SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
COMMISSION FILE # 1-06855
WORKSAFE INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1874010
(State or other jurisdiction o (Employer I.D. #)
incorporation or organization)
130 West 10th Street, Huntington Station, NY 11746
(Address of principal executive offices and zip code)
(631) 427-1802
(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 December 31, 1999
Common Stock, par value 1,686,579
$.12 per share
PART I - FINANCIAL INFORMATION
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1999 1999
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 46,948 $ 129,352
Accounts receivable - (less allowance
for doubtful accounts of $88,800 at
December 31, 1999, and $72,500 at
June 30, 1999) 3,516,438 3,485,813
Inventories 6,519,382 4,582,581
Other current assets 624,267 812,868
Net assets of discontinued operations 19,547 205,142
----------- -----------
Total current assets 10,726,582 9,215,756
Property, plant and equipment, net 2,069,036 2,112,886
Excess of cost over net assets acquired 392,147 403,547
Other assets 54,450 73,832
----------- -----------
Total assets $13,242,215 $11,806,021
=========== ===========
See accompanying notes.
1
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1999 1999
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 6,125,250 $ 5,698,642
Current maturities of long-term debt 67,986 151,411
Accounts payable 3,570,255 2,289,220
Accrued expenses and other liabilities 226,074 226,580
------------ ------------
Total current liabilities 9,989,565 8,365,853
LONG-TERM DEBT 367,143 396,447
------------ ------------
Total liabilities 10,356,708 8,762,300
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized 1,000,000 shares;
no shares issued and outstanding
Common stock, $.12 par value;
authorized 20,000,000 shares;
issued and outstanding 1,686,579
shares 202,390 202,390
Additional paid-in capital 9,844,338 9,844,338
Accumulated deficit (7,161,221) (7,003,007)
------------ ------------
Total shareholders' equity 2,885,507 3,043,721
------------ ------------
Total liabilities
and shareholders' equity $ 13,242,215 $ 11,806,021
============ ============
See accompanying notes.
2
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31,
1999 1998
(Unaudited) (Unaudited)
NET SALES $ 6,148,743 $ 5,936,398
COST OF GOODS SOLD 5,041,395 5,095,129
----------- -----------
Gross profit 1,107,348 841,269
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 989,320 746,560
----------- -----------
INCOME FROM OPERATIONS 118,028 94,709
OTHER EXPENSE (INCOME), net 16,922 (2,524)
INTEREST EXPENSE, net 161,327 121,244
----------- -----------
LOSS FROM CONTINUING OPERATIONS (60,221) (24,011)
LOSS FROM DISCONTINUED OPERATIONS -0- (735,342)
NET GAIN FROM SALE OF
DISCONTINUED OPERATIONS -0- 532,972
----------- -----------
Net loss $ (60,221) $ (226,381)
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Loss from continuing operations $ (.03) $ (.01)
Loss from discontinued operations -0- (.44)
Gain from sale of discontinued operations -0- .32
----------- -----------
Net loss $ (.03) $ (.13)
=========== ===========
Weighted average number of
common shares outstanding
Basic and diluted 1,686,579 1,683,079
=========== ===========
See accompanying notes.
3
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended December 31,
1999 1998
(Unaudited) (Unaudited)
NET SALES $ 11,935,905 $ 11,604,334
COST OF GOODS SOLD 9,839,533 9,875,883
------------ ------------
Gross profit 2,096,372 1,728,451
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 1,942,635 1,546,097
------------ ------------
INCOME FROM OPERATIONS 153,737 182,354
OTHER EXPENSE (INCOME), net 4,795 (15,175)
INTEREST EXPENSE, net 307,156 251,968
------------ ------------
LOSS FROM CONTINUING OPERATIONS (158,214) (54 439)
LOSS FROM DISCONTINUED OPERATIONS -0- (988,737)
NET GAIN FROM SALE OF
DISCONTINUED OPERATIONS -0- 532,972
------------ ------------
Net loss $ (158,214) $ (510,204)
============ ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Loss from continuing operations $ (.09) $ (.03)
Loss from discontinued operations -0- (.59)
Gain from sale of discontinued operations -0- .32
------------ ------------
Net loss $ (.09) $ (.30)
============ ============
Weighted average number of
common shares outstanding
Basic and diluted 1,686,579 1,683,079
============ ============
See accompanying notes.
4
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
December 31,
1999 1998
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (158,214) $ (54,439)
Adjustment to reconcile net loss from
continuing operations to net cash used
in operating activities:
Depreciation and amortization 152,600 132,640
Provision for losses on accounts receivable 20,132 -0-
Net changes in operating assets and liabilities:
Accounts receivable (50,757) 81,275
Inventories (1,936,801) 1,205,150
Other current assets 188,601 95,437
Other assets 19,382 3,371
Accounts payable 1,281,035 (1,438,792)
Accrued expenses and other liabilities (506) (178,898)
------------ ------------
Net cash used in operating activities (484,528) (154,256)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (97,350) (71,421)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (112,729) (138,403)
Borrowings under line of credit agreement 12,998,249 16,866,542
Repayments under line of credit agreement (12,571,641) (17,054,141)
------------ ------------
Net cash provided by (used in) financing
activities 313,879 (326,002)
------------ ------------
Net cash used in continuing operations (267,999) (551,679)
Net cash provided by discontinued operations 185,595 387,691
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (82,404) (163,988)
CASH AND CASH EQUIVALENTS, beginning of period 129,352 223,125
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 46,948 $ 59,137
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 315,366 $ 522,636
============ ============
Income taxes $ 3,205 $ 962
============ ============
See accompanying notes.
5
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements of Worksafe Industries Inc. and subsidiaries ("Worksafe")
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the consolidated balance sheet as of December 31, 1999 and the
related statements of operations and cash flows for the three and six months
ended December 31, 1999 and 1998.
The results of operations for the three and six months ended December 31, 1999
and 1998 are not necessarily indicative of the results for the entire year.
The 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 Worksafe at June 30, 1999, and
included in its annual report on Form 10-K. Such statements should be read in
conjunction with the data herein.
2. Inventories
December 31, June 30,
1999 1999
Raw materials $1,929,226 $1,571,734
Work-in-process 1,019,041 1,040,826
Finished goods 3,571,115 1,970,021
---------- ----------
Total $6,519,382 $4,582,581
========== ==========
3. Litigation
Worksafe is a party to various asbestos lawsuits alleging damages from exposure
to asbestos products previously sold by Worksafe. Refer to Part II, Other
Information, Item I "Legal Proceedings" in this form 10-Q as well as Worksafe's
Form 10-Q for the three months ended September 30, 1999, and Note 11 to the June
30, 1999, Audited Consolidated Financial Statements regarding the asbestos
litigation.
4. Income (Loss) Per Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share", basic earnings per common share amounts were
6
computed by dividing net earnings by the weighted average number of common
shares outstanding, excluding any potential dilution. Diluted earnings per
common share amounts are computed by reflecting potential dilution from the
exercise of stock options. As there were no dilutive securities for the quarters
ended September 30 and December 31, 1999 or 1998, no reconciliation is presented
herein.
5. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" requires companies to report all
changes in equity during a period, except those resulting from investment by
owners and distributions to owners, in a financial statement for the period in
which they are recognized. Comprehensive income is the total of net income and
all non-owner changes in equity (or other comprehensive income). Comprehensive
income must be reported on the face of the annual financial statements or in the
case of interim reporting, in the footnotes to the financial statements. For the
three and six months ended December 31, 1999 and 1998, Worksafe's operations did
not give rise to items included in comprehensive income which were not already
included in net income. Therefore, Worksafe's comprehensive income is the same
as its net income for all periods presented.
6. Derivitive Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 1999 (subsequently amended by SFAS No. 137, to be effective for
all fiscal years beginning after June 15, 2000) and will not require retroactive
restatement of prior period financial statements. This statement requires the
recognition of all derivative instruments as either assets or liabilities in the
balance sheet measured at fair value. Derivative instruments will be recognized
as gains or losses in the period of change. If certain conditions are met where
the derivative instrument has been designated as a fair value hedge, the hedge
items may also be marked to market through earnings, thus creating an offset. If
the derivative is designed and qualifies as a cash flow hedge, the changes in
fair value of the derivative instrument may be recorded in comprehensive income.
The Company does not presently make use of derivative instruments.
7. Discontinued Operations
During fiscal 1999, Worksafe sold certain assets (including inventory and
certain fixed assets) of its distribution division to Arbill Industries, Inc. As
a result of this transaction, the operating results of this
7
division for the three and six month periods ended December 31, 1999 have been
classified as discontinued operations.
Summarized financial information for the discontinued operation is as follows:
Six Months Ended
December 31,
1999 1998
Net Sales - $ 4,240,767
Cost of Sales - 3,671,046
Gross Profit - 569,721
Expenses - 1,558,458
Net Loss - $ (988,737)
8
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risks and Other Considerations
From time to time, information provided by Worksafe or statements made by its
employees, or information provided in its filings with the Securities and
Exchange Commission may contain forward-looking information. Any statements may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "expects", "anticipates", "plans" and similar expressions are
intended to identify forward-looking statements. Worksafe'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 the following:
Worksafe, since its fiscal year ended June 30, 1991 with the exception of fiscal
years 1996 and 1995, has had a history of significant losses. There can be no
assurances that Worksafe will be profitable or will not incur losses in the
future.
Worksafe is dependent upon its revolving line of credit with Congress Financial
Corporation ("Congress"). In the event that Worksafe is unable to comply with
its obligations to Congress, Worksafe's indebtedness could be declared
immediately due and payable and in certain cases Worksafe's assets could be
foreclosed upon. There can be no assurances that there will be other sources of
financing for Worksafe, if required.
Worksafe is a party to numerous cases with respect to asbestos litigation and
additional asbestos actions which continue to be brought against it. To date,
Worksafe believes that its insurance coverage has been adequate for those
actions previously terminated, but there can be no assurances that such coverage
will continue to be adequate in the future. There can be no assurances that
asbestos litigation will not have an adverse affect upon Worksafe. See Item 1 of
Part 2 of this Form 10-Q.
Worksafe has competitors that have greater financial, management, sales and
technical resources. Worksafe's success also depends to a significant degree on
the contributions of its key management. The loss of services of one or more key
members of management could have an adverse affect upon Worksafe. Worksafe is
also dependent upon Dupont which supplies Worksafe with Tyvek (R) which is used
for various lines of Worksafe's limited-use products. Management believes that
its current relationship with Dupont is satisfactory. Worksafe is a party to a
certain Garment Manufacturer & Seller License Agreement with Dupont, pursuant to
which Dupont provides Worksafe with nonwoven fabric under its trademark. This
agreement, subject to its terms, continues in effect until February 15, 2000.
Worksafe is in
9
the final stages of negotiation to extend this agreement for another two years
and anticipates that this will be finalized shortly. Worksafe is also required
to maintain substantial inventory for its customers who require products on
short notice. There can be no assurances that Worksafe will be able to maintain
sufficient inventory or that Worksafe will not return to periods where there is
not sufficient working capital to maintain its inventory to meet the needs of
its customers.
Worksafe also enjoys the benefits of various tax incentives with respect to its
operations in Puerto Rico. As Puerto Rico's tax exemptions are reduced or
expire, Worksafe may be required to pay taxes on income earned in Puerto Rico.
Worksafe is unable to predict the amount of such impact after such exemptions
are reduced or expire.
Due to the foregoing, the market price of Worksafe's Common Stock may be
volatile at times in response to fluctuations of Worksafe's operating results,
changes in analyst earnings estimate, market conditions as well as general
conditions and other factors.
Continuing Operations
Worksafe's continuing operations now consist entirely of its manufacturing
segment which produces disposable and reusable industrial apparel and protective
knit gloves. Worksafe maintains facilities for warehousing and production in
Puerto Rico, Alabama, Mexico (a contractor), Texas, California, Louisiana and
Minnesota.
The accompanying fiscal 1999 financial statements have been restated to reflect
the former distribution division as a discontinued operation and Management's
Discussion and Analysis addresses only the continuing operations.
Results of Operations
Net sales for the three months ended December 31, 1999 were $6,149,000 as
compared to $5,936,000 for the three months ended December 31, 1998, an increase
of 3.6%. Net sales for the six months ended December 31, 1999, were $11,936,000
as compared with sales for the same period ended the prior year of $11,604,000,
an increase of 2.9%. These increases were due to increased levels of available
inventory as well as additional sales of higher priced, more profitable
products.
Worksafe's gross margin increased to 18.0% for the second quarter of fiscal
2000, from 14.2% for the same quarter in fiscal 1999. For the six months ended
December 31, 1999, Worksafe's gross margin was 17.6% as compared to 14.9% for
the six months ended December 31, 1998. These increases were due to the
increased production levels in Mexico at lower costs for products previously
produced in Alabama and Puerto Rico as well as sales of more
10
profitable products.
Selling, general and administrative expenses for the quarter ended December 31,
1999, were $989,000 (or 16.0% of sales) as compared to $747,000 (or 12.6% of
sales) for the same period in the prior year. These expenses for the six months
ended December 31, 1999 were $1,943,000 (or 16.3% of sales) and $1,546,000 (or
13.3% of sales) for the same period in the prior year. These increases, both in
amount and as a percentage of sales, were due to increased freight rates which
took effect in January 1999, increased advertising programs and increased
commissions and salaries.
Interest expense was $161,000 for the second quarter of fiscal 2000, an increase
of $40,000 when compared to the same quarter of fiscal 1999. For the six months
ended December 31, 1999, interest expense was $307,000, an increase of $55,000
over the same period in the prior year. This increase was due to higher average
borrowings from Congress.
Liquidity and Capital Resource
Worksafe had working capital inclusive of net assets from discontinued
operations as of December 31, 1999 of $737,000 as compared to $850,000 as of
June 30, 1999. A substantial portion of Worksafe's working capital consists of
inventory, which was $6,519,000 and $4,583,000 as of December 31, 1999, and June
30, 1999, respectively. The increase in inventory at December 31, 1999 was
needed to meet the demands of Worksafe's customers for continuing sales growth
opportunities. Worksafe's open orders have steadily risen from $1,200,000 at
December 31, 1999 to $2,100,000 as of February 10, 2000. Worksafe believes that
its current working capital position will be sufficient to satisfy its needs for
the next twelve months.
The amounts outstanding under Worksafe's loan agreement with Congress at
December 31 and June 30, 1999, were $6,125,000 and $5,699,000, respectively. As
of December 31, 1999, the Company had $88,000 available, based on its formula
with Congress, after paying back its additional borrowings of $175,000 which
came due on December 31, 1999. This limited amount of availability under the
line of credit is a direct result of a significant increase in Worksafe's
investment in inventories.
Net cash used in operating activities was principally a result of an increase in
inventories, which was partially offset by an increase in accounts payable and a
decrease in other current assets. Cash flows used in investing activities was
for the purchase of property and equipment. Cash flows provided by financing
activities were principally from Worksafe's loan agreement with Congress.
At the present time, Worksafe, 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 Worksafe. Worksafe may
11
become a party to additional asbestos-related actions in the future. Worksafe is
also party to other non-asbestos-related litigation. Worksafe cannot, at this
time, determine the outcome of this uncertainty. To date, Worksafe's insurance
coverage has been adequate and Worksafe's costs relative to asbestos litigation
against it have not been material.
Quantitative and Qualitative Disclosures About Market Risk
Worksafe's principal financial instrument is its revolving line of credit with
Congress that provides for interest at the prime rate plus .75%. Worksafe is
affected by market risk exposure primarily through the effect of changes in
interest rates on amounts payable by the Company under the revolving line of
credit. A significant rise in the prime rate could materially adversely affect
Worksafe's business financial condition and results of operations. At December
31, 1999, an aggregate principal amount of approximately $6.1 million was
outstanding under the revolver. If principal amounts outstanding under
Worksafe's revolving line of credit remained at this level for an entire year
and the prime increased or decreased, respectively, by 1%, Worksafe would pay or
save, respectively, an additional $61,000 in interest in that year. Worksafe
does not utilize derivative financial instruments to hedge against changes in
interest rates or for any other purpose.
Year 2000
Our comprehensive program to address Year 2000 issues was successful in that our
business activities continued without disruption through the days before and
after January 1, 2000. In addition, nothing has been brought to our attention
that would lead us to expect disruptions caused by the failures of third parties
to remediate their Year 2000 issues.
Notwithstanding the impact on any given quarter, costs related to the Year 2000
program were not significant.
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended December 31, 1999 approximately 413 asbestos actions
involving approximately 896 plaintiffs were instituted against Worksafe and
Puerto Rico Safety Equipment Corporation. The actions are all pending in the
Supreme Court of the State of New York within the City of New York with the
exception of one action which is pending in the Superior Court of New Jersey Law
Division Camden County and involve a multitude of defendants. They are either
actions, pursuant to standard complaints, for personal injury or wrongful death
setting forth a number of causes of action in amounts of up to $10,000,000 for
compensatory damages and $10,000,000 for punitive damages. All of the foregoing
actions have been submitted to Worksafe's and Puerto Safety Equipment
Corporation's insurance carriers for defense. A schedule of these cases is
annexed hereto as Exhibit 99.14. During the quarter ended December 31, 1999
approximately 42 cases against Worksafe and Puerto Rico Safety Equipment
Corporation involving approximately 78 plaintiffs were dismissed without payment
of any monies by the Company. Reference is also made to Item 3 of Worksafe's
Form 10-K for June 30, 1999 and its Form 10-Q for September 30, 1999 regarding
asbestos actions against Worksafe and its insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following items were approved at the annual shareholders meeting on
December 15, 1999 by the votes as indicated:
A. The following directors were elected by the votes as indicated to serve
a term continuing through the Annual Meeting following the fiscal year ending
June 30, 2000 and until the election and qualification of their respective
successors:
FOR AGAINST
James Favia 1,183,132 7,997
Dr. Martin Fleisher 1,183,132 7,997
Dr. Bruce Friedman 1,183,132 7,997
Charles Holzberg 1,183,132 7,997
B. The appointment of Arthur Andersen, LLP, Certified Public Accountants,
as independent auditors to examine the financial statements of the Company for
fiscal year ended June 30, 2000.
FOR 1,190,949 AGAINST 159 ABSTAIN 21
ITEM 5. OTHER INFORMATION
A. On December 16, 1999 Martin Fleisher resigned as a director of Worksafe.
His resignation was not as a result of any disagreement with Worksafe.
B. On February 10, 2000 Jay Rothenberg was approved by the board of
directors to take the place of Martin Fleisher as a director of Worksafe.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
99.14 Schedule of asbestos actions filed against Worksafe and Puerto Rico
Safety Equipment Corporation during the quarter
ended December 31, 1999.
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 14, 2000
WORKSAFE INDUSTRIES INC.
By: /s/ Lawrence Densen
--------------------
Lawrence Densen, President
& Chief Executive Officer
By: /s/ Arthur J. Wasserspring
--------------------------
Arthur J. Wasserspring,
Vice President of Finance/
Chief Financial Officer