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 July 3, 1999 __ 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 July 3, 1999 Common Stock, $.01 par value 2,130,766 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 - July 3, 1999 and October 3, 1998 3 Consolidated Statement of Income - Nine Months Ended July 3, 1999 and June 30, 1998 4 Consolidated Statement of Cash Flows - Nine Months Ended July 3, 1999 and June 30, 1998 5 Notes to Consolidated Financial Statements 7 Item 2 Management Discussion and Analysis 13 PART II - OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 17 -2- GODDARD INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS July 3, October 3, 1999 1998 (UNAUDITED) AUDITED CURRENT ASSETS: Cash and cash equivalents $1,380,932 $ 149,756 Accounts receivable, net of allowance 543,914 527,284 Due from former Subsidiary 150,000 - - Refundable taxes on income 106,442 92,723 Inventories 1,979,466 2,066,224 Prepaid expenses and taxes 21,297 22,067 Deferred income taxes 118,000 111,000 TOTAL CURRENT ASSETS 4,300,051 2,969,054 PROPERTY, PLANT AND EQUIPMENT, at cost 4,422,211 4,324,198 Less - Accumulated depreciation -2,956,427 - -2,768,166 1,465,784 1,556,032 OTHER ASSETS: Investment 250,000 - - Deferred income taxes 136,700 131,000 Net assets of discontinued operations - 1,666,639 TOTAL OTHER ASSETS 386,700 1,797,639 TOTAL ASSETS $6,152,535 $6,322,725 LIABILITIES AND SHAREHOLDERS'EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 119,000 $ 184,000 Accounts payable 80,963 122,381 Accrued expenses 401,833 328,806 Accrued environmental liability - 4,648 Deferred compensation 60,000 42,500 TOTAL CURRENT LIABILITIES 661,796 682,335 LONG-TERM DEBT, net of current maturities 60,676 139,515 DEFERRED COMPENSATION 490,808 508,500 SHAREHOLDERS' EQUITY: Common stock - par value $.01 per share, Authorized 3,000,000 shares, issued and outstanding 2,130,766 shares (2,129,982 shares at October 3, 1998) 21,308 21,299 Additional paid-in capital 479,286 477,923 Retained earnings 4,438,661 4,493,153 TOTAL SHAREHOLDERS'EQUITY 4,939,255 4,992,375 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,152,535 $6,322,725 -3- GODDARD INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) July 3, 1999 June 30, 1998 For The Three For the Nine For The Three For The Nine Months Ended Months Ended Months Ended Months Ended NET SALES $1,109,346 $3,879,161 $1,329,453 $4,375,450 COST OF SALES 703,338 2,396,019 810,850 2,669,428 GROSS PROFIT 406,008 1,483,142 518,603 1,706,022 SELLING AND ADMINISTRATIVE EXPENSES 301,371 922,352 278,400 874,528 INCOME FROM OPERATIONS 104,637 560,790 240,203 831,494 OTHER INCOME (EXPENSE): Interest expense -18,169 -40,681 -5,872 - -17,053 Other income, net 13,378 39,466 19,477 52,218 TOTAL OTHER INCOME (EXPENSE) -4,791 -1,215 13,605 35,165 INCOME (LOSS)BEFORE INCOME TAXES FROM CONTINUING OPERATIONS 99,846 559,575 253,808 866,659 PROVISION FOR INCOME TAXES Current 49,300 248,200 96,300 353,800 Deferred -3,900 -12,700 8,900 2,600 Total income taxes(benefit) 45,400 235,500 105,200 356,400 NET INCOME FROM CONTINUING OPERATIONS 54,446 324,075 148,608 510,259 NET INCOME (LOSS)FROM DISCONTINUED OPERATIONS -32,583 30,294 31,672 16,005 NET LOSS ON DISPOSITION OF DISCONTINUED OPERATIONS -408,861 -408,861 NET INCOME (LOSS) $-386,998 $-54,492 $180,280 $526,264 -4- GODDARD INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) July 3, 1999 June 30, 1998 For The Three For the Nine For The Three For The Nine Months Ended Months Ended Months Ended Months Ended EARNINGS (LOSS) PER SHARE: Basic: Continuing operations $0.03 $0.15 $0.07 $0.24 Discontinued operations -0.02 0.01 0.01 0.01 Loss on disposition of discontinued operations -0.19 -0.19 - - - Net income (loss) $-0.18 $-0.03 $0.08 $0.25 Diluted: Continuing operations $0.03 $0.15 $0.07 $0.23 Discontinued operations -0.02 0.01 0.01 0.01 Loss on disposition of discontinued operations -0.19 -0.19 - - - Net income (loss) $-0.18 $-0.03 $0.08 $0.24 -5- GODDARD INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended (UNAUDITED) July 3, June 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations $324,075 $510,529 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 188,261 174,959 Deferred income taxes -12,700 2,600 Changes in assets and liabilities: Accounts receivable -16,630 - -68,118 Refundable taxes on income -13,719 - -62,660 Inventories 86,758 2,845 Prepaid expenses and taxes 770 - -51,981 Accounts payable -41,418 - -1,065 Accrued expenses 73,027 - -130,297 Accrued environmental liability -4,648 - -40,352 Deferred compensation -192 - - Total Adjustments 259,509 - -174,069 NET CASH PROVIDED BY OPERATING ACTIVITIES 583,584 336,460 CASH FLOWS FROM INVESTING ACTIVITIES: Discontinued operations 888,072 62,092 Property,plant and equipment additions -98,013 - -208,115 790,059 - -146,023 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common shares 1,372 2,372 Repayment of long-term debt -143,839 - -97,696 Payment of dividends - - -63,860 -142,467 - -159,184 NET INCREASE (DECREASE) IN CASH 1,231,176 31,253 CASH AND EQUIVALENTS - BEGINNING 149,756 47,194 CASH AND EQUIVALENTS - ENDING $1,380,932 $78,447 CASH PAID DURING THE PERIOD FOR: Interest $ 40,681 $ 42,913 Income taxes $282,500 $278,375 -6- GODDARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 3, 1999 (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Reference is made to the financial statements included in the Annual Report for the year ended October 3, 1998 for a summary of significant accounting policies and other disclosures. As a result of the sale of Webstone Company, Inc. (Webstone) (see Note 8), the financial statements for all periods have been restated to reflect Webstones' discontinued operations. 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: July 3, October 3, 1999 1998 Finished goods $1,416,357 $1,503,115 Work in process 139,945 139,945 Raw materials 423,164 423,164 $1,979,466 $2,066,224 NOTE 4. LONG-TERM OBLIGATIONS At July 3, 1999 long-term obligations consisted of the following: LONG-TERM CURRENT Capital lease obligations for machinery, payable in monthly installments through 2000, with imputed interest rate of approximately 8.5% $ 60,676 $119,000 -7- 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: July 3, October 3, 1999 1998 Deferred tax asset Deferred compensation $ 220,400 $ 220,400 Capital loss carryforward 164,600 0 Inventory valuation 69,200 68,600 Accrued salaries 9,300 9,300 Environmental matters 1,900 1,900 Bad debts 20,100 14,100 485,500 314,300 Capital loss carryforward 0 0 Depreciation 66,200 72,300 419,300 242,000 Less valuation allowance -164,000 - - $254,700 $242,000 Management has established a valuation allowance against deferred tax assets attributable to the capital loss carryforward. NOTE 6. ENVIRONMENTAL MATTER The results of a site assessment at the Company's headquarters in 1987 revealed that there may have been a release or threat of release of oil or hazardous materials and that an off-site source may be introducing the contaminants. As required by law, the Company notified the Massachusetts Department of Environmental Protection (DEP). In 1995, the Company received a Tier 1 Transition Classification and Permit Statement Cover Letter designating the site as a Tier 1C Site under the Massachusetts Contingency Plan. Those response actions culminated in the filing of a Class "C" Response Action Outcome Statement with the DEP in September 1998. Based upon the information presently available, periodic monitoring is required, the cost of which is not expected to be significant. -8- NOTE 7. EARNING PER SHARE: The following data show the amounts used in computing earnings per share (EPS) from continuing operations and the effects on income and the weighted average number of shares of dilutive potential common stock. Nine Months ended July 3, 1999 Income Common Shares EPS Basic EPS: Income available to common shareholders $324,075 2,130,255 $0.15 Dilutive effect of potential common Stock: Stock options - 15,821 Diluted EPS: Income available to common shareholders after assuming exercise of dilutive securities $324,075 2,146,076 $0.15 Nine Months ended June 30, 1998 Income Common Shares EPS Basic EPS: Income available to common shareholders $510,259 2,128,156 $0.24 Dilutive effect of potential common Stock: Stock options - 43,546 Diluted EPS: Income available to common shareholders after assuming exercise of dilutive securities $510,259 2,171,702 $0.23 -9- NOTE 7. EARNING PER SHARE: (continued) Quarter ended July 3, 1999 Income Common Shares EPS Basic EPS: Income available to common shareholders $ 54,466 2,130,766 $0.03 Dilutive effect of potential common Stock: Stock options - 15,821 Diluted EPS: Income available to common shareholders after assuming exercise of dilutive securities $ 54,466 2,146,587 $0.03 Quarter ended June 30, 1998 Income Common Shares EPS Basic EPS: Income available to common shareholders $148,608 2,129,198 $0.07 Dilutive effect of potential common Stock: Stock options - 17,737 Diluted EPS: Income available to common shareholders after assuming exercise of dilutive securities $148,608 2,146,935 $0.07 -10- NOTE 8. DISCONTINUED OPERATIONS: On July 1, 1999 the Board of Directors of Goddard Valve Corp. approved the sale of Webstone Company, Inc. (Webstone), its wholly-owned subsidiary, to Michael E. Reck, President of Webstone since 1996. The sale was consummated on July 2, 1999. The selling price of $1,789,324 was received in the form of $1,389,324 of cash, $250,000 of preferred stock in the Webstone Company, Inc., and a non-interest bearing loan of $150,000 due within 90 days of closing. Webstone's results are reported as a discontinued operation in the consolidated Financial Statements for all periods presented. The assets and liabilities of Webstone have been reported in the Consolidated Balance Sheet as net assets of discontinued operations and are included in Other Assets. Webstone's discontinued operations are presented as follows: Webstone Company, Inc. Statements of Income July 3, 1999 June 30, 1998 For The Three For the Nine For The Three For The Nine Months Ended Months Ended Months Ended Months Ended NET SALES $ 956,338 $3,017,982 $ 972,916 $2,826,166 COST OF SALES 651,044 2,022,990 551,406 1,916,139 GROSS PROFIT 305,294 994,992 421,510 910,027 SELLING AND ADMINISTRATIVE EXPENSES 359,068 943,994 353,863 835,747 INCOME FROM OPERATIONS -53,774 50,998 67,647 74,280 OTHER INCOME (EXPENSE): Interest expense -19 -2,075 -16,028 - -49,739 Other income, net -490 1,671 53 1,464 TOTAL OTHER INCOME (EXPENSE) -509 -404 -15,975 - -48,275 INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) -54,283 50,594 51,672 26,005 PROVISION FOR (BENEFIT FROM) INCOME TAXES -21,700 20,300 20,000 10,000 NET INCOME (LOSS) $-32,583 $30,294 $31,672 $16,005 -11- Webstone' Balance Sheet as of October 3, 1998 is summarized as follows: Webstone Company, Inc. Balance Sheet ASSETS October 3, 1998 CURRENT ASSETS: Cash and cash equivalents $ 133,717 Accounts receivable, net of allowance 647,662 Inventories 1,344,543 Prepaid expenses and taxes 5,117 TOTAL CURRENT ASSETS 2,131,039 PROPERTY, PLANT AND EQUIPMENT, NET 58,726 OTHER ASSETS 10,869 TOTAL ASSETS $2,200,633 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 167,394 Accrued expenses 128,600 TOTAL CURRENT LIABILITIES 295,994 LONG-TERM DEBT, net of current maturities 238,000 SHAREHOLDERS' EQUITY 1,666,639 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,200,633 -12- PART I - FINANCIAL INFORMATION Item 2 - MANAGEMENT DISCUSSION AND ANALYSIS During the quarter ended July 3, 1999, the Company sold Webstone, one of its two operating divisions, to the former President of that division for approximately $1,789,000, as more fully described below. As a result, the Company has three classes of income (loss) for reporting purposes for the quarter: income from continuing operations; income from discontinued operations (the sold Webstone division), and loss on the sale of the Webstone division. The decision by the Board of Directors to sell the Webstone division followed a strategic analysis of Goddard's position in both the plumbing supplies business, where it is a relatively small competitor, and the cryogenic valve business, where it is a market leader in the Western Hemisphere. There is little synergy between these two business sectors, and the decision to sell Webstone will enable the Company to focus its financial and management resources on the cryogenic valve industry. The Board of Directors was also aware that Michael Reck, President of the Webstone division since 1996, had expressed interest in acquiring the Webstone business from the Company. Because Michael Reck is the son of Saul I. Reck, founder and Chairman of the Board of the Company, and the brother of Joel Reck, Clerk and legal counsel to the Company, the Board of Directors appointed a special committee of the Board of Directors to conduct negotiations with Michael E. Reck concerning the sale of the Webstone business to him. The special committee consisted of Messrs. Humphrey,, Knopp, and Wimmergren, the three outside directors, and Mr. Salvatore J. Vinciguerra, the President and Chief Executive Officer of the Company. Messrs. Saul Reck and Joel Reck did not participate in discussions concerning the transaction. In addition, because Joel Reck is a member of the law firm of Brown Rudnick Freed & Gesmer which normally acts as the Company's legal counsel, the special committee retained separate legal counsel for the purpose of negotiating the transaction with Michael Reck. The special committee also retained the investment banking firm of Fechtor Detwiler, Inc. to advise it on the transaction. After several months of negotiations between the Company and Michael Reck, the special committee reached an agreement to sell the stock of the Webstone subsidiary to him for a purchase price of $1,789,000 - $1,389,000 in cash at closing, $150,000 in the form of a ninety day non- interest-bearing loan, and $250,000 in preferred stock of Webstone. Fechtor Detwiler, Inc. provided an opinion to the Board of Directors that the transaction was fair to the Company. The sale of the Webstone subsidiary to Michael Reck was completed July 2, 1999. At the time of the sale, the Webstone subsidiary had a book value of $2,016,000. As a result of the difference in value between book value and purchase price, transactional cost associated with the sale, and reserves taken, there was a loss on the sale of $409,000 or $.19 per share. -13- Results of Operations Net sales from continuing operations for the quarter ended July 3, 1999 were $1,109,000, with net income from continuing operations of $54,000, or $.03 per share. This compared with net sales of $1,329,000 and net income of $149,000, or $.07 per share, from continuing operations for the same quarter of fiscal 1998. Net sales from discontinued operations for the quarter were $956,000, with a net loss from discontinued operations of $33,000, or $.02 per share. This compared with net sales of $973,000 and net income of $32,000, or $.01 per share, from discontinued operations for the same quarter of fiscal 1998. The sale of Webstone resulted in a book loss of $409,000, or $.19 per share. As a result, consolidated net loss for the third quarter of fiscal 1999 from continuing operations, discontinued operations, and loss on the sale of Webstone was $387,000, or $.18 per share, compared with net income of $180,000, or $.08 per share, for the same quarter of fiscal 1998. Net sales from continuing operations for the nine months ended July 3, 1999 were $3,879,000, with net income from continuing operations of $324,000, or $.15 per share. This compared with net sales of $4,375,000 and net income of $510,000, or $.24 per share, from continuing operations for the same period of fiscal 1998. Net sales from discontinued operations for the nine months ended July 3, 1999 were $3,018,000, with net income from discontinued operations of $30,000, or $.01 per share. This compared with net sales of $2,826,000 and net income of $16,000, or $.01 per share, from discontinued operations for the same period of fiscal 1998. Consolidated net loss for the nine months ended July 3, 1999 from continuing operations, discontinued operations, and loss on sale of Webstone was $55,000, or $.03 per share, compared with new income from continuing operations and discontinued operations of $526,000, or $.25 per share for the same period last year. There were no extraordinary gains or losses in the nine month period ending June 30, 1998. Gross profit margins from continuing operations for the third quarter of fiscal 1999 declined to 36.6% from 39% in the corresponding quarter of fiscal 1998 because fixed overhead did not decline in the same proportion as the reduction in volume during the third quarter. Selling and administration expenses from continuing operations increased as a percentage of revenue from 21% in the third quarter of fiscal 1998 to 27.2% in the third quarter of fiscal 1999, reflecting slightly higher administrative costs at a lower volume. Gross profit margins from continuing operations for the first nine months of fiscal 1999 declined slightly to 38.2% from 39% in the corresponding period of fiscal 1998. Selling and administrative expenses from continuing operations increased as a percentage of revenue to 23.7% during the first nine months of fiscal 1999, compared to 20.0% during the corresponding period of fiscal 1998. The increase in selling and administrative expenses as a percentage of revenues was due in part to the lower volume and costs associated with the transition in the position of President and Chief Executive Officer in the first quarter of the fiscal year. -14- Result of Operation (continued) The downward trend in orders received year-to-year from cryogenic valve operations continued despite signs reported in the last quarter that the decline in year to year orders received had moderated. Orders received from cryogenic valve operations in the quarter ended July 3, 1999 were $938,000 compared with $1,479,000 in the same quarter last year. For the nine months, orders received were $3,504,000, compared with $4,537,000 last year. Two customers account for virtually the entire year-to-year decline of $1,033,000. Orders from our largest customer in the first nine months of this year were $835,000 compared with $1,415,000 in the same period last year, and orders from our second largest customer were $395,000 compared with $820,000 in the same period last year. Management believes that those reductions are representative of reductions in spending by those customers and the remainder of the industry, and do not reflect losses in the Company's market share. Few new air separation plants are being constructed anywhere in the world at the moment, reflecting continued stagnation in new plant and equipment spending in air separation plants in Asia, coupled with extra capacity in the industry created during the 1996-1997 expansion. Liquidity And Capital Resources Historically, the Company has funded operations through earnings and bank borrowings. However, the sale of the Webstone business has enhanced the Company's balance sheet and provides it with additional liquidity. At July 3, 1999, the Company had paid off all long term debt except equipment leases of $179,000 and had approximately $1,380,000 in cash and cash equivalents. The Company's $1,750,000 line of credit with BankBoston has been temporarily discontinued while the Company reviewed its capital requirements for the restructured operations. The Company believes that its working capital and cash position, provide sufficient liquidity to handle the normal working capital requirements of its business. During the first nine months of fiscal 1999, operating activities from continuing operations produced $584,000 of cash. The major sources of cash were net income from continuing operations and depreciation. The Company received $888,000 in cash from discontinued operations and invested approximately $98,000 in property and equipment during the nine months ended July 3, 1999, compared to $208,000 during the corresponding period of the prior year. Historically, the Company has borrowed funds for period of up to five years for the purchase of new machinery and met the required amortization and interest payments from its current working capital. The Company's results of operations have not been materially affected by seasonality. -15- Year 2000 Some computers, software, and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of the systems do not properly recognize a year that begins with "20" instead of "19". These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Year 2000 problem". In March 1999 the Company completed its assessment of the ability of the computers, systems and electronic equipment of the Valve division to process information involving the Year 2000 and beyond accurately, and completed the necessary corrective actions. The total cost for assessment and correction of internal "Year 2000" problems for the Valve division was approximately $50,000, which was paid out of working capital and expensed currently. The Company's discussions with its suppliers and customers of the Valve division as to the possible impact of Year 2000 problems has not disclosed any anticipated problems. Management believes that a reasonable "worst case scenario" is that Year 2000 problems would cause delays in deliveries of production material. Management has developed contingency plans to address this worst case scenario. -16- PART II - OTHER INFORMATION 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) Form 8-K filed July 15, 1999 related to sale of Webstone subsidiary. -17- 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 August 17, 1999 GODDARD INDUSTRIES, INC. By:/s/Salvatore J. Vinciguerra -------------------------------- - --- Salvatore J. Vinciguerra, President