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 MARCH 31, 2000
COMMISSION FILE # 1-06855
WORKSAFE INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1874010
(State or other jurisdiction of (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 May 5, 2000
- ----- --------------------------
Common Stock, par value 1,686,579
$.12 per share
PART I -- FINANCIALS
WORKSAFE INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2000 1999
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 68,307 $ 129,352
Accounts receivable - (less allowance
for doubtful accounts of $83,500
and $72,500, respectively) 4,097,455 3,485,813
Inventories 6,872,388 4,582,581
Other current assets 629,746 812,868
Net assets of discontinued operation -0- 205,142
----------- -----------
Total current assets 11,667,896 9,215,756
PROPERTY, PLANT AND EQUIPMENT, net 2,115,349 2,112,886
EXCESS OF COST OVER NET ASSETS ACQUIRED 386,447 403,547
OTHER ASSETS 54,681 73,832
----------- -----------
Total assets $14,224,373 $11,806,021
=========== ===========
See accompanying notes.
2
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2000 1999
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 6,748,375 $ 5,698,642
Current maturities of long-term debt 67,497 151,411
Accounts payable 3,684,822 2,289,220
Accrued expenses and other liabilities 336,314 226,580
------------ ------------
Total current liabilities 10,837,008 8,365,853
LONG-TERM DEBT 394,892 396,447
------------ ------------
Total liabilities 11,231,900 8,762,300
------------ ------------
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 1,686,579
shares 202,390 202,390
Additional paid-in capital 9,844,338 9,844,338
Accumulated deficit (7,054,255) (7,003,007)
------------ ------------
Total shareholders' equity 2,992,473 3,043,721
------------ ------------
Total liabilities and
shareholders' equity $ 14,224,373 $ 11,806,021
============ ============
See accompanying notes.
3
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
2000 1999
----------- -----------
(Unaudited) (Unaudited)
NET SALES $ 7,242,882 $ 6,264,330
COST OF SALES 5,924,797 5,326,872
----------- -----------
Gross profit 1,318,085 937,458
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 1,038,430 818,132
----------- -----------
INCOME FROM OPERATIONS 279,655 119,326
OTHER INCOME, net 5,256 64,269
INTEREST EXPENSE, net (177,945) (166,410)
----------- -----------
Net income $ 106,966 $ 17,185
=========== ===========
Basic and Diluted Income Per Share -
Net income $ .06 $ .01
=========== ===========
Weighted-average number of common shares outstanding:
Basic 1,686,579 1,684,246
=========== ===========
Diluted 1,686,579 1,704,906
=========== ===========
See accompanying notes.
4
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 31,
2000 1999
------------ ------------
(Unaudited) (Unaudited)
NET SALES $ 19,178,787 $ 17,868,664
COST OF SALES 15,764,330 15,202,755
------------ ------------
Gross profit 3,414,457 2,665,909
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 2,981,065 2,364,229
------------ ------------
INCOME FROM OPERATIONS 433,392 301,680
OTHER INCOME, net 461 79,444
INTEREST EXPENSE, net (485,101) (418,378)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (51,248) (37,254)
LOSS FROM DISCONTINUED OPERATIONS -0- (988,737)
GAIN FROM SALE OF DISCONTINUED OPERATION -0- 532,972
------------ ------------
Net loss $ (51,248) $ (493,019)
============ ============
Basic and Diluted (Loss)/Income Per Share:
Loss from continuing operations $ (.03) $ (.02)
Loss from discontinued operations -0- (.59)
Gain from sale of discontinued operation -0- .32
------------ ------------
Net loss $ (.03) $ (.29)
============ ============
Weighted-average number of common shares outstanding:
Basic and diluted 1,686,579 1,683,468
See accompanying notes.
5
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended March 31,
2000 1999
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (51,248) $ (37,254)
Adjustment to reconcile net loss from
continuing operations to net cash
used in operating activities:
Depreciation and amortization 238,620 203,330
Stock based compensation -0- 32,500
Provision for bad debts 32,749 -0-
Net changes in operating assets and liabilities:
Accounts receivable (644,391) (370,228)
Inventories (2,289,807) 1,212,960
Other current assets 183,122 264,599
Other assets 19,151 9,405
Accounts payable 1,395,602 (2,188,386)
Accrued expenses
and other liabilities 109,734 (137,661)
------------ ------------
Net cash used in operating activities (1,006,468) (1,010,735)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant
and equipment (223,983) (93,824)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (85,469) (207,910)
Borrowings under line of credit
agreement 20,488,680 24,202,404
Repayments under line of credit
agreement (19,438,947) (26,720,009)
Proceeds from exercise of options -0- 4,550
------------ ------------
Net cash provided by (used in) financing
activities 964,264 (2,720,965)
------------ ------------
Net cash used in continuing operations (266,187) (3,825,524)
Net cash provided by discontinued operations 205,142 3,651,093
------------ ------------
Net decrease in cash (61,045) (174,431)
6
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
CASH, beginning of period 129,352 223,125
-------- --------
CASH, end of period $ 68,307 $ 48,694
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $495,695 $688,672
Income taxes $ 4,130 $ 2,391
See accompanying notes.
7
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 accruals) necessary to
present fairly the consolidated balance sheets as of March 31, 2000 (unaudited)
and June 30, 1999, and the related statements of operations and cash flows for
each of the three and nine month periods ended March 31, 2000 and 1999.
The results of operations for the three and nine month periods ended March 31,
2000 are not necessarily indicative of the results for the entire year.
2. Inventories
Inventories consist of the following:
March 31, 2000 June 30, 1999
-------------- -------------
Raw materials $2,980,192 $1,571,734
Work-in-process 793,717 1,040,826
Finished goods 3,098,479 1,970,021
---------- ----------
Total $6,872,388 $4,582,581
---------- ----------
3. Litigation
Worksafe is a party to various asbestos lawsuits alleging damages from exposure
to asbestos products sold by Worksafe. Refer to Part II, Other Information, Item
I "Legal Proceedings" in this Form 10-Q, as well as Worksafe's Forms 10-Q for
the quarters ended September 30, 1999, and December 31, 1999, and Note 11 of the
audited Consolidated Financial Statements for the year ended June 30, 1999,
regarding the asbestos litigation.
4. Net Income/(Loss) Per Common Share
In accordance with Statement of Financial Accounting Standards ("SFAS") NO. 128,
"Earnings Per Share", basic earnings per common share amounts were 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 and warrants. There were 20,660 shares of common stock subject to stock
options included in the computation of diluted earnings per common share for the
three months ended March 31, 1999.
8
Diluted earnings per common share for the nine months ended March 31, 1999, and
for fiscal 2000 is the same as basic earnings per common share because the
inclusion of stock options and warrants outstanding would be antidilutive.
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 nine months ended March 31, 2000 and 1999, 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. Derivative 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 (as amended by SFAS No. 137) is effective for
all fiscal years beginning after June 15, 2000 and will not require retroactive
restatement for 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 division for the
nine month period ended March 31, 1999 have been classified as a discontinued
operation.
9
Summarized financial information for the discontinued operation is as follows:
Nine Months Ended
March 31,
1999
Net Sales $ 4,240,767
Cost of Sales 3,671,046
Gross Profit 569,721
Expenses 1,558,458
Net Loss $ (988,737)
10
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 assurance 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 assurance 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 assurance that such coverage
will continue to be adequate in the future. Additionally, there can be no
assurance that asbestos litigation will not have an adverse affect upon
Worksafe. Refer to Part II, Other Information, Item I, "Legal Proceedings" in
this Form 10-Q regarding the asbestos litigation.
Worksafe has competitors that have greater financial, management, sales and
technical resources. Worksafe's success also depends significantly on the
contributions of its key management. The loss of services of one or more key
members of management could have an adverse effect 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 &
11
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 January 31, 2002. Worksafe is also required to
maintain substantial inventory for its customers who require products on short
notice. There can be no assurance 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 estimates, 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 limited-use 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 March 31, 2000 were $7,243,000, as compared
to $6,264,000, for the three months ended March 31, 1999, an increase of 15.6%.
Net sales for the nine months ended March 31, 2000 were $19,179,000 as compared
with sales for the same period ended the prior year of $17,869,000, an increase
of 7.3%. These increases were due to increased inventory to support customer
demand, sales of higher priced, more profitable products and the realization of
focusing marketing efforts in existing markets and more profitable industry
segments. Worksafe's gross margin increased to 18.2% for the third quarter of
fiscal 2000, from 15.0% for the same quarter in fiscal 1999. For the nine months
ended March 31, 2000, Worksafe's gross margin was 17.8% as compared to 14.9% for
the nine months ended March 31, 1999. These increases were due to the increased
production levels in Mexico at lower costs for products previously produced
12
in Alabama and Puerto Rico, as well as sales of more profitable products.
Selling, general and administrative expenses for the quarter ended March 31,
2000 were $1,038,000 (or 14.3% of sales) as compared to $818,000 (or 13.1% of
sales) for the same period in the prior year. These expenses for the nine months
ended March 31, 2000 were $2,981,000 (or 15.5% of sales) as compared to
$2,364,000 (or 13.2% 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 and fuel surcharges, increased minimum sales orders on which
Worksafe pays the freight, increased advertising to support sales growth and
increased commissions and salaries.
Interest expense was $178,000 for the third quarter of fiscal 2000, an increase
of $12,000 when compared to the same quarter of fiscal 1999. For the nine months
ended March 31, 2000, interest expense was $485,000, an increase of $67,000 over
the same period in the prior year. Both increases were due to higher average
borrowings from Congress as well as higher interest rates for the third quarter
compared to the same quarter in the prior year.
Liquidity and Capital Resources
Worksafe had working capital as of March 31, 2000, of $831,000 as compared to
$645,000, exclusive of net assets of discontinued operation, as of June 30,
1999. A substantial portion of Worksafe's working capital consists of inventory,
which was $6,872,000 and $4,583,000 as of March 31, 2000, and June 30, 1999,
respectively. The increase in inventory as of March 31, 2000, was needed to
continue to meet the demands of Worksafe's customers for continuing sales growth
opportunities. Worksafe's open orders have steadily risen from $1,499,000 as of
June 30, 1999, to $3,120,000 as of May 1, 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 as of
March 31, 2000, and June 30, 1999, were $6,748,000 and $5,699,000, respectively.
As of May 1, 2000, Worksafe had $117,000 available for future borrowings, based
on its formula with Congress. This limited amount of availability under the line
of credit is a direct result of the significant increase in Worksafe's
investment in inventories.
Net cash used in operating activities was principally a result of an increase in
inventories and accounts receivable, 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, plant and equipment. Cash
flows provided by financing activities were principally from Worksafe's loan
agreement with Congress.
13
At the present time, Worksafe, together with a variety of defendants, is a party
to various asbestos-related lawsuits involving a number of plaintiffs alleging
damages from exposure to asbestos products sold by Worksafe. Worksafe may 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 which 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 have a material adverse
affect on Worksafe's business financial condition and results of operations. As
of March 31, 2000, an aggregate principal amount of approximately $6.7 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 rate increased or decreased, respectively, by 1%, Worksafe would
pay or save, respectively, an additional $67,000 in interest in that year.
Worksafe does not utilize derivative financial instruments to hedge against
changes in interest rates or for any other purpose.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended March 31, 2000 approximately 266 asbestos actions
involving approximately 5911 plaintiffs were instituted against Worksafe and
Puerto Rico Safety Equipment Corporation. These actions are in the Supreme Court
of the State of New York within the City of New York, and in the Supreme Court
of the State of New York, County of Erie and in the Superior Court of the State
of California City and County of San Francisco 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 99.15. During the quarter
ended March 31, 2000 approximately 13 actions involving 21 plaintiffs were
terminated against the Company, for which it has not yet been asked to
contribute any payment. Reference is also made to Item 3 of Worksafe's Form 10-K
for June 30, 1999 regarding asbestos actions against Worksafe and its insurance
coverage and Item 1 of Worksafe's Form 10-Q's for the first and second quarter
of the current fiscal year.
ITEM 5. OTHER INFORMATION
During the quarter ended March 31, 2000 the Company entered into a Garment
Manufacturer and Seller License Agreement with E.I. du Pont De Nemours and
Company ("Dupont") granting Worksafe a non-exclusive, nontransferrable license
to use, display, promote and advertise certain specified trademarks in the
United States (including its territories and possessions), Canada and Mexico in
connection with making, selling and marketing high quality protective apparel
for all industrial markets, manufactured from certain types of non-woven fabric
provided the garments comply with all technical and quality specifications
described.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
99.15 Schedule of asbestos actions filed against the Company and Puerto
Rico Safety Equipment Corporation during the quarter ended March
31, 2000.
15
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: May 15, 2000
WORKSAFE INDUSTRIES INC.
By: /s/ Lawrence Densen
--------------------
Lawrence Densen, President
& Chief Executive Officers
By: /s/ Arthur J. Wasserspring
--------------------------
Arthur J. Wasserspring,
Vice President of Finance/
Chief Financial Officer
16