SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C., 20459
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 (I.R.S.Employer)
incorporation or organization)
130 West 10th Street, Huntington Station, N.Y. 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
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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 December 31, 1996
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Common Stock, par value 1,583,079
$.12 per share
PART I - FINANCIAL INFORMATION
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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December 31, June 30,
1996 1996
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ASSETS
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CURRENT ASSETS:
Cash and cash equivalents $ 41,113 $ 646,030
Accounts receivable - (less allowance
for doubtful accounts of $136,000 at
December 31, 1996 and $155,000 at
June 30, 1996) 4,615,777 4,669,070
Inventories - (note 2) 5,925,474 5,230,237
Other 812,986 441,763
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TOTAL CURRENT ASSETS 11,395,350 10,987,100
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PROPERTY, PLANT AND EQUIPMENT, at cost - 2,700,738 2,625,703
Less accumulated depreciation and
amortization 1,404,488 1,347,608
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1,296,250 1,278,095
OTHER ASSETS 85,513 206,910
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TOTAL ASSETS $12,777,113 $12,472,105
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See accompanying notes.
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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December 31, June 30,
1996 1996
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES:
Loans Payable $4,211,016 $5,853,075
Current maturities of long-term debt 38,615 56,044
Accounts payable 2,669,787 3,234,127
Accrued expenses 256,672 291,341
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TOTAL CURRENT LIABILITIES 7,176,090 9,434,587
LONG-TERM DEBT, less current maturities 424,120 433,738
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SHAREHOLDERS' EQUITY
Common stock, $.12 par value;
authorized - 20,000,000 shares,
issued 1,583,079 shares in December 1996
and 765,488 shares in June 1996 189,970 91,859
Additional paid-in capital 9,408,879 6,742,476
Retained (deficit) (4,421,946) (4,230,555)
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TOTAL SHAREHOLDERS' EQUITY 5,176,903 2,603,780
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,777,113 $12,472,105
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See accompanying notes.
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
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Three Months Ended December 31,
1996 1995
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Net Sales $ 6,793,438 $6,250,761
Cost of Sales 5,480,935 4,862,058
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Gross Profit 1,312,503 1,388,703
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Selling, general & administrative expenses 1,196,282 1,156,733
Interest expense (NET) 166,239 192,351
Other income (NET) ( 18,349) (23,917)
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1,344,172 1,325,167
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Net (loss)/income (31,669) 63,536
Opening (deficit) (4,390,277) (4,335,350)
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Closing (deficit) $(4,421,946) $(4,271,814)
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(Loss)/Income per common share $(.03) $.18
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Weighted average number of
common shares outstanding 1,231,284 361,488
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See accompanying notes.
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
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Six Months Ended December 31,
1996 1995
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Net Sales $ 12,849,145 $12,773,147
Cost of Sales 10,512,665 10,133,822
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Gross Profit 2,336,480 2,639,325
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Selling, general & administrative expenses 2,216,557 2,242,615
Interest expense (NET) 347,882 386,767
Other income (NET) (36,568) (36,835)
Settlement with former underwriter - 78,000
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2,527,871 2,670,547
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Net loss (191,391) (31,222)
Opening (deficit) (4,230,555) (4,240,592)
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Closing (deficit) $(4,421,946) $(4,271,814)
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Loss per common share $(.18) $(.09)
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Weighted average number of
common shares outstanding 1,087,208 361,488
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See accompanying notes.
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS
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Six Months Ended December 31
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1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(191,391) $(31,222)
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Adjustment to reconcile results of operations
to net cash effect of operating activities:
Depreciation and amortization 56,880 74,270
Settlement with former underwriter 72,025
Net changes in assets and liabilities:
Decrease/(Increase) in accounts receivable 53,293 (411,897)
(Increase) in inventories (695,237) (1,057,271)
(Increase)/Decrease in other current assets (371,223) 36,885
Decrease/(Increase) in other assets 121,397 (52,499)
(Decrease)/Increase in accounts payable (564,340) 141,046
(Decrease) in accrued expenses (34,669) (108,241)
(Decrease) in current maturities
of long-term debt (17,429) -
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Total Adjustments (1,451,328) (1,305,682)
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Net cash (used for)
operating activities (1,642,719) (1,336,904)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (75,035) (36,765)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants - 48,750
Repayments of long-term debt (9,618) (23,534)
Borrowings under line of credit agreement 14,998,229 13,641,824
Repayments under line of credit agreement (16,640,288) (12,777,348)
Net proceeds of private placement 154,000 -
Net proceeds of public offering 2,610,514
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Net cash provided from financing activities 1,112,837 889,692
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NET (DECREASE) IN CASH (604,917) (483,977)
CASH, beginning of period 646,030 521,210
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CASH, end of period $ 41,113 $ 37,233
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $344,594 $ 386,767
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Income taxes $ 2,046 $ 4,772
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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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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 consolidated
financial statements contain all adjustments (consisting of only normal
accruals) necessary to present fairly the consolidated balance sheets as of
December 31, 1996 and June 30, 1996 (audited) and the related statements of
operations and deficit for each of the three month and six month periods
ended December 31, 1996 and 1995 and cash flows for the six month periods
ending December 31, 1996 and 1995.
The results of operations for the three and six month periods ended December
31, 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:
December 31, June 30,
1996 1996
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Raw materials $ 2,233,636 $ 1,701,676
Work-in-process 599,088 514,555
Finished goods 3,092,750 3,014,006
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Total $ 5,925,474 $ 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 previously sold by the Company. Refer to Part
II, Other Information, Item I "Legal Proceedings"" in this form 10-QSB, as
well as the Company's Form 10-QSB of September 30, 1996 and its Form 10-KSB
for June 30, 1996 regarding the asbestos litigation.
4. Public Offering
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On November 14, 1996, the Company consummated with Royce Investment Group its
public offering for 703,591 Units at $5.00 per Unit pursuant to which 703,591
Units were issued each of which consisted of one share of common stock and one
Class B Warrant.
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 December 31, 1996 of approximately
$4,219,000 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 $5,925,000 and $5,230,000 as of December 31, 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.
Effective November 1, 1996, Congress Financial Corporation reduced the
interest rate on the Company's loan to 1.0% above the prime rate due to the
successful consummation of the public offering. The net proceeds of this
offering were aproximately $2,611,000, which exceeded the $2,500,000 minimum
required by the loan agreement to effectuate such a reduction. The amounts
outstanding under this agreement at December 31 and June 30, 1996 were
$4,211,000 and $5,558,000, respectively. The Company has $1,854,000
available for borrowing at December 31, 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 and a decrease in accounts
payable, which was partially offset by a decrease in other assets. Cash
flows used in investing activities was for the purchase of machinery and
equipment. Cash flows provided by financing activities was principally from
a private placement and the successful public offering of the Company's
common stock, offset by a net payment under the line of credit agreement with
Congress.
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 previously 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 can not, 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 December 31, 1996 were $6,793,000 as
compared to $6,251,000 for the three months ended December 31, 1995, an
increase of $542,000 or 8.7%. Sales in the manufacturing segment increased
20.4% to $4,794,000 from $3,982,000 compared to the comparable quarter last
year, while sales in the distribution segment decreased 11.9% to $1,999,000
from $2,269,000 for the same quarter last year.
Net sales for the six months ended December 31, 1996 were $12,849,000,
compared with sales for the period ending December 31, 1995 of $12,773,000.
In the six months ended December 31, 1996 distribution sales were $4,047,000,
a decrease of $663,000 or 14.1% compared to the same period last year, while
the manufacturing sales increased 9.2% to $8,802,000 from $8,063,000 for the
same period in the prior year. The increase in sales for the manufacturing
division is due to the improvement in the Company's inventory position, as
well as the continued improvement in overall industry conditions. The lower
sales in the distribution division was due in part to stricter customer
credit criteria for environmental accounts. In spite of the sales increase
in manufacturing, the results were still below budgeted figures due, in part,
to weather related production disruptions. During November 1996, the
Company, through one of its wholly-owned subsidiaries, has signed an
agreement to manufacture industrial coveralls in The Republic of Mexico.
This is anticipated to double production at a lower cost. The training,
which began during the second quarter, should lead to full production in the
third quarter.
The Company's gross profit margin decreased to 19.3% of sales for the second
quarter of fiscal 1997 as compared to 22.2% for the second quarter fiscal
1996, and the gross profit margin for the six months ended December 31, 1996
dropped to 18.2% from 20.7% for the similar period in the prior year. The
Company's decrease in gross profit is primarily the result of a change in the
sales mix and also, in part, an increase in the minimum wage in its
manufacturing plant in Puerto Rico.
Selling, general and administrative expenses for the quarter ended December
31, 1996 were approximately $1,196,000 or 17.6% of sales compared to
approximately $1,157,000 or 18.5% for the same period last year. These
expenses for the six months ended December 31, 1996 were approximately
$2,217,000 (or 17.3% of sales) as compared to approximately $2,243,000 (or
17.6% of sales) for the same period in the prior year. These decreases in
selling, general and administrative expenses as a percentage of sales were
due to the increase in sales volume experienced in the quarter, as well as
the effect of the Company's continuing cost reductions.
Interest expense was approximately $166,000 for the second quarter of fiscal
1997, a decrease of approximately $26,000 when compared to the same quarter
of fiscal 1996. For the six months ended December 31, 1996 the interest
expense was approximately $348,000, against approximately $387,000 in the
same period in the prior year. These decreases were due to the decrease in
rates charged by Congress Financial Corporation and the repayment under our
line of credit from funds received from the public offering.
The Company showed a loss of $.03 per share for the quarter ended December
31, 1996 against earnings of $.18 per share in the quarter ended December 31,
1995. For the six months ended December 31, 1996 the Company showed a per
share loss of $.18 against $.09 per share loss for the same period in the
prior year. In both the quarter and six-month comparisons, the December 31,
1995 figures were 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 and the public offering in the second
quarter of 1997.
The Company has signed a letter of intent to acquire a branded protective
glove manufacturer for cash and stock. Subject to final due diligence this
purchase should be completed by the fourth quarter.
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,
substantial availability of 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. 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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During the quarter ended December 31, 1996, one asbestos action
was instituted by service of a summons against the Company and
Puerto Rico Safety Equipment Corporation in the Court of Common
Pleas of Philadelphia County in the State of Pennsylvania by Joan
J. Brown, Administratrix of the Estate of Charles J. Brown,
deceased, and Joan J. Brown in her own right. A total of
approximately 107 defendants were named in this action.
Item 2. CHANGES IN SECURITIES
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NONE
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 January 22, 1997, the annual 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: ELECTION OF DIRECTORS
Proposal for the election of directors to serve for the term
continuing through the 1998 annual meeting and until the election
and qualification of their respective successors.
FOR AGAINST
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Alan E. Densen 1,071,594 6,643
Lawrence Densen 1,071,594 6,643
Anthony P. Towell 1,071,594 6,643
No. 2: Proposal to ratify the appointment of Cornick, Garber &
Sandler, LLP, Certified Public Accountants, as the independent
auditors to examine the financial statements of the Company for
fiscal year 1997.
FOR 1,068,562 AGAINST 7,432 ABSTAIN 2,248
Item 5. OTHER INFORMATION
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On November 14, 1996 the Company consummated with Royce
Investment Group its public offering pursuant to Registration No.
333-09517 for 703,591 Units at $5.00 per Unit pursuant to which
703,591 Units were issued each of which consisted of one share of
common stock and one Class B Warrant.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
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NONE
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: February 14, 1997
EASTCO INDUSTRIAL SAFETY CORP.
By: /s/ ANTHONY P. TOWELL
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Anthony P. Towell
Chief Financial Officer,
Vice President of Finance, and
Treasurer