,000)
in a private placement of units in April 1997. The units sold consisted of
$360,000 11% unsecured subordinated promissory notes, all of which will be
repaid from the proceeds of this offering, and 800,000 Bridge Warrants. See
"Concurrent Offering". The exercise price for the 800,000 shares of Common
Stock associated with the Bridge Warrants is $6.25 per share. The Bridge
Warrants were valued at $.05 each, an aggregate of $40,000.
Cash flow. Net cash provided (used) by operations was ($80,240) for fiscal
1997 and $118,634 for fiscal 1996. The decrease in cash flow from operations
of $198,874 is principally attributable to the increase in the number of
employees, the requirement to build inventory levels and an increase in
interest costs as the Company positioned itself for the anticipated impact
of its growth strategy. Net cash used for the direct purchase of fixed assets
and other assets was $216,477 for fiscal 1997 and $41,450 for fiscal 1996.
In fiscal 1997, the Company financed the $1,500,000 cost of the Christie
Acquisition by a combination of borrowing $500,000 from Textron Financial
(described below) and by the issuance to the seller of a $1,000,000
convertible promissory note payable. Net short-term bank borrowings provided
funds of $210,000 for fiscal 1997 and $170,000 for fiscal 1996.
Bank Credit Facilities. At April 30, 1997 the Company had borrowing
arrangements with a commercial bank. The arrangements provided for a credit
line of up to $500,000 ($490,000 outstanding at April 30, 1997) collateralized
by substantially all of the Company's assets. The credit line called for
interest at the bank's prime rate plus 1.75%. The Company also had a term loan
with the bank with a principal balance of $224,359 at April 30, 1997 which
called for monthly principal payments of $6,173 plus interest at the bank's
prime rate plus 2%.
In June 1997, the Company concluded a credit arrangement with a new bank
which provides for a credit line of up to $700,000 on a borrowing base
consisting of 80% of eligible accounts receivable and 50% of eligible
inventory. This new credit line bears interest at the bank's prime rate plus
1%. This arrangement also provided a five-year term loan of $353,000 which was
used to pay off the old term loan and certain other term debt. The new term
loan calls for monthly principal payments of approximately $5,300 plus
interest. The term loan bears interest at the bank's prime rate plus 1%.
The Company has received a proposal from its new bank (subject to the
successful completion of this offering) to increase the line of credit
availability to $1,500,000, subject to availability, and to also provide
term loans from time to time for the purpose of the acquisition of machinery
and equipment. Interest rates pursuant to this new credit facility will
approximate those of the current arrangement. The new facilities, the proceeds
from this offering and cash flow from operations should provide sufficient
funds for the Company to meet its working capital, capital expenditure and
debt service requirement needs for the foreseeable future. Additional funds
may be required if the Company is successful in expanding its business through
internal growth and/or by acquisitions of businesses in related industries.
The current credit facilities are secured by substantially all assets of
the Company and the personal guarantee of its Chief Executive Officer, Patrick
A. DePaolo. The new credit facilities contain financial covenants which will
require the Company to maintain certain tangible net worth and debt service
coverage ratios; however, subsequent to the consummation of the offering, the
personal guarantee of Mr. DePaolo will be canceled.
In connection with the Christie Acquisition, the Company borrowed $500,000
from Textron Financial. The loan is secured by the machinery and equipment of
Christie and carries interest of 9.75% per annum and requires monthly payments
of principal and interest of $12,600 through November 2000.
The Company also had a note payable to the Connecticut Development
Authority with a principal balance of $108,407 at April 30, 1997. A portion of
the term loan included in the new credit facility was used to repay this note.
Working Capital. The Company's working capital decreased from $489,434 at
April 30, 1996 to $90,948 at April 30, 1997 or by $398,486. The decrease
relates to the due date of its prior bank term loan being accelerated to June
1997, the current portion of the note payable to Textron Financial and working
capital used to finance a portion of the costs associated with this offering.
The consummation of this offering and the execution of the new commercial bank
credit facilities will significantly improve the working capital position of
the Company.
25
<PAGE>
BUSINESS
Discas, Inc., based in Waterbury, Connecticut, 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. In November 1996, the Company acquired a plastic container
manufacturer in New Jersey as part of its strategy to vertically integrate its
operations from raw material supply through end product manufacturing. See
"--Expansion Strategy."
Historically, the Company's core business focused on the development and
marketing of niche synthetic rubber compounds such as thermoplastic elastomers
("TPE"). In addition, the Company has built a portion of its business around
providing contract testing and research services for industrial accounts,
which has resulted in the development of new materials and market
applications, although revenues from such line have not been material to date.
In recent years, Discas has extended this technology to industrial-source
scrap plastic to produce marketable value-added plastic compounds, and
management is now focused on increasing growth in plastics through market
penetration and acquisitions. See "--Expansion Strategy."
Discas is currently using industrial scrap material to manufacture high
quality recycled polypropylene-based compounds that are used by manufacturers
in place of more expensive virgin plastics. The Company secures its feedstock
(raw material supply) from industrial waste streams as well as limited amounts
of feedstock from post-consumer waste streams (such as curbside recycling
programs) and works closely with several regional firms that collect and
process industrial scrap material for reuse. Discas has the technological
capability to modify this feedstock into higher-value material and management
believes that it can lead an industry consolidation by continuing to build on
established supplier and customer relationships.
THE RECYCLED PLASTICS INDUSTRY
The use of materials recycled from industrial and commercial waste streams
has begun to expand in recent years. Increasingly restrictive regulatory
requirements and higher disposal costs have focused efforts on reclaiming
scrap materials. The availability of recycled raw materials has catalyzed the
development of technology to cost-effectively incorporate their use in
existing markets alongside or in place of virgin materials. This market-driven
use of recycled materials is established within the steel, paper and aluminum
industries and, for certain polymers, is now developing into a commercially
viable sector of the plastics industry.
The market potential for compounds using recycled polymers is large.
Reclaimed plastic accounts for a small fraction of the estimated annual 70
billion pound United States plastics market, although recent trends are toward
increasingly greater market demand, according to The Society of the Plastics
Industry, Inc. Most of the existing recycled plastic is derived from the
municipal solid waste stream which yields Polyethylene Terephthalate ("PET")
and High Density Polyethylene ("HDPE") plastics from curbside and drop off
collection programs. Companies such as Wellman Inc., Eaglebrook Industries and
Pure-Tech Plastics, Inc. developed by focusing on the processing of these
post-consumer plastics into reusable commodity virgin resin substitutes.
In addition to the reuse of PET and HDPE, certain polymer compounders
including Discas have succeeded in converting scrap feedstocks such as
polypropylene, polystyrene, nylon, ground tires and other polymers into hybrid
value-added proprietary compounds. In North America, polypropylene alone is
estimated by Crain's Plastics News (Crain's International), December 30, 1996,
to be a $4 billion annual industry using primarily virgin resins. These virgin
grades are typically priced between $.35 and $.55 per pound, ranging from
commodity grades to more sophisticated custom compounds.
Discas believes there is a major opportunity in polypropylene-based
recycled materials and has developed a wide range of product lines to compete
with virgin resins offered by major polypropylene producers. Much of the raw
material used in the Discas formulations is based on polypropylene industrial
scrap that until recently had little perceived value. The waste materials used
by Discas are generated in large volumes during various manufacturing
processes and can be reprocessed for reuse or further enhanced to produce
higher value compounds for other manufacturers. Industries generating large
quantities of scrap material include the textile, carpet, molded products and
packaging sectors. One challenge facing recyclers is a perception that the use
of scrap materials entails the acceptance of lower quality standards. Thus,
the Company is particularly focused on material performance specifications in
the formulation and testing of its compounds. Management has found that the
use of less expensive recycled material as a base for its compounds results in
pricing advantages which can be passed along to the manufacturer while still
maintaining necessary quality required to meet customer technical
specifications.
26
<PAGE>
Discas has the technology and materials expertise to blend industrial
scrap feedstocks, prime material, and a variety of additives and enhancers to
produce value-added compounds for product manufacturers.
COMPANY HISTORY
In 1974, Mr. Patrick A. DePaolo, Sr. the founder, Chairman, Chief
Executive Officer, President and controlling stockholder of the Company, left
Uniroyal Chemical Corp. and established Prolastomer, Inc. ("Prolastomer") to
develop TPE custom compounds for the footwear, sporting goods, appliance and
automotive industries. Production was sub-contracted to toll compounders until
1980 when Prolastomer purchased large scale compounding equipment and became a
processor of proprietary TPE compounds. Due to market and financial
constraints, Prolastomer entered the toll compounding business in 1985 with a
large footwear contract from Shell Chemical Company. Toll compounders process
material for a client to the client's specifications, rather than for direct
sale by such compounder, and without acquiring any proprietary rights in the
material processed. Mr. DePaolo established Discas, Inc. in December, 1985 as
a separate, commonly owned corporation to separate the TPE technology and
marketing activities from Prolastomer's toll compounding business with Shell
Chemical Company. Prolastomer exited the toll manufacturing business upon
completion of the Shell contract in 1988 and ceased operations at that time.
In July 1993, Discas created a 69%-owned subsidiary, Discas Recycled Products
Corp., with four minority stockholders who were in related disciplines, in
order to manufacture products based on recycled plastics. DRPC was merged into
Discas in August, 1996, and the four minority stockholders were issued an
aggregate of 76,623 shares of Discas Common Stock (subsequently reduced to
34,504 shares by separate agreement with Mr. DePaolo).
Focused on new product development and marketing, Discas established the
REPAR Division in 1988 to apply its compounding technology to in-house and
contract research to find commercial uses for low cost scrap feedstocks.
During this period Discas expanded marketing programs and won a contract from
British Petroleum Corp. to distribute TPE. Within two years Discas increased
sales 100% and earned honors as the 128th fastest growing company in the INC
500 survey. British Petroleum Corp. subsequently sold the division purchasing
Company product to Monsanto Company, and the contract was terminated at that
time.
In 1989, Discas began supplying TPE compounds to a major footwear
manufacturer that continues to be a large customer, accounting for 20% of
fiscal 1997 sales. This relationship involved outside toll compounding
arrangements whereby the actual mixing was performed by two other companies.
In 1991, J-Von was contracted as the compounder for Discas as part of a
transaction whereby Mr. DePaolo participated in a management buyout of J-Von
from its parent. The Company now sells proprietary components of its footwear
formulations to J-Von. After mixing oil and other common ingredients into such
footwear formulations, J-Von compounds large volumes of material, tests the
batches in accordance with the Company's specifications, and ships the
finished compounds to the Company. The finished compounds, in the form of
pellets ready for molding, are then shipped to the footwear manufacturer. This
arrangement alleviates the need for the Company to purchase and maintain large
specialized mixing equipment, additional plant space and personnel dedicated
to this customer. Mr. DePaolo has entered into a non-competition agreement
with J-Von pursuant to which neither can sell certain types of virgin TPE to a
limited list of customers of the other. See "Certain Transactions" and "Risk
Factors-Possible Conflicts of Interest."
In early 1990, the Company signed a joint venture agreement with a major
international diaper manufacturer to develop technology to convert factory
polymer and cellulose diaper scrap into reusable plastic compounds. This
corporation was searching for an economically viable alternative to its costly
solid waste disposal of millions of pounds of scrap. Discas provided the
technical and manufacturing expertise for this program which included joint
investment in formulation, production process development and test marketing.
The initial marketing program was successful and resulted in the
commercialization of several compounds for applications such as containers,
VHS cassettes, footwear components, fast food trays and other consumer items.
This arrangement was completed in March 1993 and the Company exercised its
option to manufacture and market compounds using raw materials from such
corporation as well as from other suppliers.
Effective November 1, 1996, the Company acquired substantially all of the
operating assets of Christie Enterprises, Inc., a plastic container
manufacturer, through a wholly-owned subsidiary, Christie Products, Inc. See
"-- Expansion Strategy."
Discas has developed an extensive program to source a wide variety of
polymer waste feedstocks from post-consumer and post-industrial scrap
suppliers, and has formulated a broad range of high quality, competitively
priced recycled plastics and prime and recycled thermoplastic elastomers using
these materials.
PRODUCT LINES, CUSTOMERS AND SUPPLIERS
27
<PAGE>
The recent addition of new polymer sources, and increased formulation and
compounding process development has enabled Discas to expand its product
lines. The following product types give Discas a broad recycled product line
with margins that reflect the use of lower cost feedstocks in several premium
quality/higher priced applications:
--Standard Polypropylene Grades including a range of grades for serving
trays and injection molded products.
--Impact Modified Polypropylene, including rubber alloys and polymer
blends designed for applications such as automotive parts and rigid packaging.
--Custom Compounds, including color matched pre-colored and made-to-order
compounds.
--Filled and Reinforced Polypropylenes, from scrap feedstocks containing
mineral fillers and cellulose and glass reinforcing fibers for automotive and
furniture applications.
--Standard Precolored Polypropylene, including black, white, and
standardized colors available from scrap feedstocks.
--Thermoplastic Elastomers, including compounds from recycled
polypropylene and polystyrene, ground tires, scrap TPE (e.g., footwear, auto
bumpers) and other industrial waste feedstocks. Product line applications
include footwear, automotive and consumer/industrial products. The Company
also produces a substantial quantity of proprietary formulations for the
footwear industry from prime TPE feedstocks.
Discas has also developed several proprietary compounds based on recycled
scrap tires and other vulcanized rubber waste materials which can be used by
footwear manufacturers and in industrial applications. Additional product
lines currently under development include other polyolefin based compounds
such as low, linear and high density polyethylene and styrene based compounds
from recycled expanded polystyrene, engineered plastics such as Acrylonitrile
Butadiene Styrene ("ABS") and other high performance plastics for industrial
applications.
Discas has developed compounds that have been used in a range of products
representing a large number of industries. Current applications and industrial
development programs include:
VHS cassettes Writing instruments
Agriculture containers Furniture
Fast food serving trays Shelving
Color concentrates Footwear
Coat hangers Electrical connectors
Caster wheels Office products
Disposable medical products Handles and grips
Automotive components Personal care products
Flashlights Machine housings
Discas is the primary supplier of recycled material to one of the largest
manufacturers of polypropylene VHS cassettes in the world. Continued pricing
pressure from competitive Asian manufacturers of polystyrene cassettes is
forcing other North American cassette producers to consider converting to
lower cost technologies, including the use of recycled polypropylene
feedstocks. Other market driven applications include the supply of precolored
recycled polypropylene for a new line of nationally marketed writing
instruments and proprietary precolored compounds developed for the major
plastics molders supplying serving trays to McDonald's Corp. and other
fast-food chains. Recently, a Discas compound was approved by a "Big Three"
automotive company and this successful application has led to additional
opportunities for qualification of Discas materials for other automotive
interior and exterior parts. As is customary in the industry, in the
experience of management, Discas does not have ongoing supply contracts with
any of its customers. All sales made by Discas are initiated by a purchase
order at the request of a customer which may be in the form of a blanket order
covering several months' requirements.
Management of Discas believes that its focus on quality and innovation
provides one of its primary competitive advantages. Discas incorporates extra
blending steps in its manufacturing process and performs numerous sample
testings, enabling it to ensure product consistency and homogeneity. Discas is
also able, through the technical expertise and creative
28
<PAGE>
ability of its management, to create and manufacture products tailored to its
customers' unique specifications, providing the highest level of flexibility
and service.
Resulting from this reputation for quality and innovation, Discas
currently has development and testing programs in place with several leading
manufacturers of consumer products, industrial products, medical products,
footwear and automobiles in the United States. These corporations typically
fund initial research and development by Discas to create and produce
compounds which can be used in the manufacture of consumer products using
their industrial waste which has been previously unrecyclable and sent to
landfills. Such projects, if successful in creating a commercially viable
product, will enable Discas to obtain reliable sources of supply of raw
materials at a relatively low cost while maintaining the formulation as
proprietary or the rights to the new formulations or technology created, and
affording the suppliers an opportunity to earn revenue from the sale of their
waste material rather than paying for its disposal. Through fiscal 1997,
revenues from these programs have not been significant.
The Company currently depends on third party relationships with
several suppliers of scrap polymer feedstocks, the raw materials necessary to
the business of the Company. The Company does not presently have any long term
agreements with these suppliers and does not anticipate the execution of any
long term agreements in the future. The two largest suppliers, Ash-Kourt
Fabrics, Inc. and Borden, Inc., currently provide approximately 40% of the
Company's feedstock. The Company believes that it has alternative sources of
supply available to it in the event that its requirements change or its
current suppliers are unable or unwilling to fulfill the Company's needs. The
Company does not have any material backlog of orders for product.
COMPETITION
The compounding of polymers is a highly competitive industry. The
Company's prime and recycled products compete with a variety of polymer
materials from other companies, many of which are larger, better financed
manufacturers of prime compounds, including many of the major multinational
chemical manufacturers. The Company must continue to competitively price its
products against both prime and recycled compounds and meet required
performance specifications if it is to successfully build its sales volume. In
addition to pricing and material quality, the Company also competes to meet
customer volume requirements on a timely basis. The Company's capability of
using lower cost feedstocks from scrap material provides the Company with a
pricing advantage which increases with its higher-priced custom and
proprietary compounds which have higher margins than commodity products.
While the Company believes that its technical expertise, modern
facility and advanced quality control are attractive features to potential
customers, there can be no assurance that the Company can capture adequate
competitive contracts to sustain profitability, or that other companies will
not provide superior products in both price and quality.
EXPANSION STRATEGY
The Company intends to continue expanding its operations through a
combination of internal growth and vertical integration into raw material
procurement and end-product manufacturing.
In implementing this strategy in the past year, the Company has
commercialized new compounds from scrap feedstocks, increased production
capacity and diversified its customer base. New compounds include high impact
custom formulations for appliance caster wheels, custom colored compounds for
flower pots, and reinforced compounds for retail store shelving.
Company-funded research and development expenses in connection with this
product expansion has been minimal in each of the last two fiscal years. Sales
diversification is evident by a growth in the number of customers, the number
of industrial sectors and the number of formulations available to customers.
Although the Company's two largest customers accounted for approximately 74%
of the Company's sales in fiscal 1996, the Company has subsequently
diversified its customer base such that in fiscal 1997, the Company's two
largest customers accounted for approximately 32% of sales and no other
customer accounted for more than 10% of sales. The Company recently increased
compounding capacity by 25% and management believes that Discas can best
continue its growth by further expanding capacity at existing facilities as
well as through acquisitions. With its Waterbury, Connecticut facility
approaching full capacity, Discas has begun expanding and upgrading its
equipment to increase production and efficiency. A portion of the proceeds
from this offering will be used to purchase capital equipment. See "Use of
Proceeds."
With a view towards building the Company's capabilities in the area
of acquisitions, the Company added two directors to its board in November
1996, Mr. Alan Milton and Mr. Asher Bernstein, both representatives of Mantis
V, L.L.C. ("Mantis"). Mantis is an investment vehicle for Mantis Holdings,
Inc., which is an investment and business advisory firm specializing in the
environmental and recycling industries. See "Management." The principals of
Mantis, experienced in
29
<PAGE>
acquisitions in the recovered materials industries, have worked with the
Company for approximately two years helping to establish the Company's growth
strategy. In June 1996, Mantis agreed to have its representatives join the
Board of Directors and provide the Company with a loan to cover its working
capital needs in connection with the Christie Acquisition and initiation of
the joint venture negotiations with Ash-Kourt Fabrics, Inc. described below.
Over the months following the agreement, the Company drew down $375,000 from
Mantis pursuant to 8% subordinated notes due July 1998. Mantis also received
364,500 shares of Common Stock and three year warrants to purchase 85,000
shares of Common Stock at $2.25 per share, prior to completion of the Christie
Acquisition. All of such shares are subject to a two-year "lockup" agreement
in favor of Roan Capital Partners L.P.
In recent months, consistent with the consolidation strategy to
vertically integrate its operations, management began pursuing feedstock
suppliers, processors and end-product manufacturers regarding joint venture
and merger opportunities. For example, in July 1996, the Company established
AKD, L.L.C., a recycled feedstock sourcing joint venture with Ash-Kourt
Fabrics, Inc., a North Carolina-based processor of recycled polypropylene
which presently provides approximately 30% of the Company's feedstock, with a
view to further increase efficiencies by means of joint sourcing of a wider
variety of grades of scrap feedstock to lower overall purchase prices and
transportation costs of raw materials. The two companies are currently
continuing negotiations on the potential structure of such venture. Currently
Ask-Kourt is operating AKD only as an arm's-length supplier of densified raw
materials to the Company. There can be no assurance that such joint venture
will lead to the procurement of lower-cost feedstocks or provide other
commercial advantages for the Company.
In early November 1996, Discas acquired substantially all of the business
assets of Christie, a manufacturer of high-end plastic containers and products
primarily for the wholesale plant nursery industry, located in Kenilworth, New
Jersey, for a purchase price of $1,630,000 ($130,000 of which was
consideration for a consulting agreement with Frank Criscitiello, former
president of Christie, for providing continuing assistance in customer
relations and transitional advice), of which $1,000,000 is payable by Discas'
convertible promissory note, dated October 30, 1996. This note will be
converted into 160,000 shares of the Common Stock of Discas based upon a
conversion price of 125% of the initial public offering price per share of the
common stock of Discas (the "Conversion Price") upon the closing of this
offering, or the greater of the then fair value of a share of the Common Stock
of Discas and $6.00, in the event this offering is not consummated by October
1, 1997. Some of Christie's products are molded using recycled plastic
compounds that Discas has developed, and the Company plans on expanding the
use of its formulations in other product lines.
Approximately 80% of the Company's Christie subsidiary's sales are nursery
growing containers, with the balance of sales consisting of a wide variety of
heavy-duty plastic ice buckets, laundry baskets and other plastic items.
Christie's sales have historically been evenly divided between the Southeast
and the Middle Atlantic states. Since the acquisition, the Company has also
penetrated the New England market. Sales are principally made by the Company's
in-house sales staff. One customer accounted for approximately 33% of the
subsidiary's sales since the date of the acquisition (but less than 10% of
consolidated revenues). Such customer, while a long-term customer, typically
submits only quarterly purchase orders due to the seasonality and weather
factors that affect growing container requirements.
Discas management believes that further consolidation opportunities exist
and is in early stages of discussions with several suitable acquisition
candidates. The Company is particularly interested in entrepreneurial owners
who would be willing to work for the Company in key management positions
following an acquisition. Discas envisions using Common Stock as part of the
purchase price for such acquisitions, as well as for performance based
incentive compensation to attract strong management.
PROPERTY
Discas leases approximately 55,000 square feet of industrial and office
space in Waterbury, Connecticut pursuant to three triple-net leases expiring
between 1998 and 2000, all of which are extendible until 2005 at the option of
the Company. Annual base rental is currently approximately $170,000,
escalating approximately three percent annually through 2005. Offices total
approximately 4,000 square feet with adequate space to increase office
personnel as required.
The Company also owns or leases its operating equipment located in
Waterbury, including two densifiers, two guillotines, four compounding
extruder lines, six dry blending machines ranging in capacity from 100 pounds
to 6,000 pounds, five silos including two post-blending silos, several
mid-size choppers, a complete compound development laboratory, fabrication
equipment, an extensive physical testing laboratory which has been approved by
the American Council of Independent Labs, and large capacity material handling
equipment including forktrucks, blowers, augers and transfer bins. Certain of
this equipment is leased from Mr. DePaolo or his affiliates. See "Certain
Transactions."
Discas utilizes custom database software for its polymer technology
programs, including formulation development and scrap material analysis.
Computer systems are in place to support financial controls and
sourcing/purchasing.
30
<PAGE>
The Company's New Jersey facility occupies a building with 24,000 sq.
ft. of warehouse and office space. The facility is leased from an affiliate of
the former owner of Christie at rates which management believes are consistent
with current market rates through October 1997, with an option to renew for an
additional two years. Annual rental is $120,000. Equipment includes thirteen
injection molding machines with capacities from 200 tons to 700 tons. Support
equipment includes loader control units, a 75 ton water chiller, raw material
silos and other material handling equipment, as well as a modern diesel truck
for local deliveries. The Company's inventory of molds is extensive and
suitable for the production of a wide variety of nursery products and other
items. A complete machine shop is located on the site.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION
Discas is subject to federal, state and local government requirements
regarding its operations and products which are applicable to manufacturing
businesses generally. Discas does not generate, store, transport or dispose of
any material amounts of hazardous waste. Most permits required in the
operations of Discas relate to fire codes and other local ordinances.
Management of Discas believes that it is in compliance with all material
regulations relating to the operation of its business. None of Discas'
products is regarded as hazardous material by the applicable regulations.
EMPLOYEES
As of March 31, 1997, Discas employed approximately 61 persons, of
whom approximately 11 employees are management, sales and administration and
the balance of whom are involved in the manufacturing process. None of Discas'
employees are covered by a collective bargaining agreement. Discas believes it
has a good relationship with its employees.
LEGAL PROCEEDINGS
Discas is not presently involved in any material legal proceedings.
31
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Patrick A. DePaolo, Sr. 55 Chairman of the Board of Directors,
Chief Executive Officer and President
Thomas R. Tomaszek 45 Vice President, Marketing and Business Development and
Director
Ron Pettirossi 54 Chief Financial Officer
Al Moreno 44 Vice President, Manufacturing
Stephen P. DePaolo 32 Vice President, Materials Sourcing, Distribution and Planning
John Carroll 51 Director
Asher Bernstein 53 Director
Alan Milton 43 Director
</TABLE>
Patrick A. DePaolo, Sr., Chairman of the Board of Directors,
President and CEO. Prior to founding Discas in 1985, Mr. DePaolo worked at
Uniroyal Chemical Corp. for 11 years where he had 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 is 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, Vice President, Marketing and Business
Development and 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 three plastics manufacturing firms, Rapid Granulator
Company, Nelmor Company and Eaglebrook-East. He was also the manager of
manufacturing operations of Plastics Again, a Genpak and Mobil Corporation
joint venture polystyrene recycling facility and, more recently, from 1990 to
1993, founder and President of North American Plastics Recycling Corp., the
nation's first 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.
Ron Pettirossi, Chief Financial Officer. Mr. Pettirossi became Chief
Financial Officer of the Company in February 1997. Mr. Pettirossi had been
acting Chief Financial Officer of the Company since July 1996. Mr. Pettirossi
was an audit partner for Ernst & Young L.L.P. until 1995 where he held a
variety of positions during a 31 year public accounting career. As an audit
partner, he served numerous public and privately owned companies, including
ADVO, Inc., ESPN, Inc., Reflexite Corporation, Magellan Petroleum Corporation,
the Spencer Turbine Company and Earthgro, Inc. Mr. Pettirossi worked with
senior management on a number of consulting engagements including strategic
planning, management information systems, inventory management, cost control
systems and tax planning. He graduated from the University of Massachusetts
with a B.B.A. in 1964 and is a member of the AICPA and the Connecticut Society
of Certified Public Accountants.
Al Moreno, Vice President, Manufacturing. Mr. Moreno has been the
Vice President of the Company since early 1997. Mr. Moreno worked as Plant
Manager/Purchasing/Sourcing at Converse, Inc. from 1994 until joining the
Company, and, prior to that time, he worked for 10 years as Quality Assurance
Manager and Assistant Vice President of Manufacturing at Lowell Shoe Company.
Mr. Moreno has also held management positions with Hampshire Manufacturing and
Servus Rubber Company. Mr. Moreno attended Daniel Webster College and studied
computer programming.
32
<PAGE>
Stephen P. DePaolo, Vice President, Materials Sourcing, Distribution and
Planning. Mr. DePaolo has worked at Discas in production, marketing and
purchasing since 1985 and currently manages feedstock sourcing and markets. He
has developed advertising and publicity programs covering Discas materials,
and has established approvals as suppliers to Wal-Mart Stores Inc. and
McDonald's Corp. Mr. DePaolo gained a dual B.A. degree from Northeastern
University in Business Administration and Marketing. Stephen DePaolo is the
son of Patrick A. DePaolo.
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 a managing member of J-Von, and a director of Chesterton Co., Leach
and Garner Manufacturing Co. and ATP, Inc. See "Certain Transactions."
Asher Bernstein, Director. Mr. Bernstein is President and principal
of Bernstein Real Estate, a 70 year old company that owns or manages more than
40 commercial buildings in New York City. The firm's residential rental
division specializes in the rental of luxury apartments in Manhattan. Mr.
Bernstein also serves as a Director of AFA Protection Systems, Inc., Director
and Treasurer of the Midtown Realty Owners Association, Director of the
Fashion District Business Improvement District (BID) and as a Director of the
Avenue of the Americas Association. He received a B.A. from New York
University and an M.B.A. from the Graduate School of Business of Columbia
University. Mr. Bernstein is a member of Mantis V, L.L.C., an investor in the
Company, and became a director of the Company in November 1996.
Alan Milton, Director. Mr. Milton is a founder and Managing Director
of Mantis Holdings, Inc., a private environmental industry investment and
business advisory company focusing on manufacturers in the waste minimization
and recycling sectors. Mr. Milton has worked in the energy and environmental
industries for over 17 years with experience in project development,
regulatory compliance and pollution control technology. He currently serves as
a Director of Quadrax Corporation, Composite Particles, Inc. and Industrial
Flexible Materials, Inc. He received his M.A. degree in Environmental Affairs
from Clark University, after completing his undergraduate work in Geology and
Ecology at Clark University. Mr. Milton is a member of Mantis V, L.L.C., an
investor in the Company, and became a director of the Company in November
1996.
All directors serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. No director receives any fees
for his service as such. Messrs. Bernstein, Carroll and Milton are independent
directors of the Company, and such independent directors constitute the
Board's Audit Committee.
EMPLOYMENT AGREEMENTS
Mr. DePaolo serves as 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 three 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.
It is the Company's policy to obtain confidentiality and
nondisclosure agreements from its key employees.
EXECUTIVE COMPENSATION
No employee of the Company has ever received cash compensation in excess
of $100,000 per year. The following Summary Compensation Table sets forth the
compensation earned by Patrick A. DePaolo, Sr., the Company's President, Chief
Executive Officer and Chairman of the Board of Directors.
Summary Compensation Table
33
<PAGE>
<TABLE>
<CAPTION>
OTHER
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION COMPENSATION
CASH
YEAR SALARY BONUS
- ---- --------- -------
<S> <C> <C> <C> <C>
Patrick A. DePaolo, President, Chief Executive
Officer and Chairman of the Board 1996 $50,402 0 $2,234(1)
of Directors 1995 $82,288 0 0
1994 $68,652 0 0
</TABLE>
(1) Deferred compensation.
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Plan") was approved by the
Company's Board of Directors and stockholders in February 1997. Options
granted under the Plan may include those qualified as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended, as well as
non-qualified options. Employees as well as other individuals, such as outside
directors, who provide necessary services to the Company are eligible to
participate in the Plan. Non-employees and part-time employees may receive
only non-qualified stock options. The maximum number of shares of Common Stock
for which options may be granted under the Plan is 450,000 shares. Following
the closing of this offering, the Company will issue Mr. DePaolo an option to
purchase 150,000 shares which will expire no later than April 30, 2002,
exercisable at $7.50 per share only at such time as the Company's audited
financial statements show after tax net income equal to or exceeding $0.15 per
share.
The Plan is administered by a Compensation Committee of the Board of
Directors (the "Committee") which may consist of the entire Board of Directors
or a subcommittee thereof. Messrs. DePaolo and Milton are the current members.
The Committee has wide latitude in determining the recipients of options and
numerous other terms and conditions of the options.
However, prior to the issuance of any option, the Company must provide to
Roan Capital Partners L.P. (i) an opinion of a reputable investment banking
firm acceptable to Roan Capital Partners L.P. stating that the consideration
being paid for the acquisition of securities is fair from a financial point of
view if such option is issued with an exercise price below the current market
price, and (ii) a signed lock-up agreement pursuant to which the intended
recipient agrees not to publicly sell any shares owned by them for a period of
the latter of two years from the date of this Prospectus and six months from
issuance.
The exercise price for shares purchased upon the exercise of non-qualified
options granted under the Plan is determined by the Committee. The exercise
price of an incentive stock option must be at least equal to the fair market
value of the Common Stock on the date such option is granted (110% of the fair
market value for stockholders who, at the time the option is granted, own more
than 10% of the total combined classes of stock of the Company or any
subsidiary). No employees may be granted incentive stock options in any year
for shares having a fair market value, determined as of the date of grant, in
excess of $100,000. The exercise price of a non-qualified stock option cannot
be less than 85% of the fair market value of the Common Stock on the date of
grant.
No option may have a term of more than ten years (five years for 10% or
greater stockholders). Options generally may be exercised only if the option
holder remains continuously associated with the Company or a subsidiary from
the date of grant to the date of exercise. However, options may be exercised
upon termination of employment or upon the death or disability of any employee
within certain specified periods.
INDEMNIFICATION AND EXCULPATION PROVISIONS
The Company's Amended and Restated Certificate of Incorporation limits the
liability of its directors to the fullest extent permitted by the Delaware
General Corporation Law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except for liability for (i) any breach of the duty of loyalty to
the Company or its stockholders, (ii) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) acts
falling under Section 174 of the General Corporation Law of the State of
Delaware or (iv) any transaction from which the director derives an improper
personal benefit. Liability under federal securities law is not limited by the
Amended and Restated Certificate of Incorporation.
34
<PAGE>
The Delaware General Corporation Law states that the Company may
indemnify any director, officer or employee made or threatened to be made a
party to a proceeding, by reason of the former or present official capacity of
the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred by the person in connection with the proceeding if certain
statutory standards are met. "Proceeding" means a threatened, pending or
completed civil, criminal, administrative, arbitration or investigative
proceeding, including a derivative action in the name of the Company.
Reference is made to the detailed terms of the Delaware indemnification
statute for a complete statement of such indemnification rights. The Company's
Restated Bylaws require the Company to provide indemnification to the fullest
extent allowed in the indemnification statute.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company is aware that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
CERTAIN TRANSACTIONS
The Company is indebted to Patrick A. DePaolo Sr., the Chairman, Chief
Executive Officer, President and controlling stockholder, in the amount of
$123,734 for working capital and equipment purchase loans made in 1993 and
1995. Such loans are accruing interest at rates between 6.00% to 8.00%. While
such loans are payable upon demand by their respective terms, actual payment
of principal and interest is prohibited by the terms of the Company's senior
commercial loan agreement until such bank loan is paid in full. In addition,
Mr. DePaolo has agreed with the Underwriters not to repay any of such loans
out of the proceeds of this offering or prior to July 31, 1998 without the
prior consent of the Underwriters.
Mr. DePaolo has personally guaranteed the Company's present
commercial bank lending facility. Such guarantee will terminate upon closing
of this offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity, Capital Resources and Other
Matters."
Pastanch L.L.C. ("Pastanch"), which is owned by members of the
DePaolo family, has provided financing in the forms of leases and the purchase
of certain processing equipment used by the Company. One lease is for a period
of two years ending April 30, 1998 and provides for a monthly rental of
$2,200. The Company has an option to purchase the equipment at the end of the
term at its then fair market value. This equipment was purchased by Pastanch
and leased to the Company in order to maintain compliance by the Company with
certain bank loan covenants restricting capital expenditures. In addition,
Pastanch has purchased other processing equipment needed by the Company to
meet current production and sampling requirements and has agreed to sell this
equipment at its total cost of $80,000 for cash to be paid following the
closing of this offering. Pastanch may from time to time offer additional
equipment to Discas at fair market prices in conjunction with Pastanch's
business as an investor/dealer in capital equipment.
Patrick A. DePaolo owns 8% of J-Von Group, L.L.C. ("J-Von"), a
compounder of thermoplastic elastomers, primarily for the footwear industry,
to which the Company sold $128,000 of feedstocks in fiscal 1996 and $671,000
in fiscal 1997, and from which the Company purchased approximately $140,000 of
finished goods in fiscal 1996 and $650,000 in fiscal 1997. The Company has a
non-competition agreement with J-Von pursuant to which the Company and J-Von
have each agreed not to make sales of virgin styrenic SBS and SEBS
thermoplastic elastomers to certain principal customers of the other. The
business of J-Von may be considered to be competitive with the TPE product
lines of the Company. Mr. DePaolo is a director of, but does not have a
management function with, J-Von, which is privately held. John Carroll, a
director of the Company, is a managing member of J-Von. See "Risk Factors -
Possible Conflicts of Interest."
The Company borrowed $375,000 from Mantis V, L.L.C. in 1996 and early 1997
pursuant to three notes bearing interest at 8% due July 1998. Such loans were
used to fund the Company's working capital needs subsequent to the Christie
Acquisition. In conjunction with the funding of such loans, Messrs. Asher
Bernstein and Alan Milton, who are members of Mantis V, L.L.C., were elected
to the Board of Directors of the Company. The Company intends to prepay such
loan at such time as it completes an expansion of its commercial bank debt
with a total loan availability of at least $1,000,000 and in no event may the
Company repay such loan prior to 110 days following the date of this
Prospectus. The Company also pays Mantis Holdings, Inc., an affiliate of the
managing members of Mantis V, L.L.C., a monthly consulting fee of $3,500 for
financial and business advisory services pursuant to a two-year agreement. The
Company paid Mantis Holdings, Inc. an engagement fee of $15,000 at inception
of the agreement. Mantis Holdings, Inc. waived its monthly fees for the first
three months of the agreement.
35
<PAGE>
The Company believes that all of the transactions set forth above
were made on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties. The Company has adopted a policy
that all future transactions, including loans between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors on the Board of Directors, and
will continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and be made for bona fide business
purposes.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Common Stock as of the date of this Prospectus, as adjusted
to reflect the sale of the Common Stock by the Company pursuant to this
offering, and by (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock; (ii) each director of the Company,
and (iii) all officers and directors as a group. Except as otherwise indicated
below, each of the entities or persons named in the table has sole voting and
investment powers with respect to all shares of Common Stock beneficially
owned by it or him as set forth opposite its or his name.
<TABLE>
<CAPTION>
SHARES PERCENT OWNED PERCENT OWNED
BENEFICIALLY PRIOR TO OFFERING AFTER OFFERING
NAME AND ADDRESS (3) OWNED (1)(2)
<S> <C> <C> <C>
Patrick A. DePaolo, Sr.(4) 2,164,981 93.9% 66.3%
Mantis V, L.L.C.(5) 449,500 19.2% 13.6%
c/o Mantis Holdings, Inc.
250 Park Avenue
New York, New York 10177
Alan Milton(5) 449,500 19.2% 13.6%
c/o Mantis Holdings, Inc.
250 Park Avenue
New York, New York 10177
Asher Bernstein(5) 449,500 19.2% 13.6%
c/o Bernstein Real Estate
855 Avenue of the Americas
New York, NY 10001
Christie Enterprises, Inc.(6) 160,000 6.6% 4.7%
80 Market Street
Kenilworth, New Jersey 07033
Stephen P. DePaolo 30,969 1.4% (7)
Thomas R. Thomaszek -0- -0- -0-
John Carroll -0- -0- -0-
Ron Pettirossi -0- -0- -0-
Al Moreno -0- -0- -0-
All officers and directors as a group (8 persons) 2,297,200 96.1% 68.5%
</TABLE>
(1) Except as otherwise noted, the persons named have sole voting and
investment power with respect to all shares beneficially owned by them.
(2) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares that such person or group has
the right to acquire within 60 days after such date and for purposes of
computing the percentage of outstanding shares held by each person or
group on a given date, such shares are deemed to be outstanding.
(3) Unless as otherwise indicated, the address of each beneficial owner is
c/o Discas, Inc., 567-1 South Leonard Street, Waterbury, CT 06708.
(4) This amount includes 1,546,392 shares held in Patrick A. DePaolo's name,
271,285 shares held in a family limited liability company, warrants to
purchase 50,000 shares of Common Stock at $2.25 per share, 263,250 shares
of the 364,500 shares owned by Mantis V, L.L.C. and 34,054 shares owned
by four other stockholders which Mr. DePaolo has the right to vote
pursuant to a voting trust for a period of five years.
(5) Alan Milton and Asher Bernstein, directors of the Company, have a
beneficial interest in Mantis V, L.L.C. The number of shares includes
warrants to purchase 85,000 shares of Common Stock at $2.25 per share.
263,250 of the 364,500 shares owned by Mantis V, L.L.C. are held in a
voting trust, granting voting rights to Patrick A. DePaolo for a period
of five years. Mr. Bernstein disclaims beneficial ownership of all
except 27,000 shares of Common Stock and 13,500 of such warrants.
(6) Issuable upon conversion of a note in the principal amount of $1,000,000
convertible into 160,000 shares of Common Stock upon closing of this
offering.
(7) Less than 1%.
CONCURRENT OFFERING
36
<PAGE>
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering by the Selling
Securityholders of 800,000 Selling Securityholder Warrants, which are
identical to Warrants being offered by the Company herein, and the Common
Stock issuable upon exercise of the Selling Securityholder Warrants. The
Selling Securityholder Warrants are being issued to the Selling
Securityholders as of the date of this Prospectus upon the automatic
conversion of all of the Company's outstanding Bridge Warrants. These Selling
Securityholder Warrants are identical to the Warrants offered hereby. All of
the Selling Securityholder Warrants issued upon conversion of the Bridge
Warrants and the Common Stock issuable upon the exercise of the Warrants will
be registered, at the Company's expense, under the Securities Act, and are
expected to become tradeable without further registration following the
expiration or termination of the "lock-up" agreement described below.
The Selling Securityholder Warrants are subject to two contractual
restrictions which state that (i) the Selling Securityholder Warrants may not
be exercised until 13 months from the date of this Prospectus and (ii) the
Selling Securityholder Warrants or the Common Stock issuable upon exercise of
the Selling Securityholder Warrants may not be sold, assigned, pledged,
hypothecated or otherwise disposed of until 24 months from the date of this
Prospectus (or commencing 13 months from the date of this Prospectus with the
consent of Roan Capital Partners L.P.). After the 24 month period following the
date of this Prospectus (or commencing 13 months from the date of this
Prospectus with the consent of Roan Capital Partners L.P.), the Selling
Securityholders may sell the Selling Securityholder Warrants or the Common
Stock issuable upon exercise of the Selling Securityholder Warrants without
restriction if a current prospectus relating to such Selling Securityholder
Warrants and the Common Stock issuable upon exercise of the Selling
Securityholder Warrants is in effect and the securities are qualified
for sale under any applicable state laws. The Company will not receive any
proceeds from the sale of the Selling Securityholder Warrants. Sales of Selling
Securityholder Warrants issued upon conversion of Bridge Warrants or the
securities underlying such Selling Securityholder Warrants or even the
potential of such sales could have an adverse effect on the market prices of
the Common Stock and the Warrants.
There are no material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years. The Company has been informed by the
Underwriters that there are no agreements between the Underwriters and
any Selling Securityholder regarding the distribution of the Selling
Securityholder Warrants or the underlying securities.
The sale of the securities by the Selling Securityholders may be
effected from time to time in transactions (which may include block
transactions by or for the account of the Selling Securityholders) in the
over-the-counter market or in negotiated transactions, a combination of such
methods of sale or otherwise. Sales may be made at fixed prices which may be
changed, at market prices in negotiated transactions, a combination of such
methods of sale or otherwise.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter to sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers for whom such broker-dealer may act as agent or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
The Company has agreed not to solicit Warrant exercises other than
through the Underwriters, unless the Underwriters decline to make such
solicitation. The Company will not be obligated to compensate the
Underwriters for Warrants which are exercised within the twelve months
following the date of this Prospectus. Upon any exercise of the Warrants after
the first anniversary of the date of this Prospectus, the Company will pay the
Underwriters a fee of seven percent (7%) of the aggregate exercise price of
the Warrants. No commission will be paid to the Underwriters unless such
payment is permissible under the guidelines imposed by the National
Association of Securities Dealers, Inc.
The SEC adopted Regulation M on March 4, 1997 which replaced Rule
10b-6 and certain other rules and regulations under the Exchange Act.
Regulation M prohibits any person engaged in the distribution of the Selling
Securityholders Warrants from simultaneously engaging in market-making
activities with respect to any securities of the Company during the applicable
"cooling-off" period (one to five business days) prior to the commencement of
such distribution. Accordingly, in the event either of the Underwriters
is engaged in a distribution of the Selling Securityholder Warrants, such firm
will not be able to make a market in the Company's securities during the
applicable restrictive period. However, neither of the Underwriters has
agreed to and neither is obligated to act as broker-dealer in the sale of the
Selling Securityholder Warrants and the Selling Securityholders may be
required, in the event such Underwriter is a market-maker, to sell such
securities through another broker-dealer. In addition, each Selling
Securityholder desiring to sell Selling Securityholder Warrants will be subject
to the applicable provisions of the Exchange Act and the rules and regulations
thereunder, which provisions may limit the timing of the purchases and sales of
the Company's securities by a Selling Securityholder.
37
<PAGE>
The holders and broker-dealers, if any, acting in connection with such
sales might be deemed to be "underwriters" within the meaning of Section 2(11)
of the Securities Act and any commission received by them and any profit on
the resale of the securities might be deemed to be underwriting discount and
commissions under the Securities Act.
38
<PAGE>
INTERIM FINANCING
In April 1997, the Company completed the Bridge Financing in which it sold
an aggregate of $360,000 principal amount of Bridge Notes and 800,000 Bridge
Warrants for $40,000, or $0.05 per Warrant, from which it received net
proceeds of approximately $318,000 (after expenses of such private offering).
The Bridge Notes are payable, together with interest at the rate of 11% per
annum, on the earlier of October 14, 1998 or the closing of this offering. See
"Use of Proceeds." The Bridge Warrants entitled holders thereof to purchase
one share of Common Stock per Bridge Warrant commencing May 14, 1998, but will
be exchanged automatically on the closing of the offering for the Selling
Securityholder Warrants, each of which will be identical to the Warrants
offered hereby. The Selling Securityholder Warrants and the Common Stock
underlying the Selling Securityholder Warrants have been registered for resale
in the Registration Statement of which this Prospectus forms a part, subject
to the contractual restriction that the Selling Securityholders have agreed
not to sell, transfer, hypothecate, assign or otherwise dispose of the Selling
Securityholder Warrants and the Common Stock underlying the Selling
Securityholder Warrants for a period of twenty-four months from the date of
this Prospectus (or commencing 13 months from the date of this Prospectus with
the consent of Roan Capital Partners L.P.). See "Concurrent Offering."
39
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock,
$.0001 par value per share. As of the date of this Prospectus, 2,254,500
shares of Common Stock are outstanding. There are also outstanding warrants to
purchase 135,000 shares of Common Stock at $2.25 per share and outstanding
Bridge Warrants to purchase 800,000 shares of Common Stock at $6.25 per share.
There is a convertible promissory note payable to Christie Enterprises, Inc.
currently outstanding which will be converted into 160,000 shares of Common
Stock upon closing of this offering. In addition, the Company has reserved an
aggregate of 450,000 shares to be issued pursuant to its 1997 Stock Option
Plan. The Board of Directors has authorized the reservation of a sufficient
number of shares of Common Stock for issuance in connection with the exercise
of the Warrants being issued in this offering and the Concurrent Offering.
Each holder of Common Stock is entitled to one vote for each share of
Common Stock owned of record on all matters to be voted on by stockholders,
including the election of directors. Because the Common Stock is not subject
to cumulative voting, the holders of more than 50% of the outstanding shares
of Common Stock could generally elect the entire membership of the Board of
Directors. The holders of shares of Common Stock are, subject to the prior
liquidation rights of any outstanding shares of preferred stock of the Company
(the "Preferred Stock"), entitled upon dissolution of the Company, to receive
pro rata all assets remaining available for distribution to stockholders. The
Common Stock has no pre-emptive or other subscription rights, and there are no
conversion rights or redemption provisions with respect to such shares. All
outstanding shares of Common Stock are and all Common Stock to be issued upon
the exercise of the Warrants will be validly issued, fully paid and
non-assessable.
The holders of Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors, in its
discretion, from funds legally available therefor. The Company has never paid
dividends on its Common Stock and it currently intends to retain all earnings
for use in its operations and does not expect to pay dividends on its Common
Stock in the foreseeable future. Further, the Company's current senior credit
agreement prohibits the payment of cash dividends.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
$0.01 par value per share, in series and with rights, preferences, privileges
and limitations established solely by the Board of Directors. No shares of
Preferred Stock are currently outstanding. The issuance of Preferred Stock in
the future could materially dilute the interests of the holders of the Common
Stock, including limitations on voting rights, dividends, and distributions on
liquidation of the Company, all without any further vote or other action by
the holders of the Common Stock.
WARRANTS
Upon issuance, each Warrant and each Selling Securityholder Warrant will
entitle the registered holder thereof to purchase one share of Common Stock at
a price of $6.25 per share, subject to adjustment in certain circumstances.
The Warrants will be initially exercisable thirteen months from the date of
this Prospectus and shall expire four years from the date it becomes
exercisable.
The Company may call the Warrants for redemption, at the option of the
Company, at a price of $.10 per Warrant at any time following 13 months from
the date of this Prospectus after the Common Stock of the Company trades at a
price equal to 150% of the exercise price of the Warrants for 20 consecutive
trading days, upon not less than 30 days' prior written notice. The
warrantholders shall have exercise rights until the close of business on the
date fixed for redemption.
The exercise price and number of shares of Common Stock issuable on
exercise of the Warrants are subject to adjustments under certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the Warrants
are not subject to adjustment for issuances of Common Stock at a price below
the Warrants' exercise price.
The Company has the right, in its sole discretion, to decrease the
exercise price of the Warrants or to extend the expiration date of the
Warrants on five business days' prior written notice to the warrantholders.
40
<PAGE>
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date of the Warrants at the offices of the warrant
agent, with the exercise form on the reverse side of the Warrant certificate
completed and executed as indicated, accompanied by full payment of the
exercise price (by certified check or other good funds, payable to the warrant
agent) to the warrant agent for the number of Warrants being exercised. The
warrantholders do not have the rights or privileges of holders of Common
Stock, including, without limitation, the right to vote on any matter
presented to stockholders for approval.
No fractional shares will be issued upon exercise of the Warrants.
However, the Company will pay to such warrantholder, in lieu of the issuance
of any fractional share which is otherwise issuable to such warrantholder, an
amount in cash based on the market value of the Common Stock on the last
trading day prior to the exercise date.
DELAWARE ANTI-TAKEOVER LAW
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws, as amended, may have the effect of preventing,
discouraging or delaying any change in the control of the Company and may
maintain the incumbency of the Board of Directors and management. The
authorization of undesignated preferred stock makes it possible for the Board
of Directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
the Company.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Antitakeover Law") regulating corporate
takeovers. The Antitakeover Law prevents certain Delaware corporations,
including those whose securities are authorized for quotation on The NASDAQ
Stock Market (which includes the NASDAQ SmallCap Market), from engaging, under
certain circumstances, in a "business combination" (which includes a merger or
sale of more than 10% of the corporation's assets) with any "interested
stockholder" (a stockholder who acquired 15% or more of the corporation's
outstanding voting stock without the prior approval of the corporation's Board
of Directors) for three years following the date that such stockholder became
an "interested stockholder." A Delaware corporation may "opt out" of the
Antitakeover Law with an express provision in its original certificate of
incorporation or an express provision in its certificate of incorporation or
bylaws resulting from a stockholders' amendment approved by at least a
majority of the outstanding voting shares. The Company has not "opted out" of
the application of the Antitakeover Law.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The transfer agent and registrar for the Common Stock and the warrant
agent for the Warrants, the Selling Securityholder Warrants and the
Underwriters' Warrants is American Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have 3,214,500
shares of Common Stock outstanding. Of these shares, the 800,000 shares sold
by the Company in this offering will be freely-tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased by an "affiliate" of the Company (as defined in the Securities Act
and the rules and regulations thereunder) which will be subject to the
limitations of Rule 144 promulgated under the Securities Act. Of the remaining
2,414,500 shares, subject to the holders compliance with the provisions of
Rule 144, (i) 34,504 shares beneficially owned by four non-affiliates of the
Company will become tradeable in August 1997, (ii) 364,500 shares beneficially
owned by Mantis V, L.L.C., an affiliate of the Company, will become tradeable
in September 1997, (iii) 160,000 shares of Common Stock issuable upon
conversion of a note in the principal amount of $1,000,000 payable to Christie
Enterprises, Inc. upon the closing of this offering will become tradeable in
November 1997 and (iv) 1,848,646 shares beneficially owned by Patrick A.
DePaolo, Sr., Steven DePaolo and a DePaolo family limited liability company,
all affiliates of the Company, are tradeable as of the date of this
Prospectus, although all of the aforementioned shares with the exception of
those set forth in (i) and (iii) will not be freely tradeable for two years
from the date of this Prospectus pursuant to "lock-up" agreements each such
principal stockholder has entered into with Roan Capital Partners L.P., which
lock-up may not be waived for a period of 13 months from the date of this
Prospectus as to the shares listed in (ii) above. These securities were deemed
to be "restricted securities" at the time they were purchased, as that term is
defined under Rule 144 promulgated under the Securities Act, as such shares
were issued in private transactions not involving a public offering.
In general, under Rule 144 as recently modified (which modifications
became effective April 29, 1997), subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (or persons whose
shares are aggregated), who has beneficially owned the restricted shares of
Common Stock to be sold for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the total number of outstanding shares of the same class or, if the Common
Stock is quoted on an exchange or NASDAQ, the average weekly
41
<PAGE>
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of the Company for at least the three months
immediately preceding the sale and who has beneficially owned the shares of
Common Stock to be sold for at least two years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
Prior to this offering, there has been no market for the Common Stock, and
no prediction can be made as to the effect, if any, that market sales of
restricted shares of Common Stock or the availability of such shares for sale
will have on the market prices prevailing from time to time. Nevertheless, the
possibility that substantial amounts of Common Stock may be sold in the public
market would likely adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
42
<PAGE>
UNDERWRITING
Under to the terms and conditions contained in the Underwriting Agreement,
the Company has agreed to sell to the Underwriters, and the Underwriters have
severally agreed to purchase from the Company the respective number of shares
of Common Stock and Warrants set forth opposite its name below.
NUMBER OF
SHARES AND
UNDERWRITER WARRANTS
Roan Capital Partners L.P. 600,000
Merit Capital Associates, Inc. 200,000
-------
Total 800,000
The Underwriters are committed to purchase and pay for all of the shares
of Common Stock and all of the Warrants offered hereby if any such shares of
Common Stock or Warrants are purchased. The shares of Common Stock and
Warrants are being offered by the Underwriters subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval
of certain legal matters by counsel and certain other conditions.
All principal stockholders of the Company as of the date of this
Prospectus other than Christie Enterprises, Inc., and all of the Selling
Securityholders, have entered into "lock-up" agreements with Roan Capital
Partners L.P., pursuant to which such principal stockholders and the Selling
Securityholders will not sell or transfer any of the Company's securities for
a 24 month period from the date of this Prospectus. There are no present plans,
agreements or understandings between any of such stockholders or Selling
Securityholders and Roan Capital Partners L.P. to modify, shorten or waive
such lock-up agreements. Roan Capital Partners L.P. has agreed with The Nasdaq
Stock Market, Inc. not to waive such lock-up agreements for a period of at
least 13 months. See "Shares Eligible for Future Sale."
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock and the Warrants to the public at the initial public
offering price set forth on the cover page of this Prospectus. The
Underwriters may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. (the "NASD") concessions, not in
excess of $.25 per share of Common Stock and $.005 per Warrant.
The Company has granted to the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to an aggregate of
120,000 additional shares of Common Stock and 120,000 additional Warrants at
the initial public offering price set forth on the cover page hereof less
underwriting discounts and commissions. The Underwriters may exercise such
option in whole or, from time to time, in part, solely for the purpose of
cover over-allotments, if any, made in connection with the sale of the shares
of Common Stock and the Warrants offered hereby.
The Company has agreed to pay the Underwriters a nonaccountable expense
allowance of three percent (3%) of the gross proceeds of this offering, of
which $40,000 has been paid to date. The Company has also agreed to pay all
expenses in connection with qualifying the shares of Common Stock and the
Warrants offered hereby for sale under the laws of such states as the
Underwriters may designate, including expenses of counsel retained for such
purpose by the Underwriters.
The Company has agreed to sell to the Underwriters or their designees,
for aggregate consideration of $10, warrants (the "Underwriters' Warrants")
to purchase up to 80,000 shares of Common Stock at a price of $8.25 per share
and 80,000 Warrants at a price of $.165 per Warrant and exercisable at $6.25
per share. The Underwriters' Warrants may not be exercised for one year from
the date of this Prospectus, and will then be exercisable for a period of four
years and will expire five years from the date of this Prospectus (the
"Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the
Underwriters' Warrants are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Company's Common Stock. The Company has
agreed that for three years following the date of this Prospectus, the Company
will not merge, reorganize or take any other action which would terminate the
Underwriters' Warrants without first making adequate provisions for the
Warrants. The Underwriters' Warrants may not be redeemed by the Company until
they have been exercised and the underlying Warrants are outstanding. The
Underwriters' Warrants may not be sold,
43
<PAGE>
assigned, transferred, pledged or hypothecated for a period of one year from
the date of the Prospectus except to an officer or partner of either of the
Underwriters or members of the selling group or their respective officers or
partners. To the extent that the Underwriters' Warrants are exercised,
dilution to the interests of the Company's stockholders may occur. Further,
the terms upon which the Company will be able to obtain additional equity
capital will be adversely affected since the holders of the Underwriters'
Warrants can be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable
to the Company than those provided in the Underwriters' Warrants. The
Company has agreed that upon written request of the then holders of at least a
majority of the Underwriters' Warrants made at any time within the period
commencing one year and ending five years after the date of this Prospectus,
it will file a registration or offering statement on Form SB-2 or other
appropriate form under the Securities Act registering the securities
underlying the Underwriters' Warrants. In addition, the Company has agreed
to give advance notice to the holders of the Underwriters' Warrants of its
intention to file certain registration statements commencing one year and
ending five years after the date of this Prospectus, and in such case, holders
of such Underwriters' Warrants or underlying shares of Common Stock and
Warrants shall have the right to require the Company to include all or part of
such shares of Common Stock and Warrants underlying such Underwriters'
Warrants in such registration statement at the Company's expense.
The Company has also agreed to indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act.
At the closing of this offering, the Company will enter into a consulting
agreement with the Underwriters retaining them as management and financial
consultants to the Company for a two-year period commencing as of December 17,
1996 at a fee equal to $3,558.33 per month, or $85,300, which will be paid
upon the Closing of this offering.
The Company has also agreed that, upon completion of this offering, it
will for a period of three years if requested by Roan Capital Partners L.P.
(i) engage a designee of Roan Capital Partners L.P. as an advisor to its
Board of Directors or (ii) elect one of the Roan Capital Partners L.P.'s
designees to its Board of Directors.
Upon the exercise of the Warrants commencing one year from the date of
this Prospectus, the Company will pay the Underwriters a fee of 7% of the
aggregate exercise price if (i) the market price of its Common Stock on the
date the Warrant is exercised is greater than the then exercise price of the
Warrants; (ii) the exercise of the Warrant was solicited by a member of the
NASD and the customer states in writing that the transaction was solicited and
designates in writing the broker-dealer to receive compensation for the
exercise; (iii) the Warrant is not held in a discretionary account; (iv)
disclosure of compensation arrangements was made both at the time of the
offering and at the time of the exercise of the Warrants; and (v) the
solicitation of exercise of the Warrant was not in violation of Regulation M
promulgated under the Exchange Act.
In connection with this offering, the Underwriters and their affiliates
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the Common Stock or the Warrants. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid or purchase Common Stock
or Warrants for the purpose of stabilizing its market price. Either or both of
the Underwriters may also create a short position for the accounts of the
Underwriters by selling more Common Stock and Warrants in connection with
the offering than they are committed to purchase from the Company, and in such
case may purchase Common Stock or Warrants in the open market following
completion of the offering to cover all or a portion of such short position.
The Underwriters may also cover all or a portion of such short position, up
to 120,000 shares of Common Stock and 120,000 Warrants, by exercising the
over-allotment option referred to herein. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Common Stock
and the price of the Warrants at a level above that which might otherwise
prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken, they may be discontinued
at any time.
Regulation M may prohibit either of the Underwriters or any other
soliciting broker-dealer from engaging in market-making activities with regard
to the Company's securities for the period from five business days prior to any
solicitation by either of the Underwriters of the exercise of Warrants
until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that either of the
Underwriters may have to receive a fee for the exercise of the Warrants
following such solicitation. As a result, each of the Underwriters may be
unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable.
Prior to this offering, there has been no public trading market for the
Common Stock or the Warrants. Consequently, the initial public offering price
of the Common Stock and the Warrants have been determined by negotiations
between the Company and the Underwriters. Among the factors considered in
determining the initial public offering price were the
44
<PAGE>
Company's financial condition and prospects, market prices of similar
securities of comparable publicly traded companies, certain financial and
operating information of companies engaged in activities similar to those of
the Company and the general conditions of the securities market.
LEGAL MATTERS
Epstein Becker & Green, P.C., 250 Park Avenue, New York, New York has
acted as counsel to the Company in connection with this offering. Gusrae,
Kaplan & Bruno, 120 Wall Street, New York, New York has acted as counsel for
the Underwriters in connection with this offering. Richard L. Campbell,
special counsel to Epstein Becker & Green, P.C., is an affiliate of Mantis V,
L.L.C., which is the owner of 364,500 shares of the Company's Common Stock and
of warrants to purchase 85,000 shares of the Company's Common Stock at $2.25
per share.
EXPERTS
The consolidated financial statements of Discas, Inc. and of Christie
Enterprises, Inc. included in this Prospectus have been audited by Jump,
Green, Holman and Company, independent certified public accountants, to the
extent and for the periods set forth in their reports appearing elsewhere
herein, and are included in reliance upon such reports given upon the
authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
For further information with respect to the Company and this offering,
reference is made to the Registration Statement, including the exhibits and
schedules filed therewith. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part of the Registration Statement may be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed
by the Commission. In addition, the Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission through the Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR"). The Registration Statement of which this Prospectus forms a
part has been filed electronically through EDGAR and may be retrieved through
the Commission's Web site on the Internet. Descriptions contained in this
Prospectus as to the contents of any agreement or other documents filed as an
exhibit to the Registration Statement are not necessarily complete and each
such description is qualified by reference to such agreement or document.
Upon consummation of this offering, the Company will become subject to the
reporting requirements of the Exchange Act and in accordance therewith will
file reports, proxy statements and other information with the Commission. The
Company intends to furnish its stockholders with annual reports containing
audited financial statements and such other reports as the Company deems
appropriate or as may be required by law.
45
<PAGE>
DISCAS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-------
<S> <C>
INDEPENDENT AUDITOR'S REPORT--DISCAS, INC. AND SUBSIDIARY F-2
CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1997 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS F-4
ENDED APRIL 30, 1996 AND 1997
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS F-5
ENDED APRIL 30, 1996 AND 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS F-6
ENDED APRIL 30, 1996 AND 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
INDEPENDENT AUDITOR'S REPORT--CHRISTIE ENTERPRISES, INC. F-21
BALANCE SHEET AS OF OCTOBER 31, 1996 F-22
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE F-23
TEN MONTHS ENDED OCTOBER 31, 1996
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR F-24
THE YEAR ENDED DECEMBER 31, 1995 AND THE TEN MONTHS ENDED OCTOBER 31, 1996
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED F-25
DECEMBER 31, 1995 AND FOR THE TEN MONTHS ENDED OCTOBER 31, 1996
NOTES TO FINANCIAL STATEMENTS F-27
DISCAS INC. AND SUBSIDIARY PRO FORMA CONDENSED COMBINED F-31
STATEMENT OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 1997 (UNAUDITED)
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders
Discas Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Discas Inc. and
Subsidiary as of April 30, 1997 and related consolidated statements of
operations, changes in stockholders' equity and cash flows for the two years
ended April 30, 1996 and 1997. These financial statements are the
responsibility of Discas, Inc. and Subsidiary's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Discas, Inc. and Subsidiary
as of April 30, 1997 and the results of their operations and cash flows for
the two years ended April 30, 1996 and 1997 in conformity with generally
accepted accounting principles.
JUMP, GREEN, HOLMAN AND COMPANY
June 26, 1997
Toms River, NJ
F-2
<PAGE>
DISCAS, INC. AND SUBSIDIARY
Consolidated Balance Sheet
April 30, 1997
ASSETS
Current assets:
Cash $ 173,100
Accounts receivable 1,244,554
Inventory 1,016,519
Prepaid expenses 4,170
Other current assets 11,429
---------
Total current assets 2,449,772
Property and equipment (net) 1,846,615
Other assets 1,248,602
---------
$ 5,544,989
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,280,710
Accrued expenses 174,629
Line of credit 490,000
Current portion of capital leases 30,416
Current portion of long-term debt 383,069
-------------
Total current liabilities 2,358,824
Capital leases, excluding current portion 48,101
Long-term debt, excluding current portion 2,162,777
Related party loans 123,734
Stockholders' equity:
Common stock, $.0001 par value, 20,000,000
shares authorized, 2,254,500 shares issued
and outstanding 225
Additional paid in capital 822,677
Retained earnings 28,651
---------
Total stockholders' equity 851,553
------------
$ 5,544,989
============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
DISCAS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the years ended April 30, 1996 and 1997
1996 1997
---- ----
Sales $ 3,858,205 5,179,668
Cost of sales 3,012,125 3,982,066
--------- ---------
Gross profit 846,080 1,197,602
Selling, general and administrative
expenses 710,302 1,300,859
--------- ---------
Income (loss) from operations 135,778 (103,257)
--------- ---------
Other income (expense):
Other income 30,929 35,279
Interest expense (87,292) (317,393)
--------- ---------
Net other expense (56,363) (282,114)
--------- ---------
Minority interest 23,841 36,705
--------- ---------
Earnings (loss) before income taxes 103,256 (348,666)
Income tax benefit - 36,000
--------- ---------
Net income (loss) $ 103,256 (312,666)
========= =========
Net income (loss) per share:
Primary $ .04 (.13)
========= =========
Fully diluted $ .04 (.13)
========= =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
DISCAS INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the years ended April 30, 1996 and 1997
Additional Total
Common Paid in Retained Stockholders'
Stock Capital Earnings Equity
Balances, April 30, 1995 $ 181 1,819 279,796 281,796
Prior period adjustment - - (41,735) (41,735)
------- ------- -------- --------
Adjusted balances, April 30, 1995 181 1,819 238,061 240,061
Net income for the year
ended April 30, 1996 - - 103,256 103,256
------- ------- -------- -------
Balances, April 30, 1996 181 1,819 341,317 343,317
Issuance of common stock 36 608,464 - 608,500
Acquisition of minority interest 8 172,394 - 172,402
Issuance of common stock warrants - 40,000 - 40,000
Net loss for the year
ended April 30, 1997 - - (312,666) (312,666)
------- ------- -------- --------
Balances, April 30, 1997 $ 225 822,677 28,651 851,553
======= ======= ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
DISCAS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended April 30, 1996 and 1997
1996 1997
---- ----
Cash Flows from Operating Activities:
Cash received from customers $ 4,092,786 4,573,965
Cash paid to suppliers and employees (3,872,155) (4,515,399)
Interest paid (84,742) (138,806)
Income taxes paid (17,255) ( - )
--------- ---------
Net cash provided (used) by
operating activities 118,634 (80,240)
--------- ---------
Cash Flows from Investing Activities:
Payments on other assets - (35,604)
Purchases of fixed assets (41,450) (180,873)
--------- ---------
Net cash used by investing
activities (41,450) (216,477)
--------- ---------
Cash Flows from Financing Activities:
Principal payments on long-term debt (108,631) (165,309)
Proceeds from long-term debt 47,171 710,000
Proceeds from issuance of stock warrants - 40,000
Payments of offering costs - (474,487)
Principal payments on capital leases (39,217) (33,933)
Proceeds from credit line 170,000 210,000
--------- ---------
Net cash provided by
financing activities 69,323 286,271
--------- ---------
Net increase (decrease) in cash 146,507 (10,446)
Cash at beginning of year 37,039 183,546
--------- ---------
Cash at end of year $ 183,546 173,100
========= =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
DISCAS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
For the years ended April 30, 1996 and 1997
1996 1997
---- ----
Reconciliation of net income (loss) to cash provided (used) by operating
activities:
Net income (loss) $ 103,256 (312,666)
Items which did not (provide) use cash:
Depreciation 129,754 221,267
Interest - 2,550
Amortization - 8,051
Bad debt expense (recovery) (1,000) 17,390
Minority interest (23,841) (36,705)
Deferred financing costs - 176,037
Working capital changes which provided (used) cash:
Accounts receivable 207,430 (771,826)
Inventory (6,920) (468,844)
Other assets (47,366) (500)
Prepaid expenses (6,442) (2,877)
Accounts payable (247,001) 1,000,224
Accrued expenses 17,819 123,659
Income tax payable (7,055) -
Non-current changes which used cash:
Deferred taxes - (36,000)
------- ---------
Net cash provided (used)
by operating activities $ 118,634 (80,240)
======== =========
Schedule of non-cash investing and financing activities:
Financed acquisitions $ - 1,567,904
======== =========
Offering costs $ - 15,000
======== =========
Acquisition of minority interest $ - 172,402
======== =========
Deferred financing costs $ - 608,500
======== =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-7
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
a. Organization
The accompanying consolidated financial statements of Discas, Inc.
and Subsidiary (the "Company") present the accounts of Discas, Inc.,
its 68.81% subsidiary, Discas Recycled Products Corporation (DRPC)
and its wholly owned subsidiary, Christie Products Inc. (CPI).
Intercompany transactions have been eliminated in the consolidation.
On August 27, 1996, DRPC merged into Discas, Inc., pursuant to
Section 251 of the General Corporation Law of the State of Delaware.
Each minority shareholder of DRPC was retired and the holder thereof
received 22.56 shares (76,623 shares in total) of the voting stock
of Discas, Inc., for each share of DRPC owned by them, having a par
value of $.0001 per share. The purchase price of $172,402 ($2.25 per
share) was allocated as follows:
Fixed assets $ 75,000
Minority interest 46,274
Goodwill 51,128
-------
$ 172,402
==========
Prior to the merger, the Board of Directors of Discas, Inc.
authorized a 1 for 8.718477 reverse stock split of common stock to
the stockholders of record on August 27, 1996. As a result,
1,400,000 common shares were issued and outstanding. The Company has
elected to retroactively restate this occurrence to be reflected in
the financial statements for the years ended April 30, 1996 and
1997.
On October 3, 1996, Christie Products, Inc. (CPI), a wholly owned
subsidiary of Discas, Inc., was incorporated in the state of
Delaware. CPI operates out of New Jersey and manufactures and
markets nursery growing pots and other plastic products.
CPI is authorized to issue 3,000 shares of no par value common
stock. As of the date of this financial statement, 100 shares are
issued and outstanding.
Discas, Inc. produces proprietary plastics, plastic containers and
rubber compounds using a variety of recycled and prime materials.
The Company also uses industrial scrap material to manufacture high
quality recycled polypropylene based compounds.
F-8
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
b. Cash and Cash Equivalents
Cash and cash equivalents includes all cash balances and highly
liquid investments with a maturity of three months or less. The
Company places its temporary cash investments with high credit
quality financial institutions. At times such investments may be in
excess of the FDIC insurance limits.
c. 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.
d. Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes. Deferred taxes are recognized for
differences between the basis of assets and liabilities for
financial statement and income tax purposes. Deferred tax assets and
liabilities represent future tax return consequences of those
differences, which will either be taxable or deductible when the
assets or liabilities are recovered or settled. Deferred taxes are
also recognized for operating losses and tax credits that are
available to offset future taxable income.
e. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ
from these estimates.
F-9
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
f. Fair Value of Financial Instruments
As of April 30, 1997, the carrying values of the Company's financial
instruments which are all held for non-trading purposes,
approximated their fair value.
g. Inventory
Inventory is stated at the lower of cost or market as determined by
the average cost method.
h. Economic Dependency
The Company sells a substantial portion of its product to three
customers. For the years ended April 30, 1996 and 1997, sales to
those customers were as follows:
1996 1997
Customer #1 $ 1,022,000 1,033,000
Customer #2 - 420,000
Customer #3 1,815,000 611,000
--------- ---------
$ 2,837,000 2,064,000
========= =========
As of April 30, 1997, accounts receivable from these customers were
as follows:
Customer #1 $ 63,000
Customer #2 155,000
Customer #3 116,000
---------
$ 334,000
===========
The Company performs ongoing credit evaluations of its customers'
financial condition and generally, requires no collateral from its
customers. The Company believes the allowance for doubtful accounts
is adequate to absorb estimated uncollectible amounts as of April
30, 1997.
F-10
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
i. Deferred Offering Costs
Professional fees and other expenses associated with the initial
public offering of the Company's common stock are capitalized and
subsequently charged against the proceeds of such offering or
expensed in the period such offering is abandoned.
j. Net Income Per Share
The weighted average number of common stock and common stock
equivalents was determined by including all shares issued in 1997 as
if they had been issued at the beginning of fiscal 1996. Warrants
were also deemed exercised at the beginning of fiscal 1996 to the
extent required using the treasury stock method. Primary net income
per share included the conversion of the Christie acquisition
convertible note as of the conversion date. Fully diluted net income
per share did not include the conversion of the note.
k. Impact of Recently Issued Accounting Standards
Effective May 1, 1996 and January 1, 1997, the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long Lived Assets and for
Long Lived Assets to be Disposed Of" and SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". The Company believes that the adoption of these
statements did not have a material effect on the Company's financial
position.
Effective May 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock Based Compensation." The statement requires at a minimum,
new disclosures regarding employee and non-employee stock based
compensation plans. The Company will continue accounting for stock
options under APB Opinion No. 25.
l. Deferred Financing Costs
The issuance of common stock and common stock warrants in connection
with loans made to the Company are being amortized on the interest
method over the term of the loan or expensed in full upon the early
retirement of the debt by the Company.
As a result, included in interest expense is $176,037 of deferred
financing costs for the year ended April 30, 1997.
F-11
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
As of April 30, 1997, property and equipment consist of the following:
Machinery and equipment $ 2,436,533
Leasehold improvements 63,843
Office equipment 68,402
Vehicles 58,206
Furniture and fixtures 22,098
---------
Total property and equipment 2,649,082
Less: accumulated depreciation 802,467
---------
Net property and equipment $ 1,846,615
=========
3. Accounts Receivable
Accounts receivable at April 30, 1997 are shown net of an allowance for
doubtful accounts of $11,000.
4. Inventory
Inventories at April 30, 1997 consist of:
Finished goods $ 212,148
Raw materials 804,371
---------
$ 1,016,519
=========
5. Other Assets
Other assets at April 30, 1997 consist of the following:
Security deposits $ 32,310
Deferred financing costs, net of $176,037
of accumulated amortization 432,463
Deferred offering costs 532,148
Goodwill net of $8,051 of
accumulated amortization 216,077
Other 35,604
---------
$ 1,248,602
=========
F-12
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
6. Stock Option Plan
The Company's stock option plan was approved by the Company's Board of
Directors and stockholders in February, 1997. Options granted under the
plan may include those qualified as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, as well as
non-qualified options. Employees as well as other individuals, such as
outside directors, who provide necessary services to the Company are
eligible to participate in the Plan. Non-employees and part-time
employees may receive only non-qualified stock options. The maximum
number of shares of Common Stock for which options may be granted under
the Plan is 450,000 shares.
The exercise price for shares purchased upon the exercise of
non-qualified options granted under the plan is determined by a Board
appointed committee. The exercise price of an incentive stock option
must be at least equal to the fair market value of the common stock on
the date such option is granted (110% of the fair market value for
stockholders who own more than 10% of the common stock of the Company).
The Company, upon closing of the public offering, as described in note
14, will issue 150,000 incentive stock options to its President. Each
option granted entitles the recipient to purchase one share of the
Company's common stock at an exercise price of $7.50 and is exercisable
through April 30, 2002 and only at such time as the Company's audited
financial statements show after tax net income equal to or exceeding
$.15 per share.
7. Income Taxes
The Company's effective income tax rate is lower than would be expected
if the Federal statutory rate were applied to earnings from operations,
primarily because of depreciation and the utilization of net operating
losses.
The components of income tax (expense) benefit for the years ended April
30, 1996 and 1997 were:
1996 Federal State Total
---- ------- ----- -----
Current $ - - -
Deferred (1,000) 1,000 -
-------- ------- ----
$ (1,000) 1,000 -
======== ======= ====
1997 Federal State Total
---- ------- ----- -----
Current $ - - -
Deferred 28,000 8,000 36,000
-------- ------- ------
$ 28,000 8,000 36,000
======== ======= ======
F-13
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The following is a summary of the components of the Company's Federal and
State deferred tax assets and liabilities as of April 30, 1997:
Current
------- Federal State
Deferred tax assets:
Allowance for doubtful accounts $ 4,000 1,000
Valuation allowance (4,000) (1,000)
------- -------
- -
======= =======
Non-current
-----------
Deferred tax assets:
Net operating loss carryforwards 218,000 63,000
Deferred tax liabilities:
Depreciation (102,000) (30,000)
------- -------
Net deferred tax asset before
valuation allowance 116,000 33,000
Valuation allowance (116,000) (33,000)
------- --------
- -
======= ========
The Company has net operating loss carryforwards of approximately
$545,000 (Federal) and $510,000 (State) which will begin to expire in
2012.
F-14
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
A reconciliation of the tax benefit (expense) computed at the normal
statutory Federal income tax rate with the Company's provision for income
taxes is as follows:
Year Ended Year Ended
April 30, 1996 April 30, 1997
-------------- --------------
Statutory Federal income
tax (expense) benefit $ (43,000) 136,000
State surtax benefit 16,750 -
State tax (expense) benefit (6,000) 24,400
Permanent differences:
Non-deductible expenses (2,100) (5,850)
Deductible expenses 25,050 11,550
Exempt income 9,300 14,300
Increase in valuation allowance - (154,000)
Change in estimate - tax rates - 9,600
-------- ---------
Income tax benefit $ - 36,000
======== =========
8. Line of Credit
The Company has an available line of credit with a bank which it can
borrow up to $500,000. Interest is due in monthly installments at prime
plus 1 3/4% percent. The line of credit is secured by accounts receivable
and inventory and matures in July, 1997. At April 30, 1997, outstanding
borrowings on this line amounted to $490,000, and as a result, $10,000
remained available to the Company.
In June, 1997, the Company concluded a credit arrangement with a new bank
which provides for a credit line of up to $700,000 on a borrowing base
consisting of 80% of eligible accounts receivable and 50% of eligible
inventory. This new credit line bears interest at the bank's prime rate
plus 1%. This arrangement also provided a five year term loan of $353,000
which was used to pay off the old term loan and certain other debt. The
new term loan calls for monthly principal payments of approximately
$5,300 plus interest at the bank's prime rate plus 1%.
F-15
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
9. Long-term Debt
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank in monthly principal payments of $6,173 plus
interest at "prime" plus two percent. The loan matures in June, 1997 and
is secured by machinery and equipment and the personal guarantee of the
president of the Company. $ 224,359
Note payable to the Department of Economic and Community Development,
payable in monthly installments of $1,972, including interest at 6%,
maturing in July, 2000 and secured by a lien on all business assets and
the personal guarantee of the president
of the Company. 108,407
Equipment loan payable to a finance company with monthly payments of
$1,572 including interest of 13% per annum. The loan matures in July
1998, and is secured by equipment with a net book value of $43,000. 21,766
Equipment loan payable to a finance company with monthly payments of $423
including interest at 13% per annum. The loan matures in February, 2000,
and is secured by equipment with a net book value of $16,000. 12,032
Loan payable to a finance company in monthly payments of $12,600
including interest at 9.75%. The loan matures in November 2000
and is secured by equipment. 444,282
Loan payable to a company in monthly interest only payments computed at
8% per annum. The note is unsecured and due in full in November 1998. As
partial consideration for the loan, the company was issued 364,500 shares
of common stock and warrants to purchase 85,000 shares of Discas, Inc.
The value of common stock and common stock warrants was
$607,500 and $1,000, respectively. 375,000
</TABLE>
F-16
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
9. Long-term Debt (continued)
<TABLE>
<CAPTION>
<S> <C>
Loan payable to the shareholder of Christie Enterprises, Inc. in
connection with the asset purchase agreement described in note 13. The
note is interest free until April 30, 1997 then at prime plus 1% along
with fixed monthly principal payments of $16,667. The note matures in
April, 2002 and is secured by machinery and equipment of the seller. The
holder for this note may also convert the outstanding principal balance
into common shares of Discas, Inc. at a price
which is also described in note 13. 1,000,000
Various 11% unsecured subordinated notes due on the earlier of September
15, 1998 or the closing of a registered public
offering of securities of the Company. 360,000
---------
Total long-term debt 2,545,846
Less: current portion 383,069
---------
Long-term debt, excluding
current portion $2,162,777
==========
</TABLE>
Maturities of long term debt over the next several years are as follows:
April 30, 1998 $ 383,069
1999 1,133,000
2000 343,777
2001 272,000
Thereafter 414,000
-------
$2,545,846
==========
10. Capital Leases
The Company is lessee of certain equipment under capital leases expiring
in various years through 2003. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are depreciated
over the lower of their lease terms or their estimated productive lives.
F-17
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
10. Capital Leases (continued)
Minimum future lease payments under capital leases as of April 30, 1997
is as follows:
April 30, 1998 $ 37,590
1999 20,460
2000 16,590
2001 15,816
2002 15,816
2003 7,908
-------
Total minimum lease payments 114,180
Less: amounts representing interest 35,663
-------
Present value of future minimum
lease payments 78,517
Less: current portion 30,416
-------
Capital leases, net of current portion $ 48,101
=======
As of April 30, 1997, machinery and equipment held under the
aforementioned capital leases amounted to $136,324 and depreciation
expense for the year ended April 30, 1997 approximated $20,000.
11. Related Party Activity
The president of the Company has made various loans to the company
bearing interest at rates between 6% and 8%. Interest only is due monthly
and the principal is unsecured, subordinated to the Company's bank debt
and has no specific repayment terms.
The President of the Company owns an 8% interest in a Limited Liability
Company which does business with the Company. For the years ended April
30, 1996 and 1997, sales to the related party amounted to approximately
$128,000 and $671,000, and purchases from the related party amounted to
approximately $140,000 and $650,000.
The Company owns a 50% interest in a Limited Liability Company (L.L.C.).
Included in other assets is $35,604, which represents the Company's
initial equity contribution to the L.L.C.
F-18
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
11. Related Party Activity (continued)
Included in selling, general and administrative expenses for the year
ended April 30, 1996 and 1997 is approximately $23,000 and $26,000 paid
to a related company for the rent of machinery and equipment. The lease
is classified as an operating lease and provides for minimum rentals of
$26,400 through April 30, 1998.
12. Commitments and Contingencies
The Company conducts its operations in leased facilities classified as
operating leases which expire in various years through 2000. The Company
also has an option to extend the leases through 2005.
In addition to annual base rental, the leases require additional payments
for maintenance and taxes. The following is a schedule approximating the
future minimum rental payments required under the above operating leases
as of:
April 30, 1998 $ 267,664
1999 121,338
2000 82,443
2001 41,940
Rent expense under the aforementioned leases for the year ended April 30,
1996 and 1997 amounted to $143,443 and $218,405, respectively.
13. Asset Purchase Agreement
On October 30, 1996, Christie Products, Inc. (CPI) a wholly owned
subsidiary of the Company, entered into an agreement with Christie
Enterprises, Inc., to purchase substantially all of their business
assets. The purchase price of $1,500,000 exceeded the fair market value
of the assets purchased by $173,000, which will be amortized on the
straight line basis over 15 years. CPI and Discas, Inc. as
consideration, paid Christie Enterprises, Inc., $500,000 in cash and
issued a convertible promissory note in the amount of $1,000,000. The
note is interest free until April 30, 1997, at which time interest will
be paid at prime plus 1% along with fixed monthly principal payments of
$16,667. The note matures on April 30, 2002 and is secured by the molds,
machinery and equipment of the seller. The holder of this note may also
convert the outstanding principal balance into common shares of Discas,
Inc. The number of shares into which this note may be converted shall be
determined by dividing the aggregate outstanding principal amount of the
note by 125% of the initial public offering price per share of common
stock of Discas, Inc., provided that if Discas, Inc. has not completed
an initial public offering of its common stock by October 1, 1997, then
the conversion price shall be the greater of $6.00 per share or 125% of
the then fair market value of the common stock of Discas, Inc. on a per
share basis.
F-19
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
14. Intent of Public Offering
On December 17, 1996, Discas, Inc. executed a letter of intent with an
underwriter to enter into a definitive agreement with respect to a
public offering of 800,000 shares of common stock and 800,000 redeemable
common stock purchase warrants of Discas, Inc.
In connection with the proposed public offering, Discas, Inc. effected a
1.35 for 1 stock split of common stock to the stockholders of record on
December 31, 1996. As a result of the split, 490,000 additional shares
were issued, and additional paid in capital was reduced by $49. All
references in the accompanying financial statements to the number of
common shares and per share amounts for 1996 and 1997 have been restated
to reflect the stock split.
15. Outstanding Warrants
At April 30, 1997, the date of the Company's financial statements, the
Company had outstanding warrants to purchase 135,000 and 800,000 shares
of the Company's common stock, respectively, at prices of $2.25 and $5.00
per share.
16. Prior Period Adjustment
The accompanying financial statements as of and for the year ended April
30, 1996 have been restated to correct an error in reporting
organizational costs incurred in 1994 and deferred compensation incurred
in 1996. The effect of the restatement was to decrease beginning retained
earnings by $41,735 and decrease net income by $18,356 for the year ended
April 30, 1996.
F-20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders' of
Christie Enterprises, Inc.
Kenilworth, New Jersey:
We have audited the balance sheet of Christie Enterprises, Inc. as of
October 31, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the year ended December 31, 1995 and
the ten months ended October 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Christie Enterprises,
Inc. as of October 31, 1996 and the results of its operations and its cash
flows for the year ended December 31, 1995 and the ten months ended October
31, 1996 in conformity with generally accepted accounting principles.
JUMP, GREEN, HOLMAN AND COMPANY
January 20, 1997
Toms River, New Jersey
F-21
<PAGE>
CHRISTIE ENTERPRISES, INC.
BALANCE SHEET
OCTOBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents.............................................. $ 30,841
Accounts receivable.................................................... 619,421
Inventory.............................................................. 202,948
Prepaid expenses and other receivables................................. 14,357
-------------
Total Current Assets................................................... 867,567
Property and Equipment--Net.............................................. 251,816
Other Assets............................................................. 20,287
-------------
$ 1,139,670
=============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable....................................................... 1,090,401
Accrued expenses....................................................... 46,830
Current portion of long-term debt...................................... 495,000
-------------
Total Current Liabilities.............................................. 1,632,231
Related party loans payable.............................................. 63,000
Stockholders' Equity (Deficit):
Common stock, no par value, 1000 shares authorized, 100 shares issued
and outstanding ...................................................... 140,450
Additional paid in capital............................................. 414,658
Accumulated deficit.................................................... (1,110,669)
-------------
Total Stockholders' Equity (Deficit)................................... (555,561)
-------------
$ 1,139,670
=============
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
CHRISTIE ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE TEN MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
------------ -----------
<S> <C> <C>
Sales........................................ $2,922,733 2,521,784
Cost of sales................................ 2,667,940 2,297,517
------------ -----------
Gross Profit................................. 254,793 224,267
Selling, general and administrative
expenses.................................... 469,571 386,833
------------ -----------
Loss from Operations......................... (214,778) (162,566)
------------ -----------
Other Expenses:
Interest expense............................ 75,354 42,291
------------ -----------
Net loss..................................... $ (290,132) (204,857)
============ ===========
PRO FORMA INFORMATION
Historical loss before income taxes ........ $ (290,132) (204,857)
Pro forma income tax benefit................ -- 82,000
------------ -----------
Pro forma net loss......................... $ (290,132) (122,857)
============ ===========
Pro forma net loss per share............... $ (2,901) (1,229)
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
CHRISTIE ENTERPRISES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE TEN MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
---------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Balances December 31, 1994 .............. $140,450 388,214 (615,680) (87,016)
Capital contributions ................... -- 26,444 -- 26,444
Net loss for the year ended December 31,
1995 ................................... -- -- (290,132) (290,132)
---------- ------------ ------------- ---------------
Balances December 31, 1995 .............. 140,450 414,658 (905,812) (350,704)
Net Loss for the ten months ended
October 31, 1996 ....................... -- -- (204,857) (204,857)
---------- ------------ ------------- ---------------
Balances October 31, 1996 ............... $140,450 414,658 (1,110,669) (555,561)
========== ============ ============= ===============
</TABLE>
See accompany notes to financial statements.
F-24
<PAGE>
CHRISTIE ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,1995 AND
THE TEN MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Cash received from customers.................... $ 3,038,796 2,223,531
Cash paid to suppliers and employees............ (2,845,586) (2,179,113)
Interest paid................................... (75,354) (42,291)
------------- -------------
Net Cash Provided By Operating Activities ....... 117,856 2,127
------------- -------------
Cash Flows from Investing Activities: ...........
Capital expenditures............................ (15,927) (16,038)
Proceeds from affiliates........................ -- 59,103
------------- -------------
Net Cash Provided (Used) By Investing
Activities...................................... (15,927) 43,065
------------- -------------
Cash Flows From Financing Activities:
Capital Contributions........................... 26,444 --
Principal payments on long-term debt............ (151,187) (33,260)
------------- -------------
Net Cash Used by Financing Activities............ (124,743) (33,260)
------------- -------------
Net Increase (Decrease) in Cash.................. (22,814) 11,932
Beginning cash................................... 41,723 18,909
------------- -------------
Ending cash...................................... $ 18,909 30,841
============= =============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
CHRISTIE ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31,1995 AND
THE TEN MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
------------ -----------
<S> <C> <C>
Reconciliation of Net Loss to Net Cash
Provided by Operating Activities:
Net Loss.............................................. $(290,132) (204,857)
Adjustments to Reconcile Net Loss to Net Cash Provided
by Operating Activities:
Depreciation and Amortization......................... 158,437 103,361
Provision for bad debts............................... 101,431 136,107
(Increase) decrease in:
Accounts receivable................................... 14,233 (298,283)
Prepaid expenses and other receivables................ 75 3,730
Inventory............................................. 18,144 47,054
Increase (decrease) in:
Accounts payable...................................... 116,035 199,422
Accrued expenses ..................................... (367) 15,593
------------ -----------
Net Cash Provided by Operating Activities................ $ 117,856 2,127
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
CHRISTIE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Christie Enterprises, Inc., located in Kenilworth, New Jersey,
manufactures plastic containers and products, primarily for the wholesale
plant nursery industry.
B. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from these estimates.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of October 31, 1996, the carrying values of the Company's financial
instruments which are all held for non-trading purposes, approximated their
fair value.
D. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1997, the Company will be required to adopt SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The Company believes that the adoption of
this statement will not have a material effect on the Company's financial
position.
E. INVENTORIES
Inventories have been recorded at the lower of cost or market. The cost of
finished products includes manufacturing, labor and overhead.
F. ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers'
financial condition and generally, requires no collateral from its customers.
The Company believes the allowance for doubtful accounts of $50,000 is
adequate to absorb estimated losses as of October 31, 1996.
G. PROPERTY AND EQUIPMENT
Property and Equipment is stated at cost when placed in service. Repairs
and maintenance which do not appreciably extend the useful lives of the
related assets are charged to expense as incurred; major renewals or
betterments are capitalized. Depreciation is computed using the straight line
method over the estimated useful lives of the assets ranging from five to ten
years.
H. INCOME TAXES
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S Corporation. In lieu of corporation income
taxes, the shareholders of an S Corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provisions or liability
for federal income taxes has been included in the financial statements. The
Company continues to pay state tax.
F-27
<PAGE>
CHRISTIE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
I. CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less
to be cash equivalents.
NOTE 2 -- INVENTORIES
Inventory at October 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials . $140,840
Finished
goods......... 62,108
----------
Total........ $202,948
==========
</TABLE>
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following components as of October
31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment........ $1,618,820
Molds.......................... 1,371,186
Automobiles.................... 63,177
Furniture and fixtures......... 14,785
Leasehold improvements......... 28,793
------------
3,096,761
Less: Accumulated
Depreciation.................. 2,844,945
------------
Total.......................... $ 251,816
============
</TABLE>
NOTE 4 -- LONG-TERM DEBT
Following is a summary of long-term debt as of October 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Loan payable to Constellation Bank, bearing interest at 11.25%,
maturing February 28, 1996............................................. $320,000
Loan payable to United Counties Trust Company, bearing interest at 8.0%
due on demand.......................................................... 175,000
----------
Total long-term debt.................................................... 495,000
Less current portion.................................................... 495,000
----------
Long-term debt, excluding current portion............................... $ --
==========
</TABLE>
Interest expense related to notes payable for the year ended December 31,
1995 and the ten months ended October 31, 1996 amounted to $75,354 and
$42,291, respectively.
NOTE 5 -- PENSION PLAN
The Company has a 401k plan covering substantially all of its employees.
Provisions are funded currently. Expenses charged to operations for the year
ended December 31, 1995 and the ten months ended October 31, 1996 are $2,550
and $-0-, respectively.
NOTE 6 -- RELATED PARTY TRANSACTIONS
At October 31, 1996, amounts due to related companies have been included
in the accompanying financial statements as related party loans payable.
These loans do not bear interest and have no specific repayment terms.
F-28
<PAGE>
CHRISTIE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- RELATED PARTY TRANSACTIONS (Continued)
The shareholders control five related entities which share certain
administrative costs including payroll, with the Company. The Company pays
the costs and is periodically reimbursed by the related entities.
The Company also leases its facilities from an entity owned by a
shareholder. Rental payments for the year ended December 31, 1995 and the ten
months ended October 31, 1996 were $120,000 and $100,000, respectively.
NOTE 7 -- PRO FORMA INCOME TAXES
As discussed in the summary of significant accounting policies, the
Company elected to be taxed under subchapter "S" of the Internal Revenue Code
and accordingly recognize no Federal current or deferred income taxes. The
pro forma adjustments reflect a provision for income taxes, in accordance
with Statement of Financial Accounting Standards No. 109, at an effective
rate of 40% for each year had the Company been a "C" corporation.
Given the historical net losses incurred by the Company and the tax rates
and jurisdictions in which the Company operates, the Company would incur no
income tax benefit as a "C" corporation in 1995; therefore pro forma net loss
and pro forma net loss per share would be equivalent to results as reported
in the income statement. The Company's net operating losses and certain other
items would result in a deferred tax asset and income tax benefit, but the
Company would record a valuation allowance in an equivalent amount to reduce
the deferred tax asset and income tax benefit to zero; accordingly, the
statement of financial position and results of operations would not be
impacted by the Company's pro forma taxation as a "C" corporation in 1995.
However, due to the sale of the Company's business assets on November 1,
1996, a gain of approximately 1.25 million dollars will be recorded by the
Company which can be offset by the Company's prior losses and therefore an
income tax benefit is applicable for 1996.
Deferred income taxes in 1996 reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The tax effects of significant items comprising the Company's deferred tax
assets are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss
carryforwards................... $ 240,000
Less: valuation allowance........ (158,000)
-----------
Net deferred tax asset.......... $ 82,000
===========
</TABLE>
Pro forma net loss per share is based upon 100 shares issued and
outstanding for the year ended December 31, 1995 and the ten months ended
October 31, 1996.
NOTE 8 -- SUBSEQUENT EVENTS
On November 1, 1996, Christie Products, Inc. (CPI), a wholly owned
subsidiary of Discas, Inc., entered into an agreement with Christie
Enterprises, Inc., to purchase substantially all of their business assets.
The sale price of $1,500,000 exceeded the fair market value of the assets
sold by $173,000. CPI and Discas, Inc. as consideration, paid Christie
Enterprises, Inc., $500,000 in cash and issued a convertible promissory note
in the amount of $1,000,000. The note is interest free until April 30, 1997,
at which time interest will be paid at prime plus 1% along with fixed monthly
principal payments of $16,667. The note
F-29
<PAGE>
CHRISTIE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- SUBSEQUENT EVENTS (Continued)
matures on April 30, 2002 and is secured by the molds, machinery and
equipment of the seller. The holder of this note must convert at least one
half of the outstanding principal balance into common shares of Discas, Inc.
The number of shares into which this note may be converted shall be
determined by dividing the aggregate outstanding principal amount of the note
by 125% of the initial public offering price per share of common stock of
Discas, Inc., provided that if Discas, Inc. has not completed an initial
public offering of its common stock by October 1, 1997, then the conversion
price shall be the greater of $6.00 per share or 125% of the then fair market
value of the common stock of Discas, Inc. on a per share basis.
As of November 1, 1996, Christie Enterprises, Inc. ceased substantially
all business operations.
F-30
<PAGE>
DISCAS, INC., AND SUBSIDIARY
Pro Forma Condensed Combined Statement of Operations
(Unaudited)
The following pro forma condensed combined statement of operations for the
year ended April 30, 1997 give effect to the acquisition of Christie
Enterprises, Inc. under the purchase method of accounting and assumptions and
adjustments in the accompanying notes to the pro forma financial statements.
The pro forma statement has been prepared by the management of Discas, Inc.,
and Subsidiary based upon the financial statements of Christie included
elsewhere herein. This pro forma statement may not be indicative of the
results that actually would have occurred if the combination had been in
effect on the dates indicated or which may be obtained in the future. The pro
forma financial statement should be read in conjunction with the audited
financial statements and notes of Discas, Inc., and Subsidiary and Christie
Enterprises, Inc. contained elsewhere herein.
<TABLE>
<CAPTION>
Historical Pro forma Pro forma
Discas, Inc. Christie Enterprises Adjustments Combined
------------ -------------------- ----------- -------------
<S> <C> <C> <C> <C>
Sales $5,179,668 1,756,710 (b) (350,000) 6,586,378
Cost of Sales 3,982,066 1,592,231 (c) 26,785 5,251,082
---------- --------- -----------
(b) (350,000)
Gross Profit 1,197,602 164,479 1,335,296
Selling, General,
and Administrative
Expenses 1,300,859 301,216 (c) 2,843 1,604,918
---------- --------- -----------
Loss from operations (103,257) (136,737) (269,622)
Other income (expense):
Other income 35,279 - 35,279
Interest expense (317,393) (27,388) (d) (18,162) (362,943)
---------- --------- -----------
Net other expense (282,114) (27,388) (327,664)
Minority interest 36,705 - 36,705
---------- --------- -----------
Loss before income
taxes (348,666) (164,125) (560,581)
Income tax benefit 36,000 - 36,000
---------- --------- -----------
Net loss $ (312,666) (164,125) (524,581)
========== ========= ==========
Net loss per share
Primary $ (.13) (.22)
========== ==========
Fully diluted $ (.13) (.23)
========== ==========
</TABLE>
F-31
<PAGE>
DISCAS, INC., AND SUBSIDIARY
Notes to Pro Forma Condensed Combined Financial Statements
On November 1, 1996, Discas acquired substantially all of the business assets
of Christie Enterprises, Inc. for a purchase price of $1,500,000. To finance
the acquisition, the company borrowed $500,000 and issued a note payable to
the former owner of Christie Enterprises, Inc. for $1,000,000. The note is
convertible into shares of Discas at a conversion price of 125% of the Initial
Public Offering price per share of the common stock of Discas, or the greater
of the then fair value of a share of the common stock of Discas and $6.00 in
the event an Initial Public Offering is not consummated by October 31, 1997.
The pro forma financial statements combine the results of operations for the
two companies for the year ended April 30, 1997.
Christie enterprises ceased operations on October 31, 1996, therefore, the
historical year ended April 30, 1997 represents only six months of Christie
activity, however, the last six months of this period includes operations of
both entities. In combining the two entities the following pro forma
adjustments have been made.
(a) Reflects the purchase of property and equipment adjusted to fair
value and the recording of debt.
Total purchase price $1,500,000
==========
Purchase of assets:
Machinery and equipment 912,000
Molds 415,000
----------
Total 1,327,000
Less book value of machinery
and equipment (298,730)
----------
Net adjustment $1,028,270
==========
Goodwill 173,000
Less book value of other assets (18,000)
----------
Net adjustment $ 155,000
==========
Recording of debt
Note payable 500,000
Convertible note payable 1,000,000
----------
$1,500,000
==========
Current portion 209,666
Less Christie debt not assumed (290,000)
----------
$ 80,334
==========
Long term debt excluding current portion 1,290,334
Less Christie debt not assumed (233,591)
----------
Net adjustment $1,056,743
==========
The remaining adjustments eliminates assets and liabilities
not included in the purchase.
F-32
<PAGE>
DISCAS, INC., AND SUBSIDIARY
Notes to Pro Forma Condensed Combined Financial Statements (Continued)
(b) Discas had sales to Christie of approximately $350,000 from May
1, 1996 to October 31, 1996.
(c) Depreciation of property and equipment and amortization of
goodwill was adjusted as follows:
Life
(six months)
7 years Depreciation of machinery and equipment $ 65,143
10 years Depreciation of molds 20,750
15 years Amortization of goodwill 5,752
-------
$ 91,645
========
Total in cost of sales 85,893
Less historical depreciation (59,108)
--------
Net adjustment $ 26,785
========
Total in cost of selling, general and administrative
expenses 5,752
Less historical depreciation (2,909)
-------
Net adjustment $ 2,843
========
(d) Interest on the debt incurred for the acquisition less interest
on historical Christie is as follows:
(six months)
Interest on new borrowings $ 45,550
Less interest on historical debt (27,388)
-------
$ 18,162
========
F-33
<PAGE>
No dealer, salesman or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus, and, if given or made, such information or representations
may not be relied on as having been authorized by the Company or by any of the
Underwriters. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that there has
been no change in the affairs of the Company since the date hereof. This
Prospectus does not constitute an offer to sell or the solicitation of an
offer to buy any securities other than the securities to which it relates or
an offer or solicitation to any person in any jurisdiction where such an offer
or solicitation would be unlawful.
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 15
Dividend Policy 15
Capitalization 16
Dilution 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Business 21
Management 28
Certain Transactions 31
Principal Stockholders 33
Concurrent Offering 34
Interim Financing 35
Description of Securities 36
Shares Eligible for Future Sale 37
Underwriting 38
Legal Matters 40
Experts 41
Additional Information 41
Index to Financial Statements F-1
Until 25 days after the date of this Prospectus, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as underwriter and with respect to their unsold allotments or
subscriptions.
48
<PAGE>
DISCAS, INC.
800,000 shares of Common Stock
and 800,000 Redeemable Common Stock Purchase Warrants
PROSPECTUS
ROAN CAPITAL PARTNERS L.P. MERIT CAPITAL ASSOCIATES, INC.
August 14, 1997
49
