U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1998
-----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to __________
001-13207
Commission file number 000-22827
DISCAS, INC.
(Name of small business issuer in its charter)
DELAWARE 06-1175400
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
567-1 S. Leonard Street, Waterbury, Connecticut 06708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 753-5147
------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock; Warrants None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock; Warrants
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
<PAGE>
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB |X|
State issuer's revenues for its most recent fiscal year $5,878,890
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant was $2,844,113 on June 26, 1998 (based
on the last sale price of such stock as quoted on the NASDAQ SmallCap Market).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock, par value $.0001 per share, 3,260,776 shares outstanding
as of June 26, 1998.
Transitional Small Business Disclosure Format (check one)
|_| Yes |X| No
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business. 4
Item 2. Description of Property. 8
Item 3. Legal Proceedings. 9
Item 4. Submission of Matters to a Vote of Security Holders. 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters. 10
Item 6. Management's Discussion and Analysis or Plan of Operations. 11
Item 7. Financial Statements. 15
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure. 35
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. 35
Item 10. Executive Compensation. 37
Item 11. Security Ownership of Certain Beneficial Owners and
Management. 38
Item 12. Certain Relationships and Related Transactions. 39
Item 13. Exhibits and Reports on Form 8-K. 40
<PAGE>
PART I
Item 1. Description of 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.
The Company also manufactures plastic containers and other end products.
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 and to manufacture its own end products through
market penetration and acquisitions.
Discas is currently using industrial scrap material to manufacture high
quality recycled polypropylene-based compounds that are used by manufacturers in
place of 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. These opportunities tend to be cyclical
and are substantially dependent on the supply/demand relationship for each type
of plastic resin.
<PAGE>
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. Much of the raw material used in the Discas
formulations is based on polypropylene industrial scrap. 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 it can use
recycled material as a base for its compounds while still maintaining necessary
quality required to meet customer technical specifications.
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, including its own
fabricated product lines.
Product Lines, Customers and Suppliers
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 manufacturing costs 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.
<PAGE>
* 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.
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 ability of its
management, to create and manufacture products tailored to its customers' unique
specifications, providing the highest level of flexibility and service.
<PAGE>
The Company currently purchases its scrap feedstocks directly from
manufacturers generating scrap and from third party suppliers of scrap polymer
feedstocks. Two large suppliers 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.
On July 13, 1998, the Company announced the signing of a letter of
intent with Futuramik Industries, Inc. Futuramik is a custom molder of thermoset
and thermoplastic materials and also manufactures proprietary products. The
proposed merger is expected to more than double current revenues and to also
provide cost savings through manufacturing and operating efficiencies.
Notwithstanding the foregoing, since late in 1997, there has been a
persistent negative supply/demand relationship in the polypropylene industry
which has been caused, in part, by both the economic conditions in Asia and
reduced prices for crude oil. These conditions were most heavily felt in the
Company's commodity compounding business, which, in many instances, produced
variable production costs which exceeded the products' related selling price.
Accordingly, the Company curtailed its plans to expand its manufacturing
capacity, reduced personnel and manufacturing overhead and concentrated on
building its vertically integrated business with significant investment in new
molds and molding machines at our Christie subsidiary.
Because of the losses from operations, the Company is in violation of
various loan covenants with its primary lender and has received a forbearance
agreement from its lender requiring the Company to replace such lender in early
September 1998. This situation raises substantial doubt about the Company's
ability to continue as a going concern, unless it is able to find another
lending source. The Company is currently negotiating with three commercial
lenders to provide appropriate financing. The Company has significantly
restructured its operations and made significant reductions in its work force.
Because of these changes and the Company's financial condition (equity of
$1,871,748), management believes it can continue to operate as a going concern
if satisfactory debt refinancing is accomplished. The accompanying consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
<PAGE>
Competition
The compounding of polymers and their use in the manufacture of end
products are highly competitive industries. 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 and volume requirements
on a timely basis if it is to successfully compete in this segment of its
business. 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.
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 April 30, 1998, Discas employed approximately 53 persons, of whom
approximately 12 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.
Item 2. Description of 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.
<PAGE>
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.
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 and are being updated with new enterprise software and
state-of-the-art networked hardware to accommodate the next millenium.
The Company's New Jersey facility occupies a building with 24,000 sq.
ft. of warehouse and office space. The facility is leased from a stockholder at
rates which management believes are consistent with current market rates through
October 1998, with an option to renew for another year. Annual rental is
$100,000. 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, traffic safety products and other items.
A complete machine shop is located on the site.
The Company also leases a building in Statesville, North Carolina which
provides 32,485 square feet of manufacturing, warehouse and office space. Due to
the curtailment of polypropylene products compounding sales, this facility has
been sublet on a short-term basis.
Item 3. Legal Proceedings.
Discas is not presently involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) The Company's Common Stock and Warrants are currently traded on the
NASDAQ SmallCap Market under the symbols "DSCS" and "DSCSW," respectively.
<TABLE>
<CAPTION>
August 1 - October 31, 1997 November 1 - January 31, 1998 February 1 - April 30, 1998
1998* 2nd quarter 3rd quarter 4th quarter
- ----- ----------- ----------- -----------
<S> <C> <C> <C>
High $5.375 $4.625 $4.250
Low 3.750 3.000 2.250
</TABLE>
* Initial Public Offering became effective on August 14, 1997.
At July 13, 1998, the stock price was $4.00 per share.
As of April, 30, 1998, the Company did not meet the minimum
tangible net worth requirements for listing on NASDAQ SmallCap Market. If the
merger discussed on page 7 is consummated, the Company is expected to then meet
tangible net worth requirements. In the event the merger is not consummated, or
additional equity is not raised, the Company's common stock and warrants could
be de-listed and trading would then only be available on the OTC electronic
bulletin board or the "pink sheets."
(b) Approximate Number of Holders of Common Stock and Warrants at
June 18, 1998
Title of Class Number of Record Holders
Common Stock 10
Warrants 10
(c) Dividends
The Company has not paid any cash dividends and intends to
retain earnings, if any, during the foreseeable future for use in its
operations. Payment of cash dividends in the future will be determined by the
Company's Board of Directors based upon the Company's earnings, financial
condition, capital requirements and other relevant factors.
(d) Recent Sale of Unregistered Securities
None.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operations.
General
The Company produces proprietary plastic and rubber compounds using a
variety of recycled and prime (virgin) materials. The Company has extensive
experience in polymer technology, and has commercialized proprietary
formulations used in the manufacturing of plastics in the footwear, aeronautic,
military, automotive and consumer products sectors. During November 1996, the
Company acquired the assets of a plastic container manufacturer in New Jersey,
Christie Enterprises, Inc. (the "Christie Acquisition").
As described below, economic conditions in Asia and lower crude oil
prices resulted in lower recycled plastic prices and the Company's commodity
plastic compounding operations sustained substantial losses from late 1997
through early 1998.
Statements included in this report which are not historical in nature,
are intended to be, and are hereby identified as "forward looking statements"
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. The Company cautions readers that forward
looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties, certain of which are described herein, that could cause actual
results to differ materially from those indicated in the forward looking
statements.
The Company's operations for the year ended April 30, 1998 produced
severely depressed results because of a persistent negative supply/demand
relationship in the polypropylene industry which has been caused, in part, by
over capacity, the economic conditions in Asia and reduced prices for crude oil.
These conditions were most heavily felt in the Company's commodity compounding
business beginning in the Company's fiscal third quarter which, in many
instances, produced variable production costs which exceeded the product's
related selling price. The Company also built up its commodity compounding
production capabilities by acquiring equipment, hiring production personnel and
establishing a manufacturing facility in Statesville, North Carolina. The North
Carolina facility was opened to have access to lower cost raw material,
eliminate production bottlenecks and reduce transportation costs incurred in the
preprocessing of feed stocks. When it became evident that the industry downturn
would persist for an extended period of time, the Company had to radically
change its strategic direction, at least for the short term. Accordingly, the
Company has:
* reduced the production labor costs at its Waterbury, Connecticut plant by
over 50%
* suspended operations and sub-let a significant portion of the Statesville,
North Carolina facility
<PAGE>
* implemented across the board reductions in management, sales and
administrative costs, including cut backs in personnel levels and costs
* instituted stringent cash preservation controls
* initiated discussions with other companies concerning merger, joint
venture and other consolidation opportunities (see page 7 for discussion
of letter of intent concerning merger with Futuramik Industries, Inc.).
As a result, the Company believes it is positioned to withstand the
industry downturn, identify a new primary lender and actively participate in the
anticipated further consolidation of this industry.
The Company expects to have a Year 2000 compliant computer system fully
operational by early 1999. The Company does not expect this project to have a
significant effect on operations and further expenditures are anticipated to be
immaterial (approximately $72,000 spent in fiscal 1998).
The Consolidated Financial Statements of the Company as of and for the
year ended April 30, 1998 filed as part of this 10-KSB have been prepared in
accordance with generally accepted accounting principles applicable to a company
on a "going concern" basis, which except as otherwise noted, contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business; however, as a result of operating losses and current economic
conditions, such realization of assets and liquidation of liabilities are
subject to significant uncertainties. The Company's ability to continue as a
going concern is dependent on its ability to achieve profitable operations and
to restructure its bank debt. The Company is currently in default on its
existing bank debt and is in the process of finding another lending source.
However, no assurance can be given that another lending source will be found.
(1) Results of Operations
Years Ended April 30, 1998 and 1997
Sales increased by $699,222, or approximately 13.5%, to $5,878,890 for
the year ended April 30, 1998, as compared to $5,179,668 for the year ended
April 30, 1997. The 1998 sales include a full year of sales related to the
Christie operation ($2,945,154) as compared to $1,212,477 for the six month
period November 1, 1996 (date of acquisition) to April 30, 1997. The compounding
and distribution segments of the operations generated sales of $2,933,736 in the
year ended April 30, 1998 as compared to $3,967,191 for the year ended April 30,
1997, a decrease of $1,033,455, or approximately 26.1%. The decrease is
attributable to the commodity compounding part of the operation. The depressed
sales occurred because of the continuing negative supply/demand relationship in
the polypropylene industry.
<PAGE>
The oversupply of polypropylene material is expected to continue in the
near term and may cause reduced margins and selling prices. The Company has
rejected potential sales of its recycled products because the product market
price has dipped below variable production costs of such material. These
depressed sales conditions are expected to last at least for the next nine to
twelve months.
Costs of goods sold increased by $1,192,333, or approximately 29.9%, to
$5,174,399 for the year ended April 30, 1998, compared to $3,982,066 for the
year ended April 30, 1997. The increase in cost of goods sold was attributable
to the increase in Christie sales volume. Cost of goods sold as a percentage of
sales was 88.0% for the year ended April 30, 1998 as compared to 76.9% for the
year ended April 30, 1997. The commodity compounding segment of the business,
which carries the highest indirect labor costs, had a negative gross margin of
$340,249 or 20.5% of related sales of $1,660,745. This situation was caused by
the factors noted above and also because the Company positioned itself for
anticipated growth in the compounding business by adding additional plant
capacity and production personnel. When it became apparent that the industry
depression would continue for an extended period of time, the Company reduced
its production workforce by layoffs in both February and April 1998. The Company
had to absorb the costs associated with the production capacity build-up and
subsequent retrenchment. The cost of sales percentage of the other segments of
the business approximated 75.2%.
Selling, general and administrative costs increased by $1,398,988, or
approximately 107.5%, to $2,699,847 for the year ended April 30, 1998 as
compared to $1,300,859 for the year ended April 30, 1997. Much of the increase
was attributable to costs incurred in connection with building the
infrastructure of the Company during the period of time before and after the
consummation of its initial public offering of common stock. Increased
consulting, outside service, personnel and related benefits and insurance costs
were all significantly higher than the preceding year. In addition, the Company
invested in marketing expense for Christie including additional tradeshows, a
corporate brochure and extensive travel for sales development.
Operating loss increased by $1,892,099 to a loss of $1,995,356 for the
year ended April 30, 1998 as compared to a loss of $103,257 for the year ended
April 30, 1997. The increase in loss was primarily attributable to the industry
problems noted above and their adverse impact on product selling prices and
margins, the build-up in production capacity and personnel and the subsequent
retrenchment and the increased costs associated with being a public company.
Non-cash deferred financing costs of $145,000 were incurred in the year
ended April 30, 1998 ($176,037 in 1997). The related debt was extinguished
during the year ended April 30, 1998 and resulted in an extraordinary non-cash
charge of $287,463. In addition, interest costs of $369,482 associated with bank
borrowings and equipment financing increased by $83,126, or approximately 58.8%,
to $224,482 for the year ended April 30, 1998 as compared to $141,356 for the
year ended April 30, 1997.
<PAGE>
There was no income tax benefit or charge in the year ended April 30,
1998; there was a $36,000 income tax benefit realized in the year ended April
30, 1997 because of losses incurred in that year.
As a result of the foregoing and an extraordinary charge of $287,463
related to extinguishment of debt, net loss amounted to $2,616,529 for the year
ended April 30, 1998 as compared to net loss of $312,666 for the year ended
April 30, 1997.
(2) Liquidity and Capital Resources
Financial Condition
Because the raw material imbalance and pricing pressures described
above were so severe during the last six months of the year ended April 30,
1998, the operations of the Company has resulted in the Company being in
violation of certain financial covenants under its debt agreement with a
commercial bank and the Company's working capital position has eroded to a
significant degree since the consummation of its initial public offering of
stock in August 1997. Cash and cash equivalents amount to $464,619 at April 30,
1998 and unless economic conditions improve or new banking arrangements are
established, the Company will exhaust its available cash before the end of its
1999 fiscal year and will require additional working capital.
Approximately $800,000 of the public offering proceeds were used to
acquire machinery and equipment.
Because of the losses from operations, the Company is in violation of
various loan covenants with its primary lender and is currently negotiating a
forbearance agreement with its lender and believes the Company will be required
to replace such lender by October 30, 1998. This situation raises substantial
doubt about the Company's ability to continue as a going concern, unless it is
able to find another lending source. The Company is currently negotiating with
three commercial lenders to provide appropriate financing. The Company has
significantly restructured its operations and made significant reductions in its
work force. Because of these changes and the Company's financial condition
(equity of $1,871,748), management believes it can continue to operate as a
going concern if satisfactory refinancing is accomplished. The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The Company has taken a number of significant steps in an attempt to be
in a position to continue its operations until the expected improvement in
industry conditions occurs. The Company believes economic conditions will
improve during fiscal 1999; however, the timing and degree of such improvement
cannot be predicted with certainty.
<PAGE>
Item 7. Financial Statements.
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Discas, Inc.:
We have audited the accompanying consolidated balance sheet of Discas
Inc. as of April 30, 1998 and related consolidated statements of operations,
changes in stockholders' equity and cash flows for the two years ended April 30,
1997 and 1998. These financial statements are the responsibility of Discas, Inc.
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
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. as of
April 30, 1998 and the results of their operations and cash flows for the two
years ended April 30, 1997 and 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in note 1(b) to the
financial statements, the Company has suffered losses from operations and is in
violation of various loan covenants with their primary lender, which raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters also are described in note 1(b). The financial
statements do not include any adjustments that might result from the outcome of
the uncertainty.
JUMP, SCUTELLARO AND COMPANY
Toms River, New Jersey
July 23, 1998
<PAGE>
DISCAS, INC.
CONSOLIDATED BALANCE SHEET
April 30, 1998
ASSETS
Current assets:
Cash $ 464,619
Accounts receivable 909,296
Inventory 976,967
Prepaid expenses 56,868
----------
Total current assets 2,407,750
----------
Property and equipment (net) 2,434,584
Other assets 260,495
----------
$5,102,829
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 895,978
Accrued expenses 92,962
Line of credit 1,273,023
Current portion of capital leases 35,885
Current portion of long-term debt 425,335
----------
Total current liabilities 2,723,183
----------
Capital leases, excluding current portion 83,854
Long-term debt, excluding current portion 187,888
Related party loans 236,156
Stockholders' equity:
Common stock, par value $.0001 per share:
Authorized 20,000,000 shares
3,207,200 shares issued and outstanding 321
Additional paid in capital 4,459,305
Accumulated deficit (2,587,878)
-----------
Total stockholders' equity 1,871,748
----------
$5,102,829
==========
See accompanying notes.
<PAGE>
DISCAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended April 30,
1997 1998
----------- -----------
<S> <C> <C>
Sales $5,179,668 $5,878,890
Cost of sales 3,982,066 5,174,399
----------- -----------
Gross profit 1,197,602 704,491
----------- -----------
Selling, general and administrative expenses 1,300,859 2,699,847
----------- -----------
Loss from operations (103,257) (1,995,356)
----------- -----------
Other income (expense):
Other income 35,279 -
Interest income - 35,772
Interest expense (317,393) (369,482)
----------- -----------
Net other expense (282,114) (333,710)
----------- -----------
Minority interest 36,705
-
Loss before income taxes and extraordinary item (348,666) (2,329,066)
Income tax benefit 36,000
-
Loss before extraordinary item (312,666) (2,329,066)
----------- -----------
Extraordinary item - loss on extinguishment of debt - (287,463)
----------- -----------
Net loss $ (312,666) $(2,616,529)
============ ============
Net loss per share (Basic and Diluted):
Loss before extraordinary item $(.15) $(.79)
====== ======
Extraordinary item - (.10)
====== ======
Net loss $(.15) $(.89)
====== ======
</TABLE>
See accompanying notes.
<PAGE>
DISCAS INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Two years ended April 30, 1998
<TABLE>
<CAPTION>
Retained
Additional Earnings Total
Common Paid In (Accumulated Stockholders'
Stock Capital Deficit) Equity
------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
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)
---- ---------- ----------- ----------
April 30, 1997 225 822,677 28,651 851,553
Issuance of common stock 80 2,577,225 - 2,577,305
Issuance of common stock warrants - 59,419 - 59,419
Issuance of common stock for convertible
promissory note 16 999,984 - 1,000,000
Net loss for the year ended April 30, 1998 - - (2,616,529) (2,616,529)
---- ---------- ----------- ----------
April 30, 1998 $321 $4,459,305 $(2,587,878) $1,871,748
==== ========== ============ ==========
</TABLE>
See accompanying notes.
<PAGE>
DISCAS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended April 30,
1997 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Cash received from customers $4,573,965 $6,146,181
Cash paid to suppliers and employees (4,515,399) (7,760,662)
Interest received - 35,772
Interest paid (138,806) (217,607)
----------- -----------
Net cash used by operating activities (80,240) (1,796,316)
----------- -----------
Cash Flows from Investing Activities:
Payments on other assets (35,604) -
Purchases of fixed assets (180,873) (876,659)
----------- -----------
Net cash used by investing activities (216,477) (876,659)
----------- -----------
Cash Flows from Financing Activities:
Principal payments on long-term debt (165,309) (1,232,673)
Proceeds from long-term debt 710,000 300,050
Proceeds from issuance of common stock and warrants 40,000 3,479,026
Payments of offering costs (474,487) (310,154)
Principal payments on capital leases (33,933) (33,778)
Repayment of stockholder loan - (21,000)
Payoff of credit line - (490,000)
Proceeds from credit line 210,000 1,273,023
----------- -----------
Net cash provided by financing activities 286,271 2,964,494
----------- -----------
Net increase (decrease) in cash (10,446) 291,519
Cash at beginning of year 183,546 173,100
----------- -----------
Cash at end of year $ 173,100 $ 464,619
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
DISCAS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
<TABLE>
<CAPTION>
Year ended April 30,
1997 1998
------------ -----------
<S> <C> <C>
Reconciliation of net loss to cash used by operating activities:
Net loss $(312,666) $(2,616,529)
Items which did not (provide) use cash:
Depreciation 221,267 398,294
Interest 2,550 6,875
Amortization 8,051 14,940
Bad debt expense 17,390 67,967
Consulting fees - 10,000
Minority interest (36,705) -
Deferred financing costs 176,037 145,000
Extraordinary item - extinguishment of debt - 287,463
Working capital changes which provided (used) cash:
Accounts receivable (771,826) 267,291
Inventory (468,844) 39,552
Other assets (500) (26,048)
Prepaid expenses (2,877) (41,269)
Accounts payable 1,000,224 (384,732)
Accrued expenses 123,659 (91,667)
Non-current changes which provided (used) cash:
Related party loan - 123,844
Accrued interest - 2,703
Deferred taxes (36,000) -
------------ -----------
Net cash used by operating activities $ (80,240) $(1,796,316)
============= ============
Schedule of non-cash investing and financing activities:
Financed acquisitions $ 1,567,904 $ 75,000
============= ============
Offering costs $ 15,000 $ 611,174
============= ============
Acquisition of minority interest $ 172,402 $ -
============= ============
Deferred financing costs $ 608,500 $ -
============= ============
Issuance of common stock for convertible note payable $ - $ 1,000,000
============= ============
</TABLE>
See accompanying notes.
<PAGE>
DISCAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1998
1. Summary of significant accounting policies
a. Organization
The accompanying consolidated financial statements of Discas,
Inc. and Subsidiaries (the "Company") present the accounts of
Discas, Inc., its 68.81% subsidiary, Discas Recycled Products
Corporation (DRPC) (until August 27, 1996) and its wholly
owned subsidiaries, Christie Products Inc. (CPI) and Discas
Southeast, Inc. (DSI). 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
year ended April 30, 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.
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.
<PAGE>
DISCAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1998
1. Summary of significant accounting policies (Cont'd)
b. Going concern
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles,
which contemplates continuation of the Company as a going
concern. However, the Company has sustained a substantial
operating loss this past year and as a result is in violation
of various loan covenants with its primary lender.
In view of these matters, realization of a major portion of
the assets in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing
requirements, and the success of its future operations.
Management believes that both actions implemented and those
presently being implemented; such as the restructuring of its
operations and making significant reductions in its work force
provide the opportunity for the Company to continue as a going
concern.
c. 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.
d. 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.
<PAGE>
1. Summary of significant accounting policies (Cont'd)
e. 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.
f. 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.
g. Fair value of financial instruments
As of April 30, 1998, the carrying values of the Company's
financial instruments which are all held for non-trading
purposes, approximated their fair value.
h. Inventory
Inventory is stated at the lower of cost or market as
determined by the average cost method.
<PAGE>
1. Summary of significant accounting policies (Cont'd)
i. Economic dependency
The Company sells a substantial portion of its product to a
few customers. For the years ended April 30, 1997 and 1998,
sales to those customers were as follows:
1997 1998
---- ----
Customer #1 $1,033,000 $ 823,000
Customer #2 420,000 667,000
Customer #3 611,000 108,000
---------- ----------
$2,064,000 $1,598,000
========== ==========
As of April 30, 1998, accounts receivable from these customers
were as follows:
Customer #1 $49,476
Customer #2 26,732
Customer #3 21,861
-------
$98,069
=======
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, 1998.
j. Deferred offering costs
Professional fees and other expenses associated with the
initial public offering of the Company's common stock were
capitalized and subsequently charged against the proceeds of
the Company's initial public offering.
k. Net loss per common share
Net loss per share amounts for 1997 have been restated to give
effect to the application of SFAS No. 128, "Earnings Per
Share" `which was adopted by the Company in 1998. The effect
of the restatement on net loss per share is an increase of
$.02 per share, from $(.13) to $(.15).
Net loss per share amounts are based on the weighted average
number of shares outstanding (2,153,022 in 1997 and 2,934,500
in 1998).
<PAGE>
1. Summary of significant accounting policies (Cont'd)
l. Impact of recently issued accounting standards
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income," which requires
that an entity report, by major components and as a single
total, the change in its assets from non-shareholder sources
during the period; and SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which
establishes annual and interim disclosures about its products,
services, geographic areas and major customers. Adoption of
these statements will not impact the Company's financial
position, results of operations or cash flows. Both statements
are effective for fiscal years beginning after December 15,
1997, with early application permitted.
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.
Effective May 1, 1997, the Company adopted SFAS No. 128
"Earnings Per Share" and SFAS No. 129 "Disclosure of
Information About Capital Structure." Statement No. 128,
requires all entities with publicly held common stock or
potential common stock to report earnings per share according
to the statement. Statement No. 129 consolidates existing
pronouncements on required disclosures about a company's
capital structure.
m. 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 and
$145,000 of deferred financing costs for the years ended April
30, 1997 and 1998. Additionally, upon the early extinguishment
of the debt in August, 1997, the remaining $287,463 was
charged to earnings as an extraordinary item.
<PAGE>
2. Property and equipment
As of April 30, 1998, property and equipment consist of the following:
Machinery and equipment $3,310,406
Leasehold improvements 86,091
Office equipment 144,424
Vehicles 64,556
Furniture and fixtures 29,868
----------
Total property and equipment 3,635,345
Less: accumulated depreciation (1,200,761)
----------
Net property and equipment $2,434,584
==========
3. Accounts receivable
Accounts receivable at April 30, 1998 are shown net of an allowance for
doubtful accounts of $60,000.
4. Inventory
Inventories at April 30, 1998 consist of:
Finished goods $306,707
Raw materials 670,260
--------
$976,967
========
5. Other assets
Other assets at April 30, 1998 consist of the following:
Security deposits $ 59,358
Goodwill net of $22,991 of accumulated amortization 201,137
--------
$260,495
========
<PAGE>
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 applies APB Opinion 25 in accounting for its stock option
plan. Accordingly, no compensation cost has been recognized for the plan for the
year ended April 30, 1997 and 1998. Had compensation cost been determined on the
basis of fair value pursuant to SFAS Statement No. 123, net loss and net loss
per share would have been increased as follows:
Net loss 1997 1998
-------- ---- ----
As reported $(312,666) $(2,616,529)
========== ============
Pro forma $(312,666) $(2,628,279)
========== ============
Net loss per common share 1997 1998
------------------------- ---- ----
As reported $(.15) $(.89)
====== ======
Pro forma $(.15) $(.90)
====== ======
The fair value of options granted for the year ended April 30, 1998 was
$1.11 per option. The fair value was estimated on the date of the grant using
the Black-Scholes option pricing model with the following assumptions:
Risk free interest rate 5.625%
Option life 5 years
Volatility 14.039%
Dividend yield -
<PAGE>
6. Stock option plan (Cont'd)
The following is a summary of the status of the stock option plan:
Shares Exercise
Price
Outstanding at April 30, 1997 - -
Granted 66,000 $4.125
Exercised - -
Forfeited (23,500) $4.125
--------
Outstanding at April 30, 1998 42,500 $4.125
====== ======
Fair value of options granted $47,000
=======
As of April 30, 1998, 407,500 shares of common stock were reserved for
issuance pursuant to the terms of the stock option plan.
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 benefit for the year ended April 30, 1997
were:
1997 Federal State Total
- ---- ------- ----- -----
Current $ - $ - $ -
Deferred 28,000 8,000 36,000
------- ------ -------
$28,000 $8,000 $36,000
======= ====== =======
<PAGE>
7. Income taxes (Cont'd)
The following is a summary of the components of the Company's Federal
and State deferred tax assets and liabilities as of April 30, 1998:
Federal State
Current
Deferred tax assets:
Allowance for doubtful accounts $ 20,000 $ 5,000
Valuation allowance (20,000) (5,000)
--------- --------
$ - $ -
========= ========
Non-current
Deferred tax assets:
Net operating loss carryforwards 1,020,000 270,000
Deferred tax liabilities:
Depreciation (185,000) (50,000)
----------- ----------
Net deferred tax asset before valuation allowance 835,000 220,000
Valuation allowance (835,000) (220,000)
----------- ----------
$ - $ -
=========== ==========
The Company has net operating loss carryforwards of approximately
$3,000,000 for Federal and State income tax purposes which will begin to expire
in 2012.
A reconciliation of the income tax benefit computed at the normal
statutory Federal income tax rate with the Company's provision for income taxes
is as follows:
Year Ended April 30,
1997 1998
Statutory Federal income tax benefit $ 136,000 $ 1,018,000
State tax benefit 24,400 183,000
Permanent differences:
Non-deductible expenses (5,850) (9,000)
Deductible expenses 11,550 -
Exempt income 14,300 -
Increase in valuation allowance (154,000) (1,192,000)
Change in estimate-tax rates 9,600 -
---------- ------------
Income tax benefit $ 36,000 $ -
======== ===========
<PAGE>
8. Line of credit
In June, 1997, the Company concluded a credit arrangement with a bank
which provides for a credit line of up to $1,500,000 on a borrowing base
consisting of 80% of eligible accounts receivable and 50% of eligible inventory.
This credit line bears interest at the bank's prime rate plus 1%. The line of
credit is secured by substantially all the business assets of the Company.
The loan agreement with the bank contains various covenants pertaining
to working capital and net worth. At July 23, 1998, the date of preparation of
these notes to the financial statements, the Company was in breach of these
covenants. Under terms of the agreement, the bank may call the loan if the
Company is in violation of any restrictive covenant. As of July 23, 1998, the
bank has not waived any of the covenants, and accordingly the entire amount
borrowed on the credit line ($1,273,023) and term loan ($300,050, see note 9
below) has been included in current liabilities.
9. Long-term debt
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. $313,173
Loan payable to a bank in monthly principal payments of
$5,300, plus interest at prime plus 1%. The loan matures in
September, 2002 and is secured by machinery and equipment. 300,050
Total long-term debt 613,223
Less: current portion 425,335
--------
Long-term debt, excluding current portion $187,888
========
Maturities of long-term debt over the next several years are as
follows:
April 30, 1999 $425,335
2000 126,447
2001 61,441
--------
$613,223
<PAGE>
10. Capital leases
The Company is lessee of certain equipment under capital leases
expiring in various years through 2001. 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.
Minimum future lease payments under capital leases as of April 30, 1998
is as follows:
April 30, 1999 $50,691
2000 47,209
2001 44,626
-------
Total minimum lease payments 142,526
Less: amounts representing interest 22,787
Present value of future minimum lease payments 119,739
Less: current portion 35,885
Capital leases, net of current portion $83,854
=======
As of April 30, 1998, machinery and equipment held under the
aforementioned capital leases amounted to $266,324 and depreciation expense for
the years ended April 30, 1997 and 1998 approximated $20,000 and $38,000,
respectively.
11. Related party activity
The President of the Company has made various loans to the Company
bearing interest at 6% and has deferred receipt of approximately $123,000 of
salary. 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, 1997
and 1998, sales to the related party amounted to approximately $671,000 and
$76,000, and purchases from the related party amounted to approximately $650,000
and $396,000.
Included in selling, general and administrative expenses for the year
ended April 30, 1997 and 1998 is approximately $26,400 expensed 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.
<PAGE>
12. Commitments and contingencies
The Company conducts its operations in leased facilities classified as
operating leases which expire in various years through 2003. 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, 1999 $195,438
2000 156,543
2001 116,040
2002 74,100
2003 74,100
Rent expense under the aforementioned leases for the years ended April
30, 1997 and 1998 amounted to $218,405 and $328,617, respectively.
Commencing on August 1, 1997, Mr. Patrick DePaolo, the Company's
Chairman of the Board, Chief Executive Officer and President signed a five year
employment agreement 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 payment of a bonus in amounts to be determined based on 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.
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 was interest free until April 30, 1997, at which time interest was to be
paid at prime plus 1% along with fixed monthly principal payments of $16,667.
<PAGE>
13. Asset purchase agreement (Cont'd)
In August, 1997, the holder of this note converted the loan into
160,000 common shares of Discas, Inc. As a result, the Company's common stock
was increased by $16 and additional paid in capital was increased by $999,984.
14. Initial public offering
On August 14, 1997, the Company concluded an initial public offering of
800,000 shares of common stock and 800,000 redeemable common stock purchase
warrants for total gross proceeds of $4,080,000 and subsequently the sale of
102,000 over allotment warrants for $10,200.
Accordingly, costs in the amount of $1,453,476 associated with the
public offering have been charged against such proceeds and as a result common
stock increased by $80 and additional paid in capital increased by $2,636,644.
In connection with the initial 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 1997 have been restated to reflect the stock split.
15. Outstanding warrants
At April 30, 1998, the Company had outstanding common stock purchase
warrants as follows:
No. of Exercise Expiration
Warrants Price Date
135,000 $2.25 September 30, 2001
800,000 $5.00 September 13, 2002
902,000 $6.25 September 13, 2002
100,000 $2.50 March 31, 1999
<PAGE>
16. Year 2000 issue (unaudited)
Included in fixed assets is approximately $72,000 for the purchase,
installation and training of Year 2000 complaint computer hardware and software.
The Company expects this system to be fully operational by early 1999. The
Company does not expect this project to have a significant effect on operations
and further expenditures are anticipated to be immaterial.
17. Subsequent events
On May 26, 1998 and June 25, 1998, a total of 40,000 common stock
purchase warrants were exercised at $2.50 per share. As a result, common stock
was increased by $4 and additional paid in capital was increased by $99,996.
On June 25, 1998, the Company issued 13,576 shares of common stock
($3.375 per share) in lieu of cash for consulting services rendered. The
transaction was valued at the fair market value for the services rendered. As a
result, common stock was increased by $1 and additional paid in capital was
increased by $45,818.
18. Intent of Merger
On July 23, 1998, the Company signed a letter of intent to acquire all
of the outstanding common stock of Futuramik Industries, Inc., a custom molder
of thermoset and thermoplastic materials that also manufactures proprietary
products. Futuramik Industries, Inc. is a closely-held "C" Corporation.
<PAGE>
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
MANAGEMENT
The directors and executive officers of the Company are as follows:
Name Age Position
Patrick A. DePaolo, Sr. 56 Chairman of the Board of Directors,
Chief Executive Officer and President
Thomas R. Tomaszek 46 Vice President, Marketing and Business
Development and Director
Ronald P. Pettirossi 55 Chief Financial Officer
Stephen P. DePaolo 33 Vice President, Materials Sourcing,
Distribution and Planning
John Carroll 52 Director
Asher Bernstein 54 Director
Alan Milton 44 Director
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."
<PAGE>
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. 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. Mr. Pettirossi is currently a director of Magellan
Petroleum Corporation, an oil and gas exploration company.
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."
<PAGE>
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.
Item 10. 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
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Position Year Cash Other
Salary Compensation
<S> <C> <C> <C>
Patrick A. DePaolo, President, Chief Executive Officer and 1997 $77,739 0
Chairman of the Board of Directors
1996 $50,402 $2,234(1)
1995 $82,288 0
</TABLE>
(1) Deferred compensation.
<PAGE>
The following officers were granted stock options:
<TABLE>
<CAPTION>
Name Grant Date Expiration Date Option Shares Option Shares Exercise Price
Exercisable Per Share
<S> <C> <C> <C> <C> <C>
Ronald P. Pettirossi
Chief Financial Officer 10/22/97 10/22/02 10,000 - $4.125
Thomas R. Tomaszek
Vice President & Director 10/22/97 10/22/02 15,000 - $4.125
Stephen P. DePaolo
Vice President 10/22/97 10/22/02 10,000 - $4.125
</TABLE>
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. Due to cash constraints on the Company, Mr.
DePaolo has deferred the receipt of approximately $123,000 due him for
compensation.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information with respect to the
beneficial ownership of the Common Stock as of June 18, 1998, 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.
<PAGE>
Name and Address(3) Shares Percent
Beneficially
Owned(1)(2)
Patrick A. DePaolo, Sr.(4).......................... 2,164,981 66.4
Mantis V, L.L.C.(5) 457,500 14.0
c/o Mantis Holdings, Inc.
250 Park Avenue
New York, New York 10177...........................
Alan Milton(5) 457,500 14.0
c/o Mantis Holdings, Inc.
250 Park Avenue
New York, New York 10177...........................
Asher Bernstein(5) 457,500 14.0
c/o Bernstein Real Estate
855 Avenue of the Americas
New York, NY 10001.................................
Christie Enterprises, Inc. 160,000 4.9
80 Market Street
Kenilworth, New Jersey 07033.......................
Stephen P. DePaolo.................................. 30,969 9.5
Thomas R. Tomaszek.................................. -0-
John Carroll........................................ -0-
Ron Pettirossi...................................... 3,576 1.1
All officers and directors as a group (7 persons)... 2,305,200 70.7
(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.
Item 12. Certain Relationships and Related Transactions.
The Company is indebted to Patrick A. DePaolo, Sr., the Chairman, Chief
Executive Officer, President and controlling stockholder, in the amount of
$236,156 for equipment purchase loans made in 1993 and 1995 and partial salary
deferrals in fiscal 1996 through 1998. Such loans are accruing interest at rates
between 6.00% to 8.00%.
<PAGE>
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 $671,000 of feedstocks in fiscal 1997 and $76,000 in
fiscal 1998, and from which the Company purchased approximately $650,000 of
finished goods in fiscal 1997 and $396,000 in fiscal 1998. 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.
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 repaid such loan in October
1997. 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 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.
Item 13. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
Item Number
3. Articles of Incorporation and By-laws
(i) Amended and Restated Certificate of Incorporation filed
as Exhibit 3.1 to Registration Statement No. 333-26543
is incorporated herein by reference.
<PAGE>
(ii) Amended Bylaws of the Company filed as Exhibit 3.2 to
Registration Statement No. 333-26543 is incorporated
herein by reference.
4. Instruments defining the rights of holders, including indentures
(a) Form of Common Stock Certificate filed as Exhibit 4.1
to Registration Statement No. 333-26543 is incorporated
herein by reference.
(b) Warrant Agreement between the Company and American
Stock Transfer & Trust Company filed as Exhibit 4.2 to
Registration Statement No. 333-26543 is incorporated
herein by reference.
(c) Form of Common Stock Purchase Warrant (included in
Exhibit 4.2) filed as Exhibit 4.3 to Registration
Statement No. 333-26543 is incorporated herein by
reference.
(d) Underwriters' Warrant filed as Exhibit 4.4 to
Registration Statement No. 333-26543 is incorporated
herein by reference.
9. Voting trust agreement
(a) Voting Trust Agreement - Mantis Partners III, L.P.
filed as Exhibit 9.1 to Registration Statement No.
333-26543 is incorporated herein by reference.
(b) Voting Trust Agreement - Mantis Partners IV, L.P. filed
as Exhibit 9.2 to Registration Statement No. 333-26543
is incorporated herein by reference.
(c) Voting Trust Agreement - Ramona H. Lainas and Telemahos
G. Lainas filed as Exhibit 9.3 to Registration
Statement No. 333-26543 is incorporated herein by
reference.
(d) Voting Trust Agreement - Jack Milgrom filed as Exhibit
9.4 to Registration Statement No. 333-26543 is
incorporated herein by reference.
(e) Voting Trust Agreement - Sheftel Family Irrevocable
Trust filed as Exhibit 9.5 to Registration Statement
No. 333-26543 is incorporated herein by reference.
(f) Voting Trust Agreement - Pimbyco, Inc. filed as Exhibit
9.6 to Registration Statement No. 333-26543 is
incorporated herein by reference.
<PAGE>
10. Material contracts
(a) Employment Agreement between the Company and Patrick A.
DePaolo, Sr. filed as Exhibit 10.1 to Registration
Statement No. 333-26543 is incorporated herein by
reference.
(b) 1997 Stock Option Plan filed as Exhibit 10.2 to
Registration Statement No. 333-26543 is incorporated
herein by reference.
(c) Lease (3,728 Sq. Feet) - Industrial Development Group
filed as Exhibit 10.10 to Registration Statement No.
333-26543 is incorporated herein by reference.
(d) Amendment to Lease (3,728 Sq. Feet) - Industrial
Development Group filed as Exhibit 10.11 to
Registration Statement No. 333-26543 is incorporated
herein by reference.
(e) Lease (26,018 Sq. Feet) - Industrial Development Group
filed as Exhibit 10.12 to Registration Statement No.
333-26543 is incorporated herein by reference.
(f) Amendment to Lease (26,018 Sq. Feet) - Industrial
Development Group filed as Exhibit 10.13 to
Registration Statement No. 333-26543 is incorporated
herein by reference.
(g) Lease (23,966 Sq. Feet) - Industrial Development Group
filed as Exhibit 10.14 to Registration Statement No.
333-26543 is incorporated herein by reference.
(h) Restated Lease Indenture - Plaza Realty Partnership
filed as Exhibit 10.15 to Registration Statement No.
333-26543 is incorporated herein by reference.
(i) Mantis V, L.L.C. Financing Agreement filed as Exhibit
10.16 to Registration Statement No. 333-26543 is
incorporated herein by reference.
(j) Mantis V, L.L.C. Promissory Notes totaling $375,000
filed as Exhibit 10.17 to Registration Statement No.
333-26543 is incorporated herein by reference.
(k) Convertible Promissory Note - Christie Enterprises,
Inc. filed as Exhibit 10.18 to Registration Statement
No. 333-26543 is incorporated herein by reference.
<PAGE>
(l) Non-competition Agreement - J-Von, L.L.C. filed as
Exhibit 10.19 to Registration Statement No. 333-26543
is incorporated herein by reference.
(m) Textron Installment Note filed as Exhibit 10.20 to
Registration Statement No. 333-26543 is incorporated
herein by reference.
(n) Form of Consulting Agreement between the Company and
Underwriters filed as Exhibit 10.21 to Registration
Statement No. 333-26543 is incorporated herein by
reference.
(o) Note Modification Agreement dated February 24, 1997
between Mantis V, L.L.C. and the Company filed as
Exhibit 10.22 to Registration Statement No. 333-26543
is incorporated herein by reference.
(p) Revolving and Term Loan Agreement dated June 26, 1997
among Discas, Inc., Christie Products, Inc. and
Citizens Bank of Connecticut filed as Exhibit 10.23 to
Registration Statement No. 333-26543 is incorporated
herein by reference.
21. Subsidiaries of the registrant
Filed herein.
23. Consent of experts and counsel
Consent of Jump, Scutellaro and Company filed herewith.
27. Financial Data Schedule
Filed herein.
(b) Reports on Form 8-K.
On July 31, 1998, the Company filed a Current Report on Form 8-K
to report that it had signed a letter of intent to merge with
Futuramik Industries, Inc. of Hartford, Connecticut.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DISCAS, INC.
/s/ Patrick A. DePaolo, Sr.
Patrick A. DePaolo, Sr.
President and Chief Executive Officer
Dated: August 14, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Patrick A. DePaolo, Sr. /s/ Ronald P. Pettirossi
Patrick A. DePaolo, Sr. Ronald P. Pettirossi
President, Director and Chief Financial Officer
Chief Executive Officer
Dated: August 14, 1998 Dated: August 14, 1998
----------------------------- -----------------------------
/s/ Asher Bernstein /s/ John Carroll
Asher Bernstein John Carroll
Director Director
Dated: August 14, 1998 Dated: August 14, 1998
----------------------------- -----------------------------
/s/ Alan Milton /s/ Thomas R. Tomaszek
Alan Milton Thomas R. Tomaszek
Director Director
Dated: August 14, 1998 Dated: August 14, 1998
----------------------------- -----------------------------
Subsidiaries of the registrant
Subsidiary State of Incorporation Ownership
Christie Products Inc. New Jersey 100%
Discas Southeast, Inc. North Carolina 100%
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-50085) pertaining to the Mission Bay Consulting, Inc. Stock
Option Plan of Discas, Inc. of our report dated July 23, 1998, as to which the
date is July 23, 1998, with respect to the consolidated financial statements of
Discas, Inc. included in the Annual Report (Form 10-KSB) for the year ended
April 30, 1998.
JUMP, SCUTELLARO AND COMPANY
Toms River, New Jersey
August 10, 1998
<TABLE> <S> <C>
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 464,619
<SECURITIES> 0
<RECEIVABLES> 969,296
<ALLOWANCES> 60,000
<INVENTORY> 976,967
<CURRENT-ASSETS> 2,407,750
<PP&E> 3,635,345
<DEPRECIATION> 1,200,761
<TOTAL-ASSETS> 5,102,829
<CURRENT-LIABILITIES> 2,723,183
<BONDS> 0
0
0
<COMMON> 321
<OTHER-SE> 1,871,427
<TOTAL-LIABILITY-AND-EQUITY> 5,102,829
<SALES> 5,878,890
<TOTAL-REVENUES> 5,878,890
<CGS> 5,174,399
<TOTAL-COSTS> 7,874,246
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 333,710
<INCOME-PRETAX> (2,329,066)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,329,066)
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