SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC, 20459
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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COMMISSION FILE # 0-8027
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EASTCO INDUSTRIAL SAFETY CORP.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-1874010
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(State or other jurisdiction of (IRS Employer)
incorporation or organization)
130 West 10th Street, Huntington Station, NY 11746
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(Address of principal executive offices and zip code)
(516) 427-1802
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
YES___X_____ NO_________
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at September 30, 1996
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Common Stock, par value 879,488
$.12 per share
PART I - FINANCIAL INFORMATION
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
1996 1996
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ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 196,271 $ 646,030
Accounts receivable - (less allowance
for doubtful accounts of $140,000 at
September 30, 1996 and $155,000 at
June 30, 1996) 4,193,908 4,669,070
Inventories - (notes 2) 5,882,378 5,230,237
Other 636,761 441,763
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TOTAL CURRENT ASSETS 10,909,318 10,987,100
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PROPERTY, PLANT AND EQUIPMENT, at cost - 2,672,150 2,625,703
Less accumulated depreciation and
amortization 1,375,823 1,347,608
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1,296,327 1,278,095
OTHER ASSETS 227,387 206,910
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TOTAL ASSETS $12,433,032 $12,472,105
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See accompanying notes.
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
1996 1996
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LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
CURRENT LIABILITIES:
Loan Payable $ 5,745,858 $5,853,075
Current maturities of long-term debt 48,469 56,044
Accounts payable 3,344,542 3,234,127
Accrued expenses 251,081 291,341
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TOTAL CURRENT LIABILITIES 9,389,950 9,434,587
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LONG-TERM DEBT, less current maturities 428,024 433,738
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SHAREHOLDERS' EQUITY
Common stock, $.12 par value;
authorized - 20,000,000 shares,
issued 879,488 shares in September 1996
and 765,488 shares in June 1996 105,539 91,859
Additional paid-in capital 6,899,796 6,742,476
Retained deficit (4,390,277) (4,230,555)
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TOTAL SHAREHOLDERS' EQUITY 2,615,058 2,603,780
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,433,032 $12,472,105
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See accompanying notes.
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
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Three Months Ended September 30,
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1996 1995
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Net Sales $6,055,707 $6,522,386
Cost of Sales 5,031,730 5,271,764
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Gross Profit 1,023,977 1,250,622
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Selling, general & administrative expenses 1,020,275 1,085,855
Interest expense (NET) 181,643 194,416
Other income (NET) (18,219) (12,891)
Settlement with former underwriter - 78,000
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Net loss (159,722) (94,758)
Opening (deficit) (4,230,555) (4,240,592)
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Closing (deficit) $(4,390,277) $(4,335,350)
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Loss per common share $ (.18) $ (.27)
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Weighted average number of
common shares outstanding 868,336 356,676
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See accompanying notes.
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
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Three Months Ended September 30,
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1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(159,722) $(94,758)
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Adjustment to reconcile results of operations
to net cash effect of operating
activities:
Depreciation and amortization 28,215 36,380
Settlement with former underwriter - 78,000
Net changes in assets and liabilities:
Decrease/(Increase) in accounts receivable 475,162 (607,637)
(Increase) in inventories (652,141) (644,554)
(Increase) in other current assets (194,998) (2,334)
(Increase) in other assets (20,477) (4,600)
Increase in accounts payable 110,415 220,723
(Decrease) in accrued expenses (40,260) (37,117)
(Decrease)/Increase in current maturities
of long-term debt (7,575) 1,726
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Total Adjustments (301,659) (959,413)
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Net cash (used for) operating activities (461,381) (1,054,171)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (46,447) (5,650)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants - 48,750
Repayments of long-term debt (5,714) (13,289)
Borrowings under line of credit agreement 6,897,224 6,948,132
Repayments under line of credit agreement (7,004,441) (6,317,740)
Net proceeds from private placement
of common stock 171,000 -
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Net cash provided from financing activities 58,069 665,853
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NET (DECREASE) IN CASH (449,759) (393,968)
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CASH, beginning of period 646,030 521,210
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CASH, end of period $ 196,271 $ 127,242
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 181,643 $ 194,416
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Income taxes $ 296 $ 7,508
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SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Issuance of common stock in connection with
settlement with former underwriter $ 78,000
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See accompanying notes.
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. Company's Opinion on Unaudited Financial Statements
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In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal accruals) necessary to present fairly the condensed consolidated balance
sheets as of September 30, 1996 and June 30, 1996 (audited) and the related
statements of operations and deficit for each of the three months in the
periods ended September 30, 1996 and 1995.
The results of operations for the three months ended September 30, 1996 and
1995 are not necessarily indicative of the results for the entire year.
2. Inventories
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Inventories consist of the following:
September 30, June 30,
1996 1996
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Raw materials $ 1,651,664 $ 1,701,676
Work-in-process 516,441 514,555
Finished goods 3,714,273 3,014,006
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Total $ 5,882,378 $ 5,230,237
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3. Litigation
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The Company is a party to various asbestos lawsuits alleging damages from
exposure to asbestos products sold by the Company. Refer to Part II, Other
Information, Item I "Legal Proceedings" in this form 10-QSB and Note 11 to the
June 30, 1996 Audited Consolidated Financial Statements regarding the asbestos
litigation.
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
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FINANCIAL CONDITION AND CONSOLIDATED RESULTS OF OPERATIONS
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Liquidity and Capital Resources
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The Company had working capital as of September 30, 1996 of approximately
$1,519,000 as compared to approximately $1,553,000 as of June 30, 1996. A
substantial portion of the Company's working capital consists of inventory,
which was approximately $5,882,000 and $5,230,000 as of September 30, 1996 and
June 30, 1996, respectively. The Company is required to maintain substantial
inventories of its numerous products in order to meet the immediate shipping
requirements of its customers who require products on short notice. The
Company believes that its current working capital position will be sufficient
to satisfy its needs for the current fiscal year. The Company's working
capital position will be enhanced with the proceeds from its public offering in
November 1996.
In July 1996, the line of credit with Congress Financial Corporation was
amended and extended until October 1, 1999, with an option by Congress to
extend the loan for an additional year. The line was increased to $9,000,000
with an interest rate of 1.25% above the prime rate which will be reduced to 1%
above the prime rate subject to the consummation of the public offering by
December 31, 1996 and the net proceeds of the offering being at least
$2,500,000. In addition, this amended line of credit allows for increased
limits on borrowings on eligible accounts receivable and eligible inventory.
The amounts outstanding under this agreement at September 30 and June 30, 1996
were $5,746,000 and $5,558,000 respectively. The Company has $83,000 available
for borrowing at September 30, 1996, after adjusting for its liability for
outstanding checks.
Net cash used for operating activities was principally a result of an increase
in inventory and other current assets which was partially offset by a decrease
in accounts receivable and an increase in accounts payable. Cash flows used in
investing activities was for the purchase of property, plant and equipment.
Cash flows provided by financing activities was principally from a private
placement of the Company's common stock.
At the present time, the Company, together with a variety of defendants, is
party to various asbestos-related lawsuits involving a number of plaintiffs
alleging damages from exposure to asbestos products sold by the Company. The
Company may become a party to additional asbestos-related actions in the
future. The Company is also party to other non-asbestos-related litigation.
The Company cannot, at this time, determine the outcome of this uncertainty.
To date, the Company's insurance coverage has been adequate and the Company's
costs relative to asbestos litigation against it has not been material.
Results of Operations
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Net sales for the three months ended September 30, 1996 were $6,056,000 as
compared to $6,522,000 for the three months ended September 30, 1995, a
decrease of $466,000 or 7.1%. Sales in the manufacturing segment decreased 1.8%
to $4,008,000 from $4,080,000 for the same quarter last year, while sales in
the distributing segment decreased 16.3% to $2,048,000 compared to the
comparable quarter last year. The decrease in sales overall (and for both
segments individually) was due to hurricanes in Puerto Rico that affected both
production and shipments and, therefore, sales for the quarter. The production
facilities have not been damaged. Based on sales to date for the second
quarter, these effects proved to be temporary.
The Company's gross profit margin decreased to 16.9% of sales for the first
quarter of fiscal 1997 as compared to 19.2% for the first quarter of fiscal
1996. The decrease in the gross profit margin is a result of the loss of
production in Puerto Rico where goods are produced that result in higher gross
profits. In addition, the production efficiencies in Puerto Rico were lower
for this quarter because of the weather related down-time.
Selling, general and administrative expenses for the quarter ended September
30, 1996 were approximately $1,020,000 or 16.8% of sales compared to
approximately $1,086,000 or 16.6% for the same period last year. The increase
in selling, general and administrative expenses as a percentage of sales was
due to the decrease in sales volume experienced in the quarter and an
expenditure of approximately $30,000 to find alternative sources of long-term
production in Mexico. The Company continues its efforts to reduce costs.
Interest expense was approximately $182,000 for the first quarter of fiscal
1996, a decrease of approximately $13,000 when compared to the same quarter of
fiscal 1996, and was principally due to the decrease in rates charged by
Congress Financial Corporation.
The loss per share was $.18 for the quarter ended September 30, 1996, against
a loss of $.27 per share in the September 30, 1995 quarter, as restated to
reflect a 1 for 10 reverse stock split. The increase in shares outstanding was
mainly due to shares issued in connection with a private placement that
occurred in the fourth quarter of fiscal 1996 and the first quarter of fiscal
1997.
Risks
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From time to time, information provided by the Company or statements made by
its employees, or information provided in its filings with the Securities and
Exchange Commission may contain forward looking information. The Company's
actual future results may differ materially from those projections or
statements made in such forward looking information as a result of various
risks and uncertainties, including but not limited to competition, management,
losses, availability of capital, asbestos litigation for substantial
inventories and Tyvek(R), the absence of dividends, and tax incentives. There
can be no assurances that asbestos litigation will not have an adverse effect
upon the Company in the future. There can be no assurances that the Rights and
Standby Offering that the Company filed will be successfully consummated. The
market price of the Company's Common Stock may be volatile at times in response
to fluctuations in the Company's quarterly operating results, changes in
analyst earnings estimates, market conditions, as well as general conditions
and other factors general to the Company.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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NOT APPLICABLE
Item 2. CHANGES IN SECURITIES
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On August 12, 1996 a one-for-ten reverse split of the Company's
common stock became effective.
As a result of the reverse split of the Company's common stock,
the Class A Warrants became exercisable at the rate of ten warrants
for one share at the rate of $13.00 per share. These warrants expire
April 11, 1999.
Item 3. DEFAULTS UPON SENIOR SECURITIES
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NONE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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On August 12, 1996 a special meeting of the shareholders of the
Company took place at which time the shareholders approved the
following items by the votes as indicated:
No. 1: Authorization of amendment to certificate of
incorporation to effect a one-for-ten reverse stock
split. (See Exhibit 3.01.1)
FOR 7,831,310 AGAINST 521,458 ABSTAIN 12,102 NOT VOTED -
No. 2: Authorization of amendment to certificate of
incorporation to authorize preferred stock. (This
authorized 1,000,000 shares of $.01 preferred stock.
See Exhibit 3.01.1)
FOR 5,466,731 AGAINST 386,584 ABSTAIN 173,570 NOT VOTED 2,337,985
No. 3: Proposal to approve the adoption of the 1996 Incentive
Stock Option Plan in the form attached to the Proxy
Statement. (See Exhibit 99.01)
FOR 5,463,911 AGAINST 424,404 ABSTAIN 171,515 NOT VOTED 2,305,000
No. 4: Proposal to approve the adoption of the 1996 Non-Qualified
Stock Option Plan in the form attached to the Proxy
Statement. (See Exhibit 99.02)
FOR 5,463,222 AGAINST 542,613 ABSTAIN 53,995 NOT VOTED 2,305,040
Item 5. OTHER INFORMATION
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On October 10, 1996 the Company's Registration Statement on
Form SB-2 (333-09517) became effective. Pursuant thereto the
Company granted to all of its holders of outstanding stock of
record on the close of business on September 24, 1996 in those
states where qualified, the non-transferable right to subscribe
for Units until 5:00 p.m. on November 8, 1996 (the "termination
date") on the basis of 4 Units for every 5 shares of Common
Stock owned on the record date. Each Unit consists of 1 share
of Common Stock and 1 Class B Redeemable Common Stock Purchase
Warrant. The offering was for 703,591 Units at $5.00 per Unit
or a total of $3,517,955. Upon the Termination Date of the
Rights Offering a total of 11,517 Units representing $57,585
had been subscribed for. Pursuant to the Standby Offering
described in the Registration Statement, Royce Investment
Group, Inc. is to acquire 692,074 Units at $5.00 per Unit at
the closing which is scheduled for November 15, 1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) The following exhibits are incorporated by reference to the
Company's Registration Statement on Form SB-2 (333-09517)
effective October 10, 1996:
3.01.1 Certificate of Amendment to Certificate of Incorporation
99.01 1996 Incentive Stock Option Plan.
99.02 1996 Non-Qualified Stock Option Plan.
(b) On August 12, 1996, a Form 8-K was filed under item 5 Other
Events with respect to the following:
1) Approval of the 1-for-10 reverse split.
2) Authorization for the issuance of 1,000,000 shares of
preferred stock par value $.01 per share. No shares have
been issued thereunder to date.
3) Approval of a 1996 Incentive Stock Option Plan for the
grant of up to 300,000 shares (post-reverse split) which
terminates May 13, 2006.
4) Approval of a 1996 Non-Qualified Stock Option Plan for the
grant of up to 300,000 shares (post-reverse split) which
terminates May 12, 2006.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1996
EASTCO INDUSTRIAL SAFETY CORP.
By: /s/ ANTHONY P. TOWELL
________________________
ANTHONY P. TOWELL
Chief Financial Officer,
Vice President of Finance, and
Treasurer