SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended December 31, 1997 __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______________ to ________________ Commission File No. 0-2052 GODDARD INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2268165 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 705 Plantation Street, Worcester, Massachusetts 01605 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (508)852-2435 Check whether the registrant (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 stock, as of the latest practicable date. Title of Each Class of Number of Shares Outstanding Common Stock Outstanding at December 31, 1997 Common Stock, $.01 par value 2,128,649 Transitional Small Business Disclosure Format Yes ___ No __X__ GODDARD INDUSTRIES, INC. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION PAGE Item 1 Financial Statements Consolidated Balance Sheet - December 31, 1997 and September 27, 1997 3 Consolidated Statement of Income - Three Months Ended December 31, 1997 and December 31, 1996 4 Consolidated Statement of Cash Flows - Three Months Ended December 31, 1997 and December 31, 1996 5 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II - OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 11 -2- GODDARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, September 27, 1997 1997 (UNAUDITED) AUDITED ASSETS (ALL PLEDGED, NOTE 4) CURRENT ASSETS: Cash $ 37,347 $ 82,943 Accounts receivable, net of allowances 1,181,783 1,203,244 Inventories (Note 3) 3,571,413 3,541,862 Prepaid expenses and taxes 40,983 31,420 Deferred income taxes (Note 5) 135,400 133,000 TOTAL CURRENT ASSETS 4,966,926 4,992,469 PROPERTY, PLANT AND EQUIPMENT, at cost 4,377,605 4,266,837 Less - Accumulated depreciation -2,886,009 -2,826,006 1,491,596 1,440,831 OTHER ASSETS: Excess of cost of investment in subsidiaries over equity in net assets acquired 13,685 14,624 Deferred income taxes - long term(Note 5)167,000 165,000 Total other assets 180,685 179,624 TOTAL ASSETS $6,639,207 $6,612,924 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt (Note 4) $ 123,000 $ 119,000 Accounts payable 286,139 374,689 Accrued expenses 208,648 423,035 Accrued environmental costs (Note 6) 35,446 45,000 Income taxes payable 68,060 52,660 TOTAL CURRENT LIABILITIES 721,293 1,014,384 LONG-TERM DEBT, net of current maturities (Note 4) 908,346 786,668 DEFERRED COMPENSATION 551,000 551,000 SHAREHOLDERS' EQUITY: Common stock - par value $.01 per share, authorized 3,000,000 shares, issued and outstanding 2,128,649 shares. (2,126,649 shares at September 27, 1997) 21,286 21,266 Additional paid-in capital 430,333 429,353 Retained earnings 4,006,949 3,810,253 TOTAL SHAREHOLDERS'EQUITY 4,458,568 4,260,872 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,639,207 $6,612,924 -3- GODDARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED December 31, 1997 1996 NET SALES $2,529,264 $2,989,523 COST OF SALES 1,664,072 1,957,321 GROSS PROFIT 865,192 1,032,202 SELLING AND ADMINISTRATIVE EXPENSES 522,977 502,668 INCOME FROM OPERATIONS 342,215 529,534 OTHER INCOME (EXPENSE): Interest expense -17,804 -19,383 Other income, net 8,285 7,716 TOTAL OTHER INCOME (EXPENSE) -9,519 -11,667 INCOME BEFORE INCOME TAXES 332,696 517,867 PROVISION FOR INCOME TAXES 136,000 210,600 NET INCOME $196,696 $307,267 EARNINGS PER SHARE (Note 7) Basic $ 0.09 $ 0.15 Diluted $ 0.09 $ 0.14 -4- GODDARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED December 31, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $196,696 $307,267 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 60,942 54,132 Deferred income taxes -4,400 -4,400 Changes in assets and liabilities: Accounts receivable 21,461 -203,657 Inventories -29,551 1,899 Prepaid expenses and other -9,563 -10,936 Accounts payable -88,550 87,306 Accrued expenses -214,387 -114,180 Accrued environmental costs -9,554 0 Income taxes payable 15,400 -44,000 Total Adjustments -258,202 -233,836 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES -61,506 73,431 CASH FLOWS FROM INVESTING ACTIVITIES: Property,plant and equipment additions -110,768 -37,177 CASH FLOWS FROM FINANCING ACTIVITIES: Increase in long-term debt 861,000 989,000 Repayments of long-term debt -735,322 -993,387 Issuance of common stock 1,000 0 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 126,678 -4,387 NET INCREASE (DECREASE) IN CASH -45,596 31,867 CASH AND EQUIVALENTS - BEGINNING 82,943 65,951 CASH AND EQUIVALENTS - ENDING $ 37,347 $ 97,818 CASH PAID DURING THE PERIOD Interest $ 19,176 $ 20,168 Income taxes $125,000 $259,000 -5- GODDARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Reference is made to the financial statements included in the Annual Report for the year ended September 27, 1997 for a summary of significant accounting policies and other disclosures. NOTE 2. BASIS OF PRESENTATION: The information shown in the consolidated financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim period. NOTE 3. INVENTORIES: Consolidated inventories are comprised of: December 31, September 27, 1997 1997 Finished goods $3,135,600 $3,106,049 Work in process 66,441 66,441 Raw materials 369,372 369,372 $3,571,413 $3,541,862 The following factors were taken into consideration in determining inventory values: Goddard Valve Corp. - December 31, 1997 - $1,904,100. (estimated) and September 27, 1997 - $1,966,653. Interim inventories were valued by management using the gross profit method. Webstone Company, Inc. - December 31, 1997 - $1,667,313. (estimated) and September 27, 1997 - $1,575,209. Interim inventory was valued by management using the gross profit method. Total inventory is comprised of finished goods. NOTE 4. LONG-TERM DEBT The Company has available a revolving line of credit totaling $1,750,000 bearing interest at the greater of (i) prime plus 3/4% or (ii) the Federal Funds Effective Rate plus 1 1/4% per annum. On December 31, 1997 the effective interest rate was 9.25%. The agreement expires March 30, 1998 and is secured by all property and assets. Advances are restricted by certain limitations on eligible receivables and inventories. continued -6- LONG-TERM OBLIGATIONS (continued) The credit agreement contains a number of covenants, the most restrictive of which relate to working capital, tangible net worth, and profitability levels, and restrict payment of cash dividends to 10% of the immediately preceding year's net income before taxes. At December 31, 1997 long-term obligations consisted of the following: LONG-TERM CURRENT Revolving line of credit $ 777,000 $ - Capital lease obligations for machinery, payable in monthly installments of $12,080, through 2000, with imputed interest rate of approximately 9%. 131,346 123,000 $ 908,346 $123,000 NOTE 5. INCOME TAXES: The tax effects of the principal temporary differences giving rise to the net current and non-current deferred tax assets are as follows: December 31, September 27, 1997 1997 Deferred tax asset Deferred compensation $ 220,400 $ 220,400 Inventory valuation 93,700 93,300 Accrued salaries 9,200 9,200 Environmental matters 18,000 18,000 Bad debts 14,400 12,400 355,700 353,300 Depreciation 53,300 55,300 $ 302,400 $ 298,000 Management does not believe that any valuation allowance is necessary. -7- NOTE 6. ENVIRONMENTAL MATTER In 1995, the Massachusetts Department of Environmental Protection (DEP) designated the Company's facility in Worcester, MA as a Tier 1C site under the Massachusetts Contingency Plan as a result of a prior release of oil or hazardous materials onto the site. The Company engaged an environmental consulting firm to perform further site investigation and file reports with the DEP. In February, 1998 a Phase II report was submitted to the DEP and a Phase III report is expected to be submitted in the near future that will recommend continued monitoring of the site for the next five years. The cost of such monitoring is not expected to exceed the $35,000 that the Company has recorded as a liability in the accompanying financial statements. NOTE 7. EARNING PER SHARE: The Company adopted Statement of Financial Accounting Standards No.128 (SFAS No. 128), "Earnings per Share", effective with the quarter ended December 31, 1997. SFAS No. 128 changes the method of computing earnings per share and requires that they be presented on both a basic and diluted basis. In accordance with SFAS No. 128 earnings per share for the period ended December 31, 1996 have been restated. The following data show the amounts used in computing earnings per share (EPS) and the effects on income and the weighted average number of shares of dilutive potential common stock. Quarter ended December 31, 1997 Income Common Shares EPS Basic EPS: Income available to common shareholders $196,696 2,126,670 $.09 Dilutive effect of potential common Stock: Stock options - 41,638 Diluted EPS: Income available to common shareholders after assumed exercise of dilutive securities $196,696 2,168,308 $.09 Quarter ended December 31, 1996 Income Common Shares EPS Basic EPS: Income available to common shareholders $307,267 2,040,129 $.15 Dilutive effect of potential common Stock: Stock options - 81,350 Diluted EPS: Income available to common shareholders after assumed exercise of dilutive securities $307,267 2,121,659 $.14 -8- PART I - FINANCIAL INFORMATION Item 2 - Management's Discussion and Analysis of Financial Condition RESULTS OF OPERATIONS FISCAL QUARTER ENDED DECEMBER 31, 1997 COMPARED TO FISCAL QUARTER ENDED DECEMBER 31, 1996 Consolidated sales for the quarter ended December 31, 1997 were $2,529,000, a 15.4% decline from the $2,990,000 consolidated sales in the same quarter last year. Sales of the Valve division declined 24.2% from the very strong sales during the same quarter last fiscal year when the Company shipped a number of large orders that had been on backorder. Sales of the Webstone division increased by 7% over the same quarter last fiscal year as a result of newly added product lines. Gross profit margins for the first quarter of fiscal 1998 declined slightly to 34.2%, compared to 34.5% for the first quarter of fiscal 1997. Sales and administrative expenses for the first quarter of fiscal 1998 were 20.7% of sales, compared to 16.8% of sales for the same quarter last year, as additional tooling and design funds were expended to complete the final stages of some new products. Interest expense was reduced approximately 8% from the comparable quarter of fiscal 1997 because of lower borrowing levels. The reduced sales and increased selling and administrative expenses results in lower primary net income of $197,000 for the quarter (or $.09/share)compared to primary net income of $307,000 (or $.14/share) in the corresponding quarter last year. LIQUIDITY AND CAPITAL RESOURCES The Company funds its operation for the most part through earnings and bank borrowings. As of December 31, 1997 the Company had working capital of $4,246,000, including cash of $37,000. The Company also had a line of credit of $1,750,000 with BankBoston collateralized by substantially all of the assets. On December 31, 1997 approximately $777,000 had been drawn under that line of credit, which bears interest at a rate equal to the bank's prime rate plus 3/4 of 1%. During the first quarter of fiscal 1998, the operations of the Company used $61,000 of cash. Cash was used to reduce accrued expenses ($214,000) and accounts payable ($88,000), and to purchase additional inventory ($29,000). The major sources of cash were net income of ($197,000) and depreciation ($61,000). During the quarter, the Company used approximately $111,000 in investment activities for the purchase of machinery and equipment, compared to $37,000 in the same period of the prior year. Financing activities consumed approximately $127,000 as the Company paid down long term debt. - 9 - The Company has completed a 10,000 square foot addition to its existing building which is being shared by both its operating divisions for manufacturing and warehousing. The building costs were financed using funds available under the BankBoston line of credit, yet after this transaction the Company believes that sufficient availability remains for its normal working capital needs. The Company borrows funds for periods of up to five years for the purchase of new machinery and meets the required amortization and interest payments from its current working capital. The Company believes that its future capital requirements for equipment can be met from the cash flow from operations, bank borrowings and other available sources. The Company performed an internal assessment of the cost to modify its computer systems so that it will be able to process information or logic involving the year 2000 and beyond completely and accurately. The Company estimates that the total cost to address this "Year 2000 problem" is approximately $50,000. The Company has performed approximately one-third of the anticipated work. The Company is not able to assess what the impact of the Year 2000 problem may be on its suppliers and customers. The Company's results of operations have not been materially affected by seasonality. -10- PART II - OTHER INFORMATION Item 1 - Legal Proceedings In 1995, the Company's facility in Worcester, MA was designated by the Massachusetts Department of Environmental Protection ("DEP") as a Tier 1C site under the Massachusetts Contingency Plan because of a previous release of oil or hazardous materials onto the site. As required by the Massachusetts Contingency Plan, the Company hired an environmental consulting firm to perform further site investigation and to file reports with the DEP. In February, 1998 the consulting firm submitted a Phase II report to the DEP on the results of further testing. The Company anticipates that the consulting firm will submit a Phase III report within a few weeks concluding that no remediation action is presently required, but recommending continued monitoring for the next five years. The cost of such monitoring for the 5 year period would not be material to the Company. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement Re: Computation of Per Share Earnings. The information set forth in Note 7 to the Financial Statements found in PART I hereof is hereby incorporated. (27) Financial Data Schedule (b) The Company did not file any reports on Form 8-K during the quarter ended December 31, 1997. -11- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the Report to be signed on its behalf by the undersigned thereunto duly authorized. Dated as of February 11, 1998 GODDARD INDUSTRIES, INC. by/s/Saul I. Reck Saul I. Reck, President Chief Executive Officer and Principal Financial Officer