SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C., 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
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 (Employer I.D.#)
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)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the 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.
YES X NO
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State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 1997
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Common Stock, par value 1,683,079
$.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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December 31, June 30,
1997 1997
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ASSETS
------ (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 85,586 $ 112,258
Accounts receivable - (less allowance
for doubtful accounts of $238,000 at
December 31, 1997 and $219,000 at
June 30, 1997) 5,333,318 4,561,053
Inventories - (note 2) 7,117,163 5,972,904
Other 798,840 670,155
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TOTAL CURRENT ASSETS 13,334,907 11,316,370
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PROPERTY, PLANT AND EQUIPMENT, at cost - 3,708,510 3,568,095
Less accumulated depreciation and
amortization 1,465,394 1,354,124
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2,243,116 2,213,971
EXCESS OF COST OVER NET ASSETS ACQUIRED 437,510 448,910
OTHER ASSETS 14,492 61,338
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TOTAL ASSETS $16,030,025 $14,040,589
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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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December 31, June 30,
1997 1997
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(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES:
Loans Payable $ 7,120,342 $ 5,417,675
Current maturities of long-term debt 276,031 278,821
Accounts payable 3,289,515 2,770,626
Accrued expenses 206,586 374,764
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TOTAL CURRENT LIABILITIES 10,892,474 8,841,886
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LONG-TERM DEBT, less current maturities 677,507 811,410
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SHAREHOLDERS' EQUITY
Preferred stock; $.01 par value; authorized
1,000,000 shares; no shares outstanding
Common stock, $.12 par value;
authorized - 20,000,000 shares, issued
and outstanding 1,683,079 shares
in December 1997 and in June 1997 201,970 201,970
Additional paid-in capital 9,807,708 9,807,708
(Deficit) (5,549,634) (5,622,385)
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TOTAL SHAREHOLDERS' EQUITY 4,460,044 4,387,293
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,030,025 $14,040,589
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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 December 31,
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1997 1996
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(Unaudited) (Unaudited)
Net Sales $8,103,426 $6,793,438
Cost of Sales 6,608,662 5,480,935
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Gross Profit 1,494,764 1,312,503
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Selling, general & administrative expenses 1,254,008 1,196,282
Interest expense (NET) 218,453 166,239
Other income (NET) (13,033) (18,349)
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1,459,428 1,344,172
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Net income (loss) 35,336 (31,669)
Opening (deficit) (5,584,970) (4,390,277)
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Closing (deficit) $(5,549,634) $4,421,946)
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Income/(loss) per common share-
basic and dilutive $.02 $ (.03)
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Weighted average number of
common shares outstanding 1,683,079 1,231,284
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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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Six Months Ended December 31,
1997 1996
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(Unaudited) (Unaudited)
Net Sales $15,812,667 $12,849,145
Cost of Sales 12,826,387 10,512,665
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Gross Profit 2,986,280 2,336,480
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Selling, general & administrative expenses 2,537,478 2,216,557
Interest expense (NET) 405,667 347,882
Other income (NET) (29,616) (36,568)
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2,913,529 2,527,871
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Net income/(loss) 72,751 (191,391)
Opening (deficit) (5,622,385) (4,230,555)
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Closing (deficit) $ (5,549,634) $ (4,421,946)
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Income/(loss) per common share-
basic and dilutive $ .04 $ (.18)
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Weighted average number of
common shares outstanding 1,683,079 1,087,208
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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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Six Months Ended December 31
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1997 1996
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(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) $72,751 $(191,391)
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Adjustment to reconcile results of operations
to net cash effect of operating activities:
Depreciation and amortization 122,670 56,880
Net changes in assets and liabilities:
(Increase)/Decrease in accounts receivable(772,265) 53,293
(Increase) in inventories (1,144,259) (695,237)
(Increase) in other current assets (128,685) (371,223)
Decrease in other assets 46,846 121,397
Increase/(Decrease) in accounts payable 518,889 (564,340)
(Decrease) in accrued expenses (168,178) (34,669)
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Total Adjustments (1,524,982) (1,433,899)
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Net cash (used for)
operating activities (1,452,231) (1,625,290)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (140,415) (75,035)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (136,693) (27,047)
Borrowings under line of credit agreement 17,073,244 14,998,229
Repayments under line of credit agreement (15,370,577)(16,640,288)
Net proceeds from private placement - 154,000
Net proceeds of public offering - 2,610,514
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Net cash provided from financing activities 1,565,974 1,095,408
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NET (DECREASE) IN CASH (26,672) (604,917)
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CASH, beginning of period 112,258 646,030
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CASH, end of period$ 85,586 $ 41,113
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 387,374 $ 344,594
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Income taxes $ 5,680 $ 2,046
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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 December 31, 1997 (audited) and the related statements
of operations and deficit for each of the three month and six month periods
ended December 31, 1997 and 1996 and cash flows for the six month periods
ending December 31, 1997 and 1996.
The results of operations for the three and six month periods ended December
31, 1997 and 1996 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,
1997 1997
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Raw material $2,155,740 $2,049,328
Work-in-process 1,491,935 1,145,395
Finished goods 3,469,488 2,778,181
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Total $7,117,163 $5,972,904
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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-Q, as well as the
Company's Form 10-Q of September 30, 1997 and its Note 11 to the June 30,
1997 Audited Consolidated Financial Statements regarding the asbestos litigation
4. The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with generally accepted accounting principles. Such
disclosures were included with the consolidated financial statements of the
Company at June 30, 1997, included in its annual report on Form 10-KSB. Such
statements should be read in conjunction with the data herein.
5. Quarterly Results of Operations:
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The Company previously reported unaudited net loss for the nine months ended
March 31, 1997 was $70,422, whereas the audited financial statements for the
year ended June 30, 1997 reflected a net loss of approximately $1,392,000.
As a result of the magnitude of the net loss recorded by the Company in the
fourth quarter of its year ended June 30, 1997, management is currently
analyzing its previously issued interim financial statements during such year
in order to determine the extent, if any, that such financial data requires
restatement. Management believes that the financial statements for the three
and six months period ended December 31, 1996 will not have to be restated.
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 Resource
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The Company had working capital as of December 31, 1997 of approximately
$2,442,000 as compared to approximately $2,474,000 as of June 30, 1997. A
substantial portion of the Company's working capital consists of inventory,
which was approximately $7,117,000 and $5,973,000 as of December 31, 1997 and
June 30, 1997, respectively. The increase in inventory was principally due to
the increased production in Mexico and higher finished goods needed to meet
continued demand. 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 amounts outstanding under the Company's loan agreement with Congress
Financial Corporation at December 31 and June 30, 1997 were $7,120,000 and
$5,418,000, respectively. The Company had $217,000 available for borrowing
at December 31, 1997 after adjusting for its liability for outstanding
checks.
Net cash used for operating activities was principally a result of an
increase in inventory, accounts receivable and other current assets and
payment of accrued expenses which was partially offset by an increase
in accounts payable. These increases were largely a result of increased
sales. Cash flows used in investing activities was for the purchase of
property, plant and equipment. Cash flows provided by financing activities
was principally from borrowings under the Company's loan agreement with
Congress Financial Corporation.
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 December 31, 1997 were $8,103,000 as
compared to $6,793,000 for the three months ended December 31, 1996, an
increase of 19.3%. Sales in the manufacturing segment increased 25.4%
to $6,010,000 from $4,794,000 compared to the comparable quarter last year,
while sales in the distribution segment increased 4.7% to $2,093,000 from
$1,999,000 for the same quarter last year.
Net sales for the six months ended December 31, 1997 were $15,813,000,
compared with sales for the period ended December 31, 1996 of $12,849,000,
an increase of 23.1%. In the six months ended December 31, 1997,
distribution sales were $4,525,000, an increase of $478,000 or 11.8% compared
to the same period last year, while the manufacturing sales increased 28.2%
to $11,288,000 from $8,802,000 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, in part because of a continuous
increased flow of certain products produced in Mexico, as well as the continued
improvement in industry conditions and market share. The distribution division
increase is due to the increased demand for our products by both the
industrial and hazardous material abatement customers.
The Company's gross profit margin decreased to 18.4% of sales for the second
quarter of fiscal 1998 as compared to 19.3% for the second quarter fiscal
1997 and the gross profit margin for the six months ended December 31, 1996
increased to 18.9% from 18.2% for the similar period in the prior year. The
overall decrease for the second quarter was due to competitive pricing in the
manufacturing division in an effort to increase market share offset partly by
the reduction of costs to produce major products in Mexico and continual
production efficiencies in Puerto Rico.
Selling, general and administrative expenses for the quarter ended December
31, 1997 were approximately $1,254,000 (or 15.5% of sales) compared to
approximately $1,196,000 (or 17.6% of sales) for the same period last year.
These expenses for the six months ended December 31, 1997 were approximately
$2,537,000 (or 16.0% of sales) as compared to approximately $2,217,000 (or
17.3% of sales)for the same period in the prior year. These expense
decreases as a percentage of sales were due to the increased sales volume, as
well as continuing cost reductions.
Interest expense was approximately $218,000 for the second quarter of fiscal
1998, an increase of approximately $52,000 when compared to the same quarter
of fiscal 1997. For the six months ended December 31, 1997 the interest
expense was approximately $406,000, against approximately $348,000 in the
same period in the prior year. These increases were principally due to the
increased average borrowings from Congress Financial Corporation.
The Company has adopted Financial Accounting Standards Statement (FASB) No.
128, "Earnings Per Share", which changes the computation and presentation of
earnings per share. Under FASB 128, the Company is required to present basic
and dilutive (if applicable) income (loss) per common share for periods ended
after December 15, 1997. The prior period comparative financial statements
have been restated utilizing the provisions of FASB 128. For the three and
six month periods ended December 31, 1997, outstanding options and warrants
were not dilutive. The adoption of FASB 128 had no effect on the prior
periods.
The Company showed basic and dilutive income per share of $.02 for the
quarter ended December 31, 1997 against a loss of $.03 per share in the quarter
ended December 31, 1996. For the six months ended December 31, 1997 the Company
showed basic and dilutive per share income of $.04 against $.18 per share
loss for the same period in the prior year. The increase in the weighted
average number of common shares outstanding in the current fiscal period was
due to shares issued in connection with Company's shareholder rights and public
offering that occurred in the second 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 or 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. 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, 1997, 239 asbestos actions involving
430 plaintiffs were instituted against the Company and Puerto Rico Safety
Equipment Corporation. All of these actions have been brought by one firm of
attorneys. The actions are all pending in the Supreme Court of the State of New
York within the City of New York and involve a multitude of defendants and are
either actions, pursuant to standard complaints, for personal injury or
wrongful death setting forth a number of cause of action each in the amount
of $10,000,000 for compensatory damages and $10,000,000 for punitive damages.
During the quarter ended September 30, 1997 one additional third party
asbestos action involving 2 plaintiffs and a multitude of defendants was
instituted against the Company in the State of New Jersey, Law Division,
Middlesex County.
This action incorporates the standard complaint filed with Middlesex County
Clerk in the State of New Jersey pursuant to which various counts are alleged
seeking unspecified amounts of compensatory and punitive damages on behalf of
each plaintiff. All of the foregoing actions have been submitted to the
Company's and Puerto Rico Safety Equipment Corporation's insurance carriers
for defense. A schedule of these cases is annexed hereto as Exhibit 99.05.1.
During the quarter ended December 31, 1997, the following asbestos cases
pending in the State of New York to which Eastco Industrial Safety Corp. was
a party, were settled or dismissed. All of the below cases were settled
pursuant to the settlement agreement reached during fiscal 1994. (See
Exhibit 99.11 to the Company's registration on Form SB-2, No. 333-09517, filed
on August 2, 1996.) Pursuant to this settlement, an aggregate of $49,300 was
paid. The entire amount is to be paid by Eastco's insurance carriers with the
exception of $5,300 to be paid by Eastco. These cases are as follows and each
was settled or dismissed for the amount in the aggregate indicated.
CASE NUMBER OF PLAINTIFFS SETTLEMENT PAID
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Colabella 2 $200
Turner 1 100
Theil 28 2800
Francica 25 2700
Bullock 20 2400
Masalin 39 3900
Fenwick 40 4200
Distefano 43 4500
Ecuyer 47 4800
Jester 36 3800
Clinton 37 3700
Tassa (A) 5 1500
Lorelle 48 4800
Newby 61 6100
Vilarino 28 2800
Kern 7 700
Ellis 2 200
Pagnozzi 1 100
Javornicky 26 -0-
Brosnan 36 -0-
Wiegleb 29 -0-
Peek 29 -0-
Caso 6 -0-
Duell (A) 4 -0-
Giddio 37 -0-
Vollmart 51 -0-
Catozzi 4 -0-
TOTAL 692 $ 49,300
(A) These cases not previously reflected on schedules filed (see Exhibit
99.05 to the Form 10-KSB for the year ended June 30, 1997).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
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(a) Exhibits
99.05.1 Schedule of asbestos actions filed against the Company
and Puerto Rico Safety Equipment Corporation during the
quarter ended December 31, 1997.
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 hereunto duly authorized.
Dated: February 13, 1998
EASTCO INDUSTRIAL SAFETY CORP.
By: /s/ LAWRENCE DENSEN
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LAWRENCE DENSEN PRESIDENT
& CHIEF EXECUTIVE OFFICER
By: /s/ ARTHUR J. WASSERSPRING
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ARTHUR J. WASSERSPRING
VICE PRESIDENT OF FINANCE/
CHIEF FINANCIAL OFFICER