SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 2000
OR
[_] 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. 01-06855
WORKSAFE INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
New York 3842 11-1874010
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of incorporation Classification Code Identification Number)
or organization) Number)
130 West 10th Street, Huntington Station, New York 11746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 427-1802
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class On Which Registered
a) $.12 par value common stock ("Common Stock") Boston Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
a) $.12 par value common stock ("Common Stock")
- -------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during the
preceding twelve (12) months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past ninety (90) days.
YES__X__ NO___
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
State registrant's revenues for its most recent fiscal year. $27,101,030
The aggregate market value of the Common Stock held by non-affiliates is
approximately $1,487,000. Market value is based upon the price of the Common
Stock of the registrant as of the close of business on September 29, 2000 which
was $.97 per share as reported by NASDAQ.
As of September 29, 2000 the number of shares outstanding of the Common Stock of
the registrant was 1,686,579 shares. The number of shares has been adjusted for
prior stock splits and estimated rounding for fractional shares.
PART I
Item 1. BUSINESS
(a) General Development of Business
Worksafe Industries Inc. (the "registrant" or "Worksafe"), is a corporation
organized and existing under the laws of the State of New York, having been
incorporated on May 15, 1958. On December 17, 1998, the name of the registrant
was changed from Eastco Industrial Safety Corp.
Worksafe, through its wholly-owned subsidiaries, Disposable Safety Wear, Inc.
("Disposable"), Safety Wear Corp. ("Safety Wear"), Eastco Glove Technologies,
Inc. ("Glove Technologies") and Puerto Rico Safety Equipment Corp. ("Puerto Rico
Safety Equipment"), manufactures industrial protective clothing products.
Worksafe sells its products to distributors. Use of products sold by Worksafe
has in a large part resulted from the adoption of OSHA and insurance industry
standards.
In January 1999, Worksafe sold certain of the assets of its distribution
operation, and the "Eastco" name, to Arbill Industries, Inc. ("Arbill"), thus
discontinuing its distribution operation. The distribution operation had
specialized in the distribution of industrial safety products manufactured by
third parties. The distribution operation served a different customer base than
Worksafe's manufacturing operation, and was managed as a separate operating unit
with its own identifiable assets. The distribution operation had been
experiencing operating losses during the previous several years, and the sale
was intended to enable management to better devote their attention and resources
to the core strategies of the manufacturing operation. The sales price was
approximately $2,494,000, exclusive of related adjustments, payments applicable
to rent and payments for open accounts receivable. Worksafe generally agreed not
to directly compete with Arbill in the business conducted by its distribution
operation prior to the sale for a period of five years. Reference should be made
to Worksafe's Form 8-K of January 11, 1999, for a more detailed discussion of
this transaction.
In connection with the completion of its fiscal 2000 year-end closing, Worksafe
discovered an inventory discrepancy, between the physical count and its recorded
general ledger balance, of approximately $1,350,000. This inventory discrepancy
has been charged against Worksafe's operations in fiscal 2000. Worksafe has
engaged forensic consultants to assist in the determination of the cause of this
discrepancy. This investigation is presently ongoing. However, Worksafe does
have $1,000,000 of insurance coverage for employee theft and $1,000,000 for
third party theft. Worksafe has not yet filed a claim against its policies, but
has notified the
-2-
applicable carriers of its intention to file a claim, although there can be no
assurance that the Company will be awarded any benefit as a result of any claim
filed. In addition, Worksafe has made certain managerial changes at its
manufacturing facilities, and has hired outside consultants to review its
operational structure for potential cost savings measures.
(b) Financial Information about Industry Segments
Since the sale of the distribution operation in January 1999, Worksafe is
organized and operates in one business segment, the manufacturing of protective
clothing and safety products that are sold to distributors for end use by
manufacturers, utilities, hospitals and others.
(c) Description of Business
The following is a discussion of the business activities conducted by Worksafe:
(i) Manufactured products are sold under the Charkate/Worksafe, Charkate(R),
Worksafe(R) and Cover-Up(R) trade names. Worksafe, through Disposable,
Safety Wear and Puerto Rico Safety Equipment, manufactures limited-use and
reusable industrial protective apparel. Limited-use protective products
include coveralls, shirts, pants, headwear, hoods, aprons, smocks, lab
coats, hazardous material handler suits, examination gowns, sleeves, shoe
covers and other related items. Limited-use clothing is designed to protect
the user from, among other things, splash, dirt, contamination and a wide
range of other substances. Limited-use clothing is made primarily of a spun
bonded polyolefin produced solely by E.I. Dupont DeNemours & Company
("Dupont") under the trade name Tyvek(R). Reusable industrial protective
clothing includes items for the protection of various parts of the body
which are designed to shield the user from, among other things, splash,
dirt, contamination, heat, fire, cold and the outside environment. Reusable
products include coveralls, gloves, mitts, shirts, thermal underwear,
sleeves, coats, pants, leggings, spats, bibs, safety vests and a variety of
other kinds of protective clothing and uniforms.
-3-
As a result of an acquisition in April 1997, Worksafe now manufactures
protective knit gloves and sleeves, which are sold by the
Charkate/Worksafe knit glove division. These products are generally made
of cotton and cotton polyester, composite high tensile cut-resistant
yarns and Kevlar(R) aramid fibers, as well as steel, stainless steel and
other high cut-resistant composite fibers. The products may have a
special coating and are used to protect the individual from cuts and
abrasions. These items are used in the meat packing, glass handling,
sheet metal, and automotive industries, to name a few, for the protection
of the employee.
Sales of manufactured limited-use clothing and related limited-use
products accounted for approximately 70%, 67%, and 75% of Worksafe's net
sales for the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.
The manufacturing operation and warehousing facilities are located in
Puerto Rico, Minnesota and Alabama, and warehousing facilities are also
located in Texas, California and Louisiana. Worksafe has also contracted
the sewing of materials already cut by Worksafe to production facilities
in the Republic of Mexico. The manufacturing operation is primarily
directed from Alabama, and its sales are directed from New York.
Worksafe utilizes catalogs, telemarketing and its web site
(www.charkate.com) to aid in its sales efforts. Sales are also promoted
through trade shows, mailings and advertising in trade magazines and
directories. Worksafe does not engage in any mail order business.
Worksafe primarily sells to independent distributors that sell to
end-users comprised of industrial, commercial and governmental accounts.
Worksafe considers industrial accounts to be those businesses that are
primarily based upon manufacturing and production, while commercial
accounts are considered to be service businesses. Worksafe also believes
that standards established by OSHA and the insurance industry have
resulted in a need by others to purchase Worksafe's products.
(ii) Worksafe has made no public announcement of, or made public information
about, any new products that would require the investment of a material
amount of its assets or which are otherwise material.
(iii) Worksafe is not dependent upon any one vendor as a supplier of raw
materials, other than Dupont, which supplies Worksafe with Tyvek(R), a
material used in various lines of its limited-use products. See (iv)
immediately below for reference to a certain License Agreement with
Dupont, which expires January 31, 2002, pursuant to which Dupont supplies
raw materials to Worksafe. Management believes that its current
relationship with Dupont is satisfactory. Loss of Dupont as a supplier of
Tyvek(R) would have a material adverse effect on Worksafe's operations.
-4-
(iv) Puerto Rico Safety Equipment is engaged in manufacturing in Puerto Rico.
Under the Puerto Rico Industrial Tax Exemption Act of 1963 (the
"Industrial Tax Act"), Puerto Rico Safety Equipment was granted a 17-year
exemption, beginning in January 1970, with respect to Puerto Rico income
taxes on the production of safety clothing, protective sleeves, coats,
pants, hoods, jackets and other items. On July 1, 1989, Puerto Rico
Safety Equipment was granted an extension of its exemption, and had a 90%
exemption from Puerto Rico income taxes for the ten-year period ending
June 30, 1999. During this period, Puerto Rico Safety Equipment had a 75%
exemption from Puerto Rico municipal taxes on its real and personal
property utilized in operations. Puerto Rico Safety Equipment has applied
for an extension of this exemption, and is currently awaiting final
approval. If granted, this exemption would be for a period of ten years,
would impose an income tax rate of only 5% on taxable income, and may
grant a 75% exemption on the corresponding real and personal property
taxes, municipal taxes and other applicable taxes.
Disposable was granted a 15-year exemption, beginning in June 1977, under
the Puerto Rico Industrial Tax Act with respect to Puerto Rico income
taxes on the production of limited-use clothing, and property used in its
operations, subject to the terms of the grant. This exemption has been
extended until June 20, 2006, and provides for a 90% exemption on Puerto
Rico income taxes, and a 60% exemption on municipal, real, personal
property and other applicable taxes.
As Puerto Rico tax exemptions are reduced or expire, the registrant may
be required to pay taxes on income earned in Puerto Rico. Worksafe is
unable to predict the monetary impact of such exemptions being reduced or
expiring.
Puerto Rico Safety Equipment and Disposable have elected to apply Section
936 of the Internal Revenue Code, effective July 1, 1979. The provisions
of Section 936 are effective until revoked by the registrant. If the
conditions of Section 936(a) are satisfied, the Section 936 credit equals
the portion of United States income tax attributable to taxable income
from sources outside the United States, derived from the active conduct
of a trade or business within a United States possession, or the sale or
exchange of substantially all of the qualified possession source
investment income. Dividends from operations, payable to the registrant
by each subsidiary, are entitled to a 100% dividends received deduction,
but are subject to a 10% withholding tax in Puerto Rico. The Omnibus
Budget Reconciliation Act of 1993 (the "Omnibus Act") imposed new
limitations on computing the Possession Tax Credit under Section 936 for
tax years beginning after 1993. The registrant made an election in 1995
which reduced the credit to 60% of the 1994 level and which further
phased out the credit by 5% in each subsequent year, to a maximum credit
of 40% in 1998. Since the credit is a function of future earnings, if
any, the effect of such limitations cannot be determined at the
-5-
present time. In addition, the Omnibus Act subjects the 100% dividends
received deduction to the Alternative Minimum Tax Calculation. The Small
Business Job Protection Act of 1996 further limits the Possession Tax
Credit for years beginning after 2001, with the credit being eliminated
for tax years beginning after 2005. No dividends have been declared on
the aggregate undistributed earning of Puerto Rico Safety Equipment and
Disposable, which through June 30, 2000 aggregates approximately
$194,000. No dividends are intended to be declared as it is management's
intention to reinvest the earnings, if any, from such subsidiaries
indefinitely. Worksafe believes that based upon current operations, the
Omnibus Act will not have a material effect on it for the foreseeable
future.
Worksafe is a party to a certain Garment Manufacturer & Seller License
Agreement (the "License Agreement") with Dupont, which, subject to
termination for cause at any time and other specified provisions,
continues in effect until January 31, 2002. Pursuant to the License
Agreement, Dupont provides non-woven fabric under its trademark, to
Worksafe as licensee, for use in its manufacturing operations.
(v) Worksafe does not consider its business to be seasonal.
(vi) Worksafe is required to maintain substantial inventories (see Note 4 to
Consolidated Financial Statements) in order to meet the immediate
shipping requirements of its customers, who require products on short
notice and who do not maintain inventories of the same. Worksafe believes
that other companies in this industry also maintain substantial
inventories.
(vii) Worksafe is not dependent upon any single customer or several customers,
the loss of any one or more of which would have an adverse effect on its
business. No one customer accounts for more than 10% of Worksafe's net
sales for the fiscal year ended June 30, 2000.
(viii) The dollar amount of backlog orders estimated and believed to be firm was
approximately $2,326,000 as of June 30, 2000, as compared to
approximately $1,500,000 as of June 30, 1999. Worksafe expect to fill the
entire backlog as of June 30, 2000 during the current fiscal year.
(ix) No material portion of the business of Worksafe is subject to
renegotiation of profits, termination of contracts or subcontracts at the
election of the government.
(x) In all of its product markets, Worksafe faces competition from larger and
more established companies that have greater financial, managerial, sales
and technical resources, and certain markets for Worksafe's products are
dominated by these companies. While larger competitors may be able to
benefit from economies of scale and introduce new products that compete
with Worksafe's products, Worksafe's management is accustomed to such
competition and believes it will remain competitive with such companies.
Worksafe's major competitors in price and service are Kappler, Inc.,
Lakeland Industries, Inc. and DuPont, in limited-use clothing sales, and
Red Kap (a subsidiary of VF Industries, Inc.), Topps Mfg. Co. and
Workrite Uniform Co., in reusable clothing sales. Primary competitors in
glove manufacturing are Chicago Protective Apparel, Inc., Steel Grip,
Inc. and Ansell Golden Needles, Inc.
(xi) During the past three fiscal years, the registrant has not spent a
material amount on research and development activities relating to new
products, services or techniques, or for the improvement of existing
products, services or techniques.
(xii) Compliance with Federal, State and local environmental laws is not
expected to have a material effect on capital expenditures, earnings and
the competitive position of the registrant. Worksafe's manufacturing
facilities are subject to regulation and inspection standards established
by OSHA. Such facilities have not been inspected for compliance with
OSHA. Although Worksafe's management believes it is in material
compliance with required standards, there can be no assurance that any
inspection would not reveal that Worksafe has failed to comply with OSHA
and, as a result, the registrant may be required to expend material sums
to ensure compliance with OSHA regulations.
-6-
(xiii) The total number of employees employed by the registrant as of June 30,
2000 was approximately 245.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
Sales of the registrant's products are primarily in the United States.
Item 2. PROPERTIES
The following properties are material to the business of Worksafe:
The executive offices of Worksafe are located at 130 West 10th Street,
Huntington Station, New York (the "Huntington Property"), and are owned by
Worksafe. The Huntington Property contains approximately 30,000 square feet, of
which 25,000 square feet are being sublet to non-affiliates. The remaining 5,000
square feet are being used by Worksafe for its executive offices and for its
sales function.
On May 23, 2000, Worksafe refinanced the mortgage on the Huntington Property. In
connection therewith, Worksafe mortgaged the premises to a new bank for the
amount of $650,000. See Note 8 to the Consolidated Financial Statements. At the
time of the refinancing, the principal balance on the then existing first
mortgage was approximately $349,000. This mortgage was held by 130 West 10th
Street Associates, LLC ("Associates"). The wives of Messrs. Anthony P. Towell,
an executive officer and director of Worksafe, and Alan E. Densen, a director of
Worksafe, were members of Associates. Charles Holzberg, a director of Worksafe,
was also a member of Associates. The balance of the mortgage, with unpaid
interest totaling approximately $352,000, was satisfied by the new mortgage. The
principal balance of the mortgage on the Huntington Property as of June 30, 2000
was $650,000. Due to the fact that Worksafe is currently in default of the
financial covenants in their line of credit agreement with Congress, should
Congress demand repayment of the amounts due under the line, the mortgage on the
Huntington Property would be in default and become due and payable.
The registrant's wholly-owned subsidiary, Disposable, leases a building, which
is used for manufacturing and warehousing, consisting of approximately 45,000
square feet in Aguadilla, Puerto Rico, from the Puerto Rico Industrial
Development Company. A lease was entered into for these premises on February 21,
1995, effective for the ten-year period commencing September 1, 1993. Rent for
the twelve-month period ending August 31, 2000 was at the monthly rate of
$11,178, and escalates to $13,041 in the final year of the lease.
The registrant's wholly-owned subsidiary, Safety Wear, leases approximately
50,000 square feet in Decatur, Alabama. These premises are utilized for the
cutting and warehousing of coveralls and other limited-use products. Rent is
payable at $13,500 per month, on a month-to-month basis. A lease for this
location is currently being negotiated. Should these facilities not be available
in the future, Worksafe believes that alternative sites will be readily
available at a comparative cost.
The registrant's wholly-owned subsidiary, Glove Technologies, subleases
approximately 9,500 square feet in Chaska, Minnesota. These premises are
utilized in connection with the manufacturing of protective knit gloves and
related operations. This sublease terminates on December 31, 2001, with
provisions for earlier termination. Rent is currently payable at a rate of
$5,150 per month.
The registrant believes that its facilities are adequate for its current and
immediate future needs.
Item 3. LEGAL PROCEEDINGS
In the past, the registrant used asbestos in the manufacture of certain of its
products. Such use was terminated by the registrant in the mid-1980's. It has
been alleged that asbestos is a cause of cancer, asbestosis, mesothelioma, and
other related diseases, the symptoms of which may not appear for twenty or more
years. Since the early 1980's,
-7-
numerous lawsuits have been instituted against the registrant by persons who
have been exposed to asbestos and asbestos products.
As of June 30, 2000, Worksafe estimates that it is a party to approximately
5,000 cases with respect to exposure to asbestos involving approximately 18,000
plaintiffs. Most of these cases also include Puerto Rico Safety Equipment as a
defendant.
To date, all of the actions against the registrant have been brought by
non-employees and are based upon personal injury claims. The pending actions are
for the most part in the Supreme Court of the State of New York, all Counties
within the City of New York; United States District Court, Eastern and Southern
Districts of New York, the Superior Court of New Jersey, Middlesex County, Law
Division; the Court of Common Pleas of Luzerne County, Trial Division of
Pennsylvania, and the Superior Court of California, County of San Francisco. The
number of first- party plaintiffs referred to throughout this Form 10-K include
in various instances, husbands and wives. For the most part, settlements have
usually involved one settlement for both spouses. The actions, with the
exception of one pending action, involve a multitude of defendants. The
complaints allege exposure to asbestos and asbestos products over various
periods of time. In general, each action seeks varying amounts of damages,
unlimited, or for each plaintiff as high as $10,000,000 for compensatory
damages, and $10,000,000 for punitive damages and more against each defendant.
The registrant is likely to continue to become a party to additional asbestos
actions in the future.
From 1981 through June 30, 2000, Worksafe estimates that approximately 7,000
actions on behalf of approximately 27,000 first-party plaintiffs have been
instituted against it concerning asbestos-related claims, and that approximately
1,000 actions involving the claims of approximately 8,000 plaintiffs have been
settled or discontinued against the registrant. During the year ending June 30,
2000, the registrant estimates approximately 1,700 actions on behalf of
approximately 10,500 plaintiffs were instituted against it, and approximately
140 cases involving approximately 600 plaintiffs were settled or discontinued
against the registrant. The registrant estimates that as of June 30, 2000, and
since 1981, with the exception of defense costs, a total of approximately
$2,600,000 has been paid or agreed to be paid in settlements to date, with
regards to the terminated actions on behalf of Worksafe (inclusive of actions
against Puerto Rico Safety Equipment, which totals approximately $2,000,000), by
the registrant's insurance carriers. In addition, and since 1981, approximately
$43,000 has been paid by the registrant. The foregoing is based upon information
available to the registrant to date. Through June 30, 2000, and since 1981, the
registrant has paid approximately $50,000 for legal and defense costs to counsel
appointed by the insurance carriers to defend it. Past results of settlements
and defense costs are not necessarily indicative of future settlements and
defense costs, which the registrant is unable to predict.
The registrant believes that it maintained various policies of primary
insurance, in different amounts, which provide coverage to the extent of their
respective terms for asbestos-made, product-related personal injuries for the
periods April 1, 1968 to April 1, 1969, and March 11, 1971 to November 27, 1985.
The policies range in amounts from $50,000 to $1,000,000. The registrant also
believes that from August 10, 1972 to on or about August 11, 1986, it has had
various policies for excess coverage to the extent of their terms applicable to
asbestos claims. These policies range in amounts from $500,000 to $10,000,000
for excess coverage. There are gaps of approximately six weeks in the primary
coverage between March 11, 1971 to November 27, 1985, approximately thirty-six
months in the excess coverage between August 10, 1972 and August 11, 1986, and
an additional period of approximately thirteen months for excess coverage
insurance companies in liquidation, where there is likely to be no coverage.
Reference is made to Exhibits 99.06 and 99.07 for a schedule of the foregoing
insurance policies applicable to Worksafe. The policies of insurance set forth
on Exhibits 99.06 and 99.07 are not applicable to all of the subsidiaries of the
registrant, which have varying coverage, and such subsidiaries may also have
been without coverage for various times of their doing business. Not all of
these policies are in the possession of Worksafe. The foregoing exhibits are
incorporated by reference and made a part hereof as referred to in Item 14 of
this Form 10-K.
A schedule of insurance believed to be applicable to Puerto Rico Safety
Equipment is designated Exhibit 99.08. Not all of these policies are in the
possession of the registrant. No agreement has been reached with the insurance
companies confirming all of these policies, which range from $100,000 to
$500,000 for primary coverage and $1,000,000 to $5,000,000 for excess coverage.
The policies for Puerto Rico Safety Equipment cover the period
-8-
March 11, 1971 to July 23, 1986, with various gaps as described in the exhibit.
The foregoing exhibit is incorporated by reference and made a part hereof as
referred to in Item 14 of this Form 10-K.
-9-
During fiscal 1994, the registrant reached a settlement pertaining to all
pending and future cases against it in the State of New York brought by one firm
of plaintiffs' attorneys. The settlement does not apply to Puerto Rico Safety
Equipment and is only applicable to cases brought by the same law firm against
the registrant in the State of New York. The registrant is to be dismissed
without any payment in cases not involving any exposure to a power generating
station in the State of New York ("Powerhouse"). Where there is Powerhouse
exposure, a payment of $100 is to be made for each alleged non-malignant case
and $300 for each malignant case. Where plaintiffs consist of two spouses, such
is deemed one case. Payment is to await appropriate documentation of exposure,
releases from the plaintiffs and the agreement of each plaintiff whose case is
settled. A copy of the letters between counsel for the registrant and counsel
for plaintiffs' attorneys setting forth this settlement is designated as Exhibit
99.11 and is incorporated by reference and made a part hereof as referred to in
Item 14 of this Form 10-K.
An agreement between the registrant and its primary insurance carriers, dated
March 26, 1990, became effective June 26, 1990 (the "Indemnity Agreement"). This
agreement does not apply to Puerto Rico Safety Equipment. The registrant entered
into the Indemnity Agreement in an effort to resolve uncertainties as to its
insurance coverage that will cover asbestos claims against the parent company,
where any exposure to asbestos is alleged during the period 1971 to 1985,
inclusive. Further, the registrant is obligated to share in the payment of
asbestos-related claims against it. Pursuant to the Indemnity Agreement, the
registrant is obligated to pay 12% of all attorneys' fees incurred on its behalf
and 17% of indemnity costs (which include judgment and settlement amounts). The
balance of these costs are to be paid by the insurance carriers which are party
to the Indemnity Agreement. The Indemnity Agreement is subject to the policy
limitations of each insurance policy, and may be terminated at any time upon 90
days notice by any of the parties, provided that termination may not be
effective as to any asbestos action that has already been placed on the trial
calendar, unless it has a scheduled trial date more than 12 months from the date
the notice of termination is given. A copy of the Indemnity Agreement is
designated as Exhibit 99.09 and is incorporated by reference in Item 14 of this
Form 10-K.
Effective during May 1991, the registrant entered into a Settlement Agreement
and Release (the "Settlement Agreement") with Mount Vernon Fire Insurance
Company ("Mount Vernon"). Pursuant to the Settlement Agreement, which is
designated Exhibit 99.10 and is incorporated by reference and made a part hereof
as referred to in Item 14 of this Form 10-K, the registrant discontinued its
action against Mount Vernon. Subject to the terms of the Settlement Agreement,
Mount Vernon agreed to reimburse the registrant (where applicable) for 6.25% of
attorneys' fees (52.08% of the registrant's 12% share referred to in the
Indemnity Agreement in the previous paragraph) and 6.25% of indemnification
costs (36.76% of registrant's 17% share referred to in the Indemnity Agreement
in the previous paragraph). The Settlement Agreement is not applicable to any
asbestos actions against the registrant where no exposure is alleged to products
manufactured or distributed by the registrant between April 1, 1968 and April 1,
1969, and this agreement does not apply to Puerto Rico Safety Equipment. The
Settlement Agreement may be terminated at any time upon 90 days notice, but such
-10-
notice is not applicable to asbestos actions placed on a trial calendar, unless
such has a trial date more than 12 months from the date the notice of
termination is given. The Settlement Agreement provides that the limit available
under the policy is $100,000 plus attorneys' fees while the Settlement Agreement
is in effect. The Settlement Agreement is applicable only to the parent company.
As of June 30, 2000, approximately $38,000 has been reimbursed by Mount Vernon
for indemnification.
To date, the claims settled by Puerto Rico Safety Equipment have been paid in
full by insurance. One of the carriers covering Puerto Rico Safety Equipment has
recently requested a cost sharing agreement with Puerto Rico Safety Equipment.
This request has been disputed by Puerto Rico Safety Equipment and is currently
being negotiated.
Worksafe is unable to ascertain the total extent of its insurance applicable to
asbestos claims against it or the extent to which its insurance carriers will
provide coverage in the future.
The registrant's insurance may not provide coverage for punitive damages where
such damages are sought against it in pending litigation. Punitive damages are
allowable in addition to compensatory damages and are awarded as a punishment to
a defendant for the wrong in a particular case as well as for the protection of
the public against similar acts, to deter the defendant from a repetition of the
wrongful act and to serve as a warning to others. Usually a wrong, aggravated by
an evil or wrongful motive or a willful and intentional misdoing, or a reckless
indifference equivalent thereof, is required for a court to award punitive
damages. Worksafe is unable to specify whether its actions would give rise to
punitive damages. Worksafe believes that its actions should not give rise to
punitive damages. However, there can be no assurance that this will be the case.
Worksafe is a party to an action entitled Rule v. The Bethleham Corporation, et
al pending in the Court of Common Pleas, Bucks County, Pennsylvania. There are 4
defendants, including Worksafe, in this action. The action was instituted in
April 1997 and has been referred to both Worksafe's primary and umbrella
insurance carriers. The action is for injuries sustained while the plaintiff was
allegedly wearing clothing manufactured by Worksafe. The complaint in this
action seeks damages in an unspecified amount in excess of $50,000 on each of 5
counts and an unspecified amount on one count. Worksafe believes that its
primary and umbrella coverage will cover any liability that it may have with
respect to this claim. Worksafe is a party to other miscellaneous litigation,
which it believes will not have a material adverse affect against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-11-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The principal market on which the Common Stock of Worksafe is traded is
the NASDAQ Small-Cap Market and its symbol is WRKS. The following chart
sets forth the high and low sale prices for the periods indicated as
determined from NASDAQ quotations:
High Low
-------- --------
Fiscal Year Ended June 30,
1999
----
First Quarter $ 2.38 $ 1.44
Second Quarter 3.19 1.25
Third Quarter 3.31 1.81
Fourth Quarter 2.19 1.00
2000
----
First Quarter $ 2.06 $ 1.00
Second Quarter 1.38 .91
Third Quarter 1.75 1.06
Fourth Quarter 1.31 .81
(b) The approximate number of holders of record of the Common Stock as of
October 18, 2000 was 357. The registrant believes there are in excess of
1,000 beneficial holders of the Common Stock.
(c) (1) The registrant has no present intention of paying any cash
dividends in the foreseeable future and intends to use its net
income, if any, in its operations.
(2) The registrant is prohibited from paying dividends under its loan
agreement with Congress Financial Corporation ("Congress").
However, within the terms of its agreement, Congress has approved
a buy-back of 320,000 shares for up to $400,000.
-12-
ITEM 6. SELECTED FINANCIAL DATA
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
Year Ended June 30,
- --------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------
(In thousands, for continuing operations, except for per share data)
- --------------------------------------------------------------------------------------
Operations
- --------------------------------------------------------------------------------------
Net sales $ 27,101 $ 24,094 $ 24,807 $ 19,907 $ 17,889
- --------------------------------------------------------------------------------------
Income/(loss) from
continuing operations (1,671) 29 256 (621) 521
- --------------------------------------------------------------------------------------
Basic income (loss) per
share from continuing
operations (.99) .02 .15 (.44) .87
- --------------------------------------------------------------------------------------
Diluted income (loss) per
share from continuing
operations (.99) .02 .15 (.44) .87
- --------------------------------------------------------------------------------------
Cash dividends per share(1) 0 0 0 0 0
- --------------------------------------------------------------------------------------
As of June 30,
- --------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------
(In thousands, except for per share data)
- --------------------------------------------------------------------------------------
Financial condition
- --------------------------------------------------------------------------------------
Total assets $ 12,682 $ 11,806 $ 16,575 $ 13,381 $ 11,546
- --------------------------------------------------------------------------------------
Long-term debt 693 396 538 811 434
- --------------------------------------------------------------------------------------
Stockholders' equity 1,373 3,044 3,899 4,387 2,604
- --------------------------------------------------------------------------------------
Book value per share(2) 0.81 1.80 2.32 2.61 3.40
- --------------------------------------------------------------------------------------
- ----------
(1) Worksafe has never declared or paid a cash dividend on its Common
Stock. It is the policy of the Board of Directors to retain earnings for use in
Worksafe's operations. In addition, Worksafe is prohibited from paying such
dividends based on its loan agreement with Congress.
(2) Adjusted to reflect a 1 for 10 reverse stock split effective August 12,
1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Worksafe operated in the manufacturing and distribution industry segments until
the end of its second fiscal quarter for the year ending June 30, 1999, when it
sold its distribution business. Since such sale, Worksafe continues only its
manufacturing operation. For an understanding of the significant factors that
influenced Worksafe's performance during the past three fiscal years, the
following discussion should be read in conjunction with the consolidated
-13-
financial statements, including the related notes and other information
appearing elsewhere in this report.
Worksafe's continuing operations now consist of its manufacturing operation
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 financial statements for fiscal 1999, and 1998 have been
restated to reflect the former distribution division as a discontinued operation
and Management's Discussion and Analysis discusses only the continuing
operations.
Results of Operations
Fiscal 2000 Compared to Fiscal 1999
Net sales for fiscal 2000 were $27,101,000 as compared to $24,094,000 for fiscal
1999, an increase of 12.5%. This increase in fiscal 2000 was primarily due to
increased inventory to support an increase in customer demand resulting from
industry consolidation, sales of higher priced products, and the realization of
additional sales volume from focusing marketing efforts in new and existing
markets and industry segments.
Gross profit of $3,055,000, or 11.3% of net sales, for fiscal 2000 decreased
from the $3,434,000, or 14.3% of net sales, for fiscal 1999. These decreases,
both in amount and as a percentage of net sales, were mainly due to a negative
inventory discrepancy of $1,350,000, or 5% of net sales, between the Company's
physical inventory count and the amount recorded on the general ledger, which
was discovered in connection with the completion of the fiscal 2000 year-end
closing, which has been charged to cost of goods sold. Worksafe has engaged
forensic consultants to assist in the determination of the cause of this
discrepancy. This investigation is presently ongoing. However, Worksafe does
have $1,000,000 of insurance coverage for employee theft and $1,000,000 for
third party theft. Worksafe has not yet filed a claim against its policies, but
has notified the applicable carriers of its intention to file a claim, although
there can be no assurance that Worksafe will be awarded any benefit as a result
of any claim filed. In addition, Worksafe has made certain managerial changes at
its manufacturing facilities, and has hired outside consultants to review the
operational structure for potential cost savings measures.
Selling, general and administrative expenses for the fiscal year ended June 30,
2000 were $4,059,000, or 15.0% of net sales, compared to approximately
$2,915,000, or 12.1% of net sales, for the prior fiscal year. These increases,
both in amount and as a percentage of net sales, were mainly due to increased
freight rates and fuel surcharges, increased sales orders on which Worksafe pays
the freight, increased advertising to support sales growth and increased
commissions and salaries.
Interest expense was $683,000 for fiscal 2000, an increase of $119,000 when
compared to fiscal 1999. This increase was due to higher average borrowings from
Congress as well as higher interest rates in fiscal 2000 as compared to fiscal
1999.
Fiscal 1999 Compared to Fiscal 1998
Net sales for fiscal 1999, were $24,094,000 as compared to $24,807,000 for
fiscal 1998, a decrease of 2.9%. This decrease in sales in fiscal 1999 was in
large part due to the fact that manufacturing inventory, which normally would
have been sold directly to customers during the second half of fiscal 1999, was
instead transferred as part of the second quarter transaction with Arbill, who
in turn sold the inventory to their customers. In addition, in prior years,
Worksafe realized as part of its manufacturing sales, the sales price to
end-users. Since the sale to Arbill of the discontinued operation, the sales
price realized was the price to Arbill, a distributor, where the sales price is
lower than the price to the end-user.
Worksafe's gross margin decreased to 14.3% for fiscal 1999 from 16.8% for fiscal
1998. These reductions were
-14-
the continuing results of the competitive environment in the marketplace as well
as the lower margins on sales to distributors as opposed to end-users. In a
continued effort to increase margin levels, Worksafe continues to take major
steps to reduce overhead expenses, i.e., by producing more products in Mexico,
and increasing efficiencies in material utilization.
Selling, general and administrative expenses for the year ended June 30, 1999,
were approximately $2,915,000, 12.1% of sales, compared to approximately
$3,391,000, 13.7% of sales, for the same period last year. This decrease as a
percentage of sales was mainly due to lower salaries and related benefits.
Worksafe took advantage of more vendor rebates in fiscal 1999, due to improved
cash availability.
Interest expense was approximately $563,000 for fiscal 1999, an increase of
approximately $2,000 when compared to fiscal 1998.
Income from continuing operations for fiscal 1999 decreased to $29,000 as
compared to $256,000 for fiscal 1998. This decrease was a direct result of the
aforementioned decrease in sales and gross margins.
-15-
Liquidity and Capital Resources
As of June 30, 2000, Worksafe had a working capital deficit of $552,000 as
compared to working capital of $850,000 as of June 30, 1999. The working capital
deficit is primarily the result of the $1,671,000 net loss incurred in fiscal
2000. A significant factor giving rise to the fiscal 2000 net loss relates to a
$1,350,000 inventory discrepancy that management believes occurred in the fourth
quarter. Management intends to file a claim with its insurance carriers
regarding this inventory discrepancy, however, there can be no assurance as to
the amount of recovery, if any, resulting from such claim.
Worksafe has a line of credit agreement (the "Agreement") with Congress
Financial Corporation ("Congress"), which expires in October 2002. The line
provides for borrowings of up to $8,000,000, with interest payable monthly at
.75% in excess of prime (9.5% as of June 30 2000), and an unused line fee of
1/4% per year. The limits on borrowings are 85% of eligible accounts receivable
and 55% of eligible inventory. The maximum amount Worksafe can borrow on the
inventory portion is $3,600,000. The amounts outstanding under the line as of
June 30, 2000 and June 30, 1999, were approximately $6,564,000 and $5,699,000,
respectively. The loan is subject to certain working capital and net worth
requirements and is collateralized by all of the assets of Worksafe (except for
the Huntington Property, which is subject to a first mortgage of $650,000). The
Agreement prohibits the payment of cash dividends. Worksafe is in technical
default of certain loan covenants contained in the Agreement with Congress,
whereby Congress has the right to demand repayment. To date, Congress has not
demanded repayment. Should Congress demand repayment of the amounts due under
the line, the mortgage on the Huntington Property would be in default and become
due and payable as well.
Congress has been advised of the net loss and technical defaults that have
caused Worksafe's current negative working capital position. While there is no
formal agreement, Congress has been providing Worksafe with an overdraft
facility, and Worksafe has been in engaged in ongoing discussions with Congress
in an effort to obtain additional increases in availability. Worksafe is also
considering alternative financing sources such as strategic investors and
lenders. There can be no assurance that Congress will not declare the
indebtedness immediately due payable, and that there will be other sources of
financing for Worksafe.
Management has been developing a broad operational plan, which provides for
personnel reductions, alternative sources of lower cost raw materials,
consolidation of certain manufacturing operations, reconfiguration of sales
territories and lower sales commissions. Management believes that with the
successful execution of this plan, and the necessary financing arrangement, they
will have sufficient working capital to continue in operations for the next 12
months. However, there can be no assurance that Worksafe will be able to obtain
the necessary financing, at favorable terms, needed to implement this plan.
Additionally, even with the necessary financing, due to uncertainties involved
in the execution of this plan, many of which are outside the control of
Worksafe, there can be no assurance that Worksafe will be able to successfully
implement this plan. As a consequence, Worksafe's independent public accountants
have included a additional paragraph in their audit opinion with regard to the
uncertainty as to Worksafe's ability to continue as a going concern.
Net cash used in operating activities was principally a result of the net loss
incurred during fiscal 2000.
Cash flows used in investing activities was a result purchases of property and
equipment. Worksafe has no material commitments for capital expenditures.
Cash flows provided by financing activities were principally a result of net
borrowings of from Congress.
On September 9, 1999, the Board of Directors of Worksafe approved a buy-back
plan of up to 320,000 shares of Worksafe's common stock to be purchased over the
next two years at the discretion of Worksafe. Congress has authorized Worksafe
to expend up to $400,000 for such purchase. No shares have been purchased to
date.
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.
-16-
Worksafe may become a party to additional asbestos-related actions in the
future. Worksafe is also party to a non-asbestos product liability action. While
as indicated in Item 3. Legal Proceedings, of this Form 10-K, legal and
settlement costs to Worksafe have not been material to date, Worksafe cannot, at
this time, determine the outcome of these uncertainties which may have an
adverse effect upon its future liquidity.
FORWARD LOOKING STATEMENTS
From time to time, information provided by Worksafe or statements made by its
employees, or information provided in it filing with the Securities and Exchange
Commission may contain forward-looking information. Any statements contained
herein or otherwise made that are not statements of historical fact may be
deemed to be forwarded-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.
RISKS
Worksafe is a party to approximately 5,000 cases involving approximately 18,000
plaintiffs as of June 30, 2000 with respect to asbestos litigation and
additional asbestos actions continue to be brought against it. During the year
ended June 30, 2000 approximately 1,700 asbestos actions were instituted against
Worksafe concerning approximately 10,500 plaintiffs and additional asbestos
actions are anticipated in the future. 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
-17-
will continue to be adequate in the future. Worksafe is unable to ascertain the
total extent of its insurance applicable to asbestos claims against it or the
extent to which its insurance carriers will provide coverage in the future.
There can be no assurances that asbestos litigation will not have an adverse
affect upon Worksafe. For a more complete discussion on asbestos litigation and
Worksafe's insurance coverage, reference is made to Item 3 of this Form 10-K,
and future filings under Forms 10-Q and Forms 10-K.
Worksafe has competitors that have greater financial, management, sales and
technical resources than Worksafe. 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. Loss of Dupont as a supplier of Tyvek (R) would have a material
adverse effect on Worksafe's operations. Worksafe is also required to maintain
substantial inventory for its operations in order to meet the immediate
requirements of its customers who require products on short notice. There can be
no assurances that Worksafe will be able to maintain sufficient inventories or
that Worksafe will not return to period where there is not sufficient working
capital to maintain its inventories to meet the needs of its customers.
Worksafe also enjoys the benefits of various tax incentives with respect to its
operations in Puerto Rico which are described in Item 1 of Part I of this Form
10-K. As Puerto Rico's tax exemptions are reduced or expired, 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 general to Worksafe.
Item 7a. 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. As of June
30, 2000, an aggregate principal amount of approximately $6,564,000 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 $65,600 in interest in that year. Worksafe
does not utilize derivative financial instruments to hedge against changes in
interest rates or for any other purpose.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements annexed hereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The following sets forth the names and ages of all of the directors of
Worksafe:
-18-
Name Age Office Held
---- --- -----------
Lawrence Densen 42 President and Chief Executive Officer
Alan E. Densen 66
Anthony P. Towell 69 Senior Vice President and Secretary
Jay Rothenberg 54
James A. Favia 67
Charles Holzberg 65
Dr. Bruce Friedman 42
The Board of Directors is divided into two classes. The terms of James
Favia, Bruce Friedman, and Charles Holzberg do not expire until the
annual meeting following fiscal year ended June 30, 2001 and when their
successors are chosen. The terms of office of Lawrence Densen, Alan E.
Densen and Anthony P. Towell expire following the next annual meeting and
when their successors are chosen.
(b) Identification of Executive Officers
The following sets forth the names and ages of all executive officers of
the registrant and the positions held by each:
Officers and First Elected Officer
Name Age Position Held of Worksafe
---- --- ------------- ---------------------
Lawrence Densen 42 President and Chief Executive Officer 1986
Anthony P. Towell 69 Senior Vice President and Secretary 1989
Arthur Wasserspring 59 Vice President of Finance and
Chief Financial Officer 1997
Richard Boyen(1) 59 Vice President of Manufacturing 1997
- ----------
(1) During October, 2000 his employment was terminated by the Company.
All of the above executive officers have been elected to serve until
the next annual meeting of the Board of Directors or until their
respective successors are elected and qualified.
(c) Not applicable.
(d) Lawrence Densen is the son of Alan E. Densen.
(e) Lawrence Densen became President and Chief Executive Officer of Worksafe
effective March 1, 1997. Prior to this time, he served as Senior
Vice-President and from 1986 a Vice-President of Worksafe. He has been a
director of Worksafe since 1986. He is the son of Alan E. Densen.
Alan E. Densen was Senior Vice-President until April 1999, has been a
director of Worksafe since 1958 and Co-Chairman of the Board since March
1997. From 1958 through March 1, 1997 (except for the period from
September 1993 to January 1994 when he served as Senior Vice-President),
he served as President and Chief Executive Officer of Worksafe. He was
also Treasurer and Chief Financial Officer of Worksafe through 1992. He
is the father of Lawrence Densen.
Anthony P. Towell is a Senior Vice-President and has been Secretary of
Worksafe since 1993, as well as Vice-President and Co-Chairman of the
Board since March 1997. From 1992 through February 1,1997, he served as
Worksafe's Vice-President of Finance, Treasurer, and Chief Financial
Officer, and from 1989 to 1992 he served as its Vice- President. He has
been a director of Worksafe since 1989. In addition, he has
-19-
been a director of Windswept Environmental Group, Inc. ("Windswept")
(formerly Tradewinds, Inc.) since November 1996. He was a director from
1988 through September 1997 of Nytest Environmental Inc. ("Nytest"), a
hazardous waste testing company. Mr. Towell was a director of Ameridata
Technologies, Inc. ("Ameridata"), a provider of computer products and
services, from 1991 to 1996. Since January 1998, Mr. Towell has been a
director of GulfWest Oil Company, an oil exploration and production
company. The common stock of Windswept and GulfWest Oil Company are
registered under Section 12(g) of the Securities and Exchange Act of 1934
(the "Exchange Act"), and the common stock of Ameridata and GulfWest Oil
Company were registered respectively under Section 12(g) and (b) of the
Exchange Act.
Jay Rothenberg has been a director of Worksafe since February 2000. He is
President of Palm Sales Associates, a manufacturing representative
company selling various industrial products. He devotes only a limited
portion of his time to the business of Worksafe.
James A. Favia has been a director of Worksafe since July 26, 1995. He
has been a consultant during the past five years to Donald & Co.
("Donald"), which has acted in the past as Worksafe's investment advisor.
He is a chartered financial analyst and has an MBA in finance that he
obtained from New York University in 1959. He devotes only a limited
portion of his time to the business of Worksafe.
Charles Holzberg has been a director of Worksafe since December 5, 1996.
He has been President, since 1975, of The Charles Holzberg Agency, Inc.,
a general agent for the sale of life insurance. He devotes only a limited
portion of his time to the business of Worksafe.
Dr. Bruce Friedman has been a director of Worksafe since April 16, 1997.
Since 1988, he has served as President of the Flower Hill Chiropractic
Office, P.C., where he is a chiropractic doctor. He devotes only a
limited portion of his time to the business of Worksafe.
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than ten
percent of the Company's Common Stock, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission.
Executive officers, directors and greater than ten percent beneficial owners are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on a review of the copies of such forms
furnished to the Company and written representations from the Company's
executive officers and directors, the Company believes that during the fiscal
year ended June 30, 1999, all Section 16(a) filing requirements applicable to
its executive officers, directors and greater than ten percent beneficial owners
were complied with, with the exception that the extension during December 1999
of the exercise date of warrants exercisable at $5.623 per share, held by
Lawrence Densen, Alan E. Densen and Anthony P. Towell until March 31, 2005, was
not reported until March 2000. This delay in filing Form 4's for such extensions
was inadvertent.
Item 11. Executive Compensation
Summary Compensation Table
The following describes the components of the total compensation of the CEO and
each other executive officer of the Company whose total annual salary and bonus
exceeds $100,000.
-20-
Summary Compensation Table
Annual Compensation Long term compensation
------------------- ---------------------
Awards Payouts
----------------------------- --------------------------
Other Securities All
Name and Annual Restricted underlying LTIP other
principal Salary Bonus compen- stock options/ payouts compen-
position Year ($) ($) sation($) award(s)($) SARs(#)(1) ($) sation($)
- -------- ---- ------ ----- ---------- --------- ---------- ------ --------
Lawrence 2000 169,838 -0- 4,200 -0- 8,000 -0- -0-
Densen, 1999 175,409 30,000 4,200 -0- 15,000 -0- -0-
Pres/CEO 1998 121,441 -0- 4,200 -0- 1,500 -0- -0-
Arthur 2000 102,921 -0- -0- -0- -0- -0- -0-
Wasser- 1999 98,526 20,000 -0- -0- 10,000 -0- -0-
spring, 1998 89,988 -0- -0- -0- -0- -0- -0-
VP of
Finance,
Treasurer
and CFO
Richard 2000 106,167 -0- -0- -0- -0- -0- -0-
Boyen, 1999 104,116 -0- -0- -0- -0- -0- -0-
VP of 1998 96,500 -0- -0- -0- -0- -0- -0-
Manufacturing
Operations
- ----------
(1) See below for all options granted and exercised during the last fiscal
year.
Options/SAR Grant Table
Option/SAR Grants and Exercises in Last Fiscal Year
Option/SAR Grants in Last Fiscal Year
[Individual Grants]
Number of Percent of Potential realizable value
securities total options/ at assumed annual rates
underlying SARs granted Exercise of stock price apprecia-
Options/SARs in fiscal or base Expiration tion for option term
Name granted (#) year price($/Sh) Date 5% 10%
- ----- -------------- ------------ ------------ ----------- ---- -----
Lawrence
Densen, 8,000 12% 1.0625 11/04/04 $10,848 $13,689
Arthur
Wasser-
spring -- -- -- -- -- --
Richard
Boyen -- -- -- -- -- --
-21-
Aggregated Option/sar Exercises in Last Fiscal Year
And Fy-end Option/sar Values
Number
of securities Value
underlying unexercised in-
unexercised the-money options
Shares SARs at FY-end (#) SARs at FY-end($)
acquired on Value exercisable / exercisable /
Name exercise (#) realized ($) unexercisable(1) unexercisable
- ----- -------------- ----------- ------------- -------------
Lawrence
Densen -- -- 191,264/68,000 -0-/-0-
Arthur
Wasser-
spring -- -- 29,200/32,000 -0-/-0-
Richard
Boyen -- -- 9,700/32,000 -0-/-0-
- --------------
(1) Includes all options, rights and warrants owned by such person.
Members of the board of directors who are not employees of the Company
receive a fee of $500 for each board of directors meeting attended in person.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL FEATURES
As of July 1, 1995, Lawrence Densen entered into an employment agreement
("Employment Agreement") which provided for him to serve as the Company's
Vice President for a term of five years. Effective March 1, 1997,
Lawrence Densen signed a modification agreement (the "1997 Modification
Agreement"). The 1997 Modification Agreement of Lawrence Densen changed
his position with the Company to President. Pursuant to the 1997
Modification Agreement, the Company may terminate his Employment
Agreement as a result of physical or mental disability, or failure or
inability to perform required duties for a period of six (6) months in
any two-year period. At the end of each fiscal year during the term of
the Employment Agreement, it is automatically extended for one additional
year to be added at the end of the then current term of the agreements,
unless the Board of Directors determines not to extend the Employment
Agreements. Lawrence Densen may also terminate his Employment Agreement
upon 30 days written notice. He is also entitled to receive an annual
bonus, which has been waived through June 30, 2000, equal to 3 1/3% of
the Company's earnings before interest and taxes for the fiscal year
ended June 2000 and each fiscal year thereafter during the term of the
Employment Agreement, and he is also entitled to .75% of the Company's
revenues in excess of $20.5 million which has also been waived through
June 30, 2000.
The Employment Agreement entered into by Lawrence Densen includes provisions
that provide for his right to terminate his Employment Agreement and thereby
receive additional compensation, as provided below, in the event that he is not
elected or retained as President or as a director of the Company; the Company
acts to materially reduce his duties and responsibilities under the Employment
Agreement; the Company changes its geographic location; his base compensation is
reduced by 10% or more; any successor to the Company fails to assume the
Employment Agreement; any other material breach of the Employment Agreement is
not cured by the Company within 30 days; and a "Change of Control" occurs by
which a person, other than a person who is an officer and/or director of the
Company as of the effective date of the agreement, or a "group" as defined in
Section 13(d)(3) of the Securities
-22-
Exchange Act of 1934, becomes the beneficial owner of 20% or more of the
combined voting power of the then outstanding securities of the Company or the
composition of the board of directors changes so that officers of the Company no
longer hold a majority of the seats.
In the event that Lawrence Densen terminates his position because of any of the
aforesaid reasons other than a "Change of Control", or if the Company terminates
his employment in any way that is a breach of the Employment Agreement by the
employer, he shall be entitled to receive, in addition to his salary
continuation, a cash payment equal to his total base salary plus projected
expenses and bonuses for the remainder of the term thereof, payable within 30
days of termination and all stock options, warrants and other stock appreciation
rights granted by the Company, with the exception of qualified incentive stock
option plans, to them shall become immediately exercisable at an exercise price
of $0.10 per share. In the event that he either owns or is entitled to receive
any unregistered securities of the Company, than the Company shall register such
securities. In the event that there is a "Change of Control", Lawrence Densen
shall be paid within 30 days thereof a one-time bonus equal to his total minimum
base salary for the next three years.
Arthur Wasserspring, Vice President of Finance and Richard Boyen, Vice President
of Manufacturing Operations each have employment agreements with the Company.
The agreements each terminate January 31, 2002 and automatically continues for
an additional year to year thereafter, unless canceled by either party, at least
a year in advance. Each agreement provides that the employee shall have the
right to terminate his employment within six months of the withdrawal from the
Company's board of directors of a majority of the board as constituted as of
February 1, 1997, other than by reason of a voluntary resignation or demise of
such directors and receive a one-time bonus equal to one dollar less than three
times the present value of the base amount of the employee's salary, as
determined in accordance with Section 280G of the Internal Revenue Code, as
amended. Each agreement also provides that the employee may terminate his
agreement and receive his compensation until the end of the agreement, and for
the vesting of all options and warrants, if the employee is not retained in his
position as officer, his duties are immediately reduced, the geographic location
of where his duties are performed are changed, any successor employer does not
assume their agreements or a material breach of the agreement by the employer.
The Company terminated Richard Boyen's employment for cause during October,
2000. This may give rise to a claim by Richard Boyen for damages.
-23-
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The following table sets forth, as of October 24, 2000, the ownership
with respect to each person known to own beneficially more than 5% of the
Company's common stock:
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Owner(1) of Class(1)
- -------------- -------------------- ------------------- -----------
Common Stock Lawrence Densen 296,814(2) 16%
$0.12 par value 130 W. 10th Street
Huntington Station, NY
Common Stock Alan E. Densen 258,566(2) 14%
$0.12 par value 130 W. 10th Street
Huntington Station, NY
Common Stock Anthony P. Towell 289,266(2) 16%
$0.12 par value 130 W. 10th Street
Huntington Station, NY
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934.
(2) Includes 100,000 shares of Common Stock for each Messrs. L. Densen, A.
Densen, and A. Towell, who are each trustees under a voting trust
agreement dated April 17, 1997, (the "Voting Trust Agreement") by and
among Eastco Glove Technologies, Inc., the Company, Steven Robins and
Phillip Robins. The Voting Trust Agreement was a condition to the closing
of a stock exchange agreement (the "Stock Exchange Agreement") dated
April 17, 1997, by and among Eastco Glove Technologies, Inc., the
Company, Steven Robins and Phillip Robins. Pursuant to the Stock Exchange
Agreement and the Voting Trust Agreement, 100,000 shares of the Company's
Common Stock were issued, said shares being issued in the names of
Lawrence Densen, Alan E. Densen and Anthony P. Towell as trustees until
the five (5) year term of the voting trust expires or Steven Robins or
Phillip Robins desires to sell the shares after one year pursuant to Rule
144 of the Securities Act of 1933.
-24-
(b) The following table sets forth as of October 24, 2000, the number of shares
of Common Stock owned by each of the present directors of the Company, together
with certain information with respect to each:
Shares
Director Beneficially Percent
Name Since Owned (1) (1)
- ---- ----- ----------- ------
Lawrence Densen 1986 296,814(2) 16%
Alan E. Densen 1958 258,566(2) 14%
Anthony P. Towell 1989 289,266(2) 16%
Jay Rothenberg 1999 9,000 *
James Favia 1995 22,000 *
Charles Holzberg 1996 20,000 *
Dr. Bruce Friedman 1997 19,000 *
- -------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934.
(2) Includes 100,000 shares of Common Stock for each Messrs. L. Densen, A.
Densen, and A. Towell, who are each trustees under a voting trust
agreement dated April 17, 1997, (the "Voting Trust Agreement") by and
among Eastco Glove Technologies, Inc., the Company, Steven Robins and
Phillip Robins. The Voting Trust Agreement was a condition to the closing
of a stock exchange agreement (the "Stock Exchange Agreement") dated
April 17, 1997, by and among Eastco Glove Technologies, Inc., the
Company, Steven Robins and Phillip Robins. Pursuant to the Stock Exchange
Agreement and the Voting Trust Agreement, 100,000 shares of the Company's
Common Stock were issued, said shares being issued in the names of
Lawrence Densen, Alan E. Densen and Anthony P. Towell as trustees until
the five (5) year term of the voting trust expires or Steven Robins or
Phillip Robins desires to sell the shares after one year pursuant to Rule
144 of the Securities Act of 1933.
As of October 24, 2000, the directors and executive officers of the Company,
nine persons, owned of record and beneficially a total of 714,646 shares
representing approximately 33% of the Common Stock of the Company. The stated
ownership of these shares assumes the exercise of 598,694 shares issuable upon
the exercise of options, rights and warrants exercisable within 60 days of
October 20, 2000, but reflects the ownership of the shares described in the
preceding footnote (2) above for each of the three directors named therein, only
once.
-25-
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A group of investors (the "Associates") held a first mortgage on the Company's
executive offices in Huntington Station, New York in the principal amount of
approximately $352,000 as of May 23, 2000, which was satisfied as of that date.
The wife of Anthony P. Towell, an executive officer and director of the Company,
Charles Holzberg, director of the Company and the wife of Alan E. Densen, a
director, together own approximately 40% thereof. During the fiscal year ended
June 30, 2000 and prior to payment in full of the mortgage, the Company paid
Associates $71,092 in principal and interest on the mortgage of which $42,769
constituted interest. The first mortgage held by Associates, which was issued in
1992 and upon which interest was being paid at the rate of 14%, was scheduled to
come due on July 1, 1997, in the amount of approximately $434,000. Associates
and the Company agreed to extend the mortgage for five years with interest at
12% per annum or 3% over prime, whichever is greater. On May 23, 2000 the
Company obtained a new mortgage from a non-affiliate bank and paid off the
mortgage to Associates in full.
The Company has extended from March 31, 2000 to March 31, 2005, the exercise
date of warrants to acquire 41,618 shares at $5.623 held by each Lawrence
Densen, Alan E. Densen and Anthony P. Towell.
Considering the circumstances of each transaction, the Company believes that all
transactions heretofore with officers/directors and shareholders of the Company
and their affiliates have been made, and in the future will be made, on terms no
less favorable to the Company than those available from unaffiliated parties and
will be approved by a majority of the disinterested directors.
Item 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference to the registrant's
Registration Statement on Form SB-2 (No. 333-09517), as filed on August
2, 1996, and as amended:
Exhibit Description of Exhibit
- ------- ----------------------
1.01 Form of Standby Agreement (with Royce Investment Group Inc.)
3.01 Certificate of Incorporation, as amended
3.01.1 Certificate of Amendment to Certificate of Incorporation filed August 12, 1996
3.01.2 Certificate of Amendment to Certificate of Incorporation dated February 15, 1989
3.02 By-Laws
3.02.1 Amendments to By-Laws adopted September 1996
4.06 Form of Underwriters (Royce Investment Group Inc.) Warrant
10.01 Employment Agreement with Alan E. Densen, dated as of July 1, 1995
10.02 Employment Agreement with Lawrence Densen, dated as of July 1, 1995
10.03 Employment Agreement with Anthony P. Towell, dated as of July 1, 1995
10.05 Amendment to Financing Agreements with Congress Dated July 1996
10.07 Form of Modification Agreement to Employment Agreements with Alan Densen, Lawrence Densen
and Anthony Towell and Waiver
99.01 1996 Incentive Stock Option Plan as amended to date
99.02 1996 Non-Qualified Stock Option Plan as amended to date
99.03 Form of Warrants held by Anthony Towell dated January 31, 1994 (and whose exercise date has been
extended to March 31, 2005)
99.04 Form of Option Agreements granted as of January 20, 1995, with Alan Densen, Anthony Towell and
Lawrence Densen
99.06 Primary insurance coverage for asbestos for Worksafe
99.07 Excess insurance coverage for asbestos for Worksafe
99.08 Insurance coverage for Puerto Rico Safety Equipment Corporation for asbestos
99.09 Defense and indemnity agreement dated March 26, 1990
99.10 Defense and indemnity agreement dated May, 1991
99.11 Letters between L'Abbate & Balkan, counsel for Eastco and Wilentz, Goldman & Spitzer, counsel
-26-
for plaintiffs' attorneys, dated February 3, 1994, and March 14, 1994,
respectively, with respect to settlement of New York cases
The following exhibits are incorporated by reference to Worksafe's Annual
Reports on Forms 10-K for the periods indicated:
For the year ended June 30, 1998:
10.01.1 Modification to employment agreement with Alan E. Densen dated March
1, 1997
10.02.1 Modification to employment agreement with Lawrence Densen dated March
1, 1997
10.03.1 Modification to employment agreement with Anthony P. Towell dated
March 1, 1997
10.10 Voting Trust agreement among Eastco Industrial Safety Corp., Alan E.
Densen, Anthony Towell, Lawrence Densen, Steven Robins and Phillip
Robins dated April 17, 1997
10.11 Employment agreement with Arthur Wasserspring dated February 1, 1997
10.12 Employment agreement with Richard Boyen dated February 1, 1997
10.13 Amendment #8 to Financing Agreements with Congress Financial Corp.
dated April 17, 1997
For the year ended June 30, 1999:
4.01 Form of Common Stock Certificate
10.16 Amendment Number 10 to line of credit agreement with Congress
10.17 Amendment Number 11 to line of credit agreement with Congress
21.01 Subsidiaries of the Registrant
-27-
The following exhibit is incorporated by reference to Worksafe's Form 10-Q for
the quarterly period ended December 31, 1998:
3.01.3 Certificate of Amendment to Certificate of Incorporation filed
December 17, 1998
The following exhibits are incorporated by reference to Worksafe's Form 8-K
filed on January 26, 1999:
10.14 Asset Purchase Agreement between the registrant and Arbill Industries
Inc. dated December 14, 1998 (without exhibits and schedules)
10.15 Amendment Number 9 to line of credit agreement with Congress
The following exhibits are annexed hereto:
10.04 Accounts Financing Agreement (Security Agreement), Covenants
Supplement to Accounts Financing Agreement (Security Agreement),
Inventory Loan Agreement and Inventory and Equipment Security
Agreement Supplement to Accounts Financing Agreement (Security
Agreement) executed as of October 1, 1991,with Congress.
-28-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WORKSAFE INDUSTRIES INC.
By: /s/ LAWRENCE DENSEN Date: November 13, 2000
-------------------
LAWRENCE DENSEN
President and Chief Executive Officer
By: /s/ ARTHUR WASSERSPRING Date: November 13, 2000
-----------------------
ARTHUR WASSERSPRING
Vice President of Finance
and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ LAWRENCE DENSEN Date: November 13, 2000
-------------------
LAWRENCE DENSEN
Director
By: /s/ ALAN E. DENSEN Date: November 13, 2000
------------------
ALAN E. DENSEN
Director
By: /s/ CHARLES HOLZBERG Date: November 13, 2000
--------------------
CHARLES HOLZBERG
Director
By: /s/ JAY ROTHENBERG Date: November 13, 2000
------------------
JAY ROTHENBERG
Director
By: /s/ ANTHONY P. TOWELL Date: November 13, 2000
---------------------
ANTHONY P. TOWELL
Director
By: /s/ JAMES A. FAVIA Date: November 13, 2000
------------------
JAMES A FAVIA
Director
By: /s/ BRUCE FRIEDMAN Date: November 13, 2000
------------------
BRUCE FRIEDMAN
Director
-29-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Worksafe Industries Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Worksafe
Industries Inc. (a New York corporation) and subsidiaries (the "Company") as of
June 30, 2000 and 1999, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended June 30, 2000. These financial statements and the Schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Worksafe Industries Inc. and
subsidiaries as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements for fiscal 2000 have been
prepared assuming the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered a significant loss
from continuing operations in fiscal year 2000, has negative working capital,
and is in technical default of certain loan covenants contained in its line of
credit agreement. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
Melville, New York
November 8, 2000
1
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
----------------------------
ASSETS 2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 129,352
Accounts receivable, net of allowance for doubtful
accounts of $80,500 and $72,500, respectively 4,202,401 3,485,813
Inventories 5,263,245 4,582,581
Other current assets 598,516 812,868
Net assets of discontinued operation -- 205,142
------------ ------------
Total current assets 10,064,162 9,215,756
PROPERTY, PLANT AND EQUIPMENT, net 2,161,123 2,112,886
EXCESS OF COST OVER NET ASSETS ACQUIRED 380,865 403,547
OTHER ASSETS 75,411 73,832
------------ ------------
Total assets $ 12,681,561 $ 11,806,021
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Loans payable $ 6,563,839 $ 5,698,642
Accounts payable 3,710,860 2,289,220
Accrued expenses and other liabilities 297,980 226,580
Current portion of long-term debt 43,336 151,411
------------ ------------
Total current liabilities 10,616,015 8,365,853
LONG-TERM DEBT 692,964 396,447
------------ ------------
Total liabilities 11,308,979 8,762,300
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9 and 11)
SHAREHOLDERS' EQUITY (DEFICIT):
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;
1,686,579 shares issued and outstanding 202,390 202,390
Additional paid-in capital 9,844,338 9,844,338
Accumulated deficit (8,674,146) (7,003,007)
------------ ------------
Total shareholders' equity 1,372,582 3,043,721
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 12,681,561 $ 11,806,021
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
2
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
NET SALES $ 27,101,030 $ 24,093,811 $ 24,807,480
COST OF GOODS SOLD 24,046,504 20,659,453 20,644,336
------------ ------------ ------------
Gross profit 3,054,526 3,434,358 4,163,144
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,058,270 2,914,617 3,390,604
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (1,003,744) 519,741 772,540
OTHER INCOME, net (15,201) (72,768) (44,166)
INTEREST EXPENSE 682,596 563,451 561,128
------------ ------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (1,671,139) 29,058 255,578
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (1,454,167) (744,063)
Gain on sale of discontinued operation -- 532,972 --
------------ ------------ ------------
Net loss $ (1,671,139) $ (892,137) $ (488,485)
============ ============ ============
BASIC AND DILUTED PER SHARE INFORMATION:
(Loss) Income from continuing operations $ (.99) $ .02 $ .15
Loss from discontinued operations -- (.87) (.44)
Gain on sale of discontinued operation -- .32 --
------------ ------------ ------------
Net loss $ (.99) $ (.53) $ (.29)
============ ============ ============
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 1,686,579 1,684,246 1,683,079
============ ============ ============
Diluted 1,686,579 1,691,452 1,696,336
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
3
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Total
------------------------ Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
----------- ---------- ----------- ----------- -------------
BALANCE, June 30, 1997 1,683,079 $ 201,970 $ 9,807,708 $(5,622,385) $ 4,387,293
Net loss -- -- -- (488,485) (488,485)
----------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1998 1,683,079 201,970 9,807,708 (6,110,870) 3,898,808
Stock-based compensation -- -- 32,500 -- 32,500
Shares issued upon exercise of stock options 3,500 420 4,130 -- 4,550
Net loss -- -- -- (892,137) (892,137)
----------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1999 1,686,579 202,390 9,844,338 (7,003,007) 3,043,721
Net loss -- -- -- (1,671,139) (1,671,139)
----------- ----------- ----------- ----------- -----------
BALANCE, June 30, 2000 1,686,579 $ 202,390 $ 9,844,338 $(8,674,146) $ 1,372,582
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
4
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income from continuing operations $ (1,671,139) $ 29,058 $ 255,578
Adjustments to reconcile net (loss) income from continuing operations
to net cash (used in) provided by operating activities:
Depreciation and amortization 280,709 244,621 236,307
Provision for losses on accounts receivable 12,151 46,248 16,000
Loss on disposal of fixed assets -- 16,173 --
Stock-based compensation expense -- 32,500 --
Net changes in assets and liabilities:
Accounts receivable (728,739) 22,441 (1,012,890)
Inventories (680,664) 1,789,045 (1,602,036)
Other current assets 214,352 (306,981) (49,290)
Other assets (1,579) (49,038) 36,544
Accounts payable 1,421,640 (1,099,830) 1,127,056
Accrued expenses and other liabilities 71,400 (54,989) 57,772
------------ ------------ ------------
Total adjustments 589,270 640,190 (1,190,537)
------------ ------------ ------------
Net cash (used in) provided by operating activities (1,081,869) 669,248 (934,959)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (306,264) (97,814) (280,888)
------------ ------------ ------------
Net cash used in investing activities (306,264) (97,814) (280,888)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings 650,000 -- --
Long-term debt repayments (461,558) (268,053) (274,320)
Borrowings under line of credit 15,233,050 31,095,163 35,919,028
Repayments under line of credit (14,367,853) (33,586,363) (33,146,861)
Proceeds from exercise of stock options -- 4,550 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,053,639 (2,754,703) 2,497,847
------------ ------------ ------------
Net cash (used in) provided by continuing operations (334,494) (2,183,269) 1,282,000
Net cash provided by (used in) discontinued operations 205,142 (4,218) (1,171,133)
Net cash provided by sale of discontinued operations -- 2,093,714 --
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (129,352) (93,773) 110,867
CASH AND CASH EQUIVALENTS, beginning of year 129,352 223,125 112,258
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ -- $ 129,352 $ 223,125
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for -
Interest $ 695,343 $ 779,443 $ 879,406
============ ============ ============
Income taxes $ 5,430 $ 3,832 $ 8,454
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
5
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. BUSINESS AND ORGANIZATION
Worksafe Industries Inc. and subsidiaries (the "Company") is a corporation
organized and existing under the laws of the State of New York, having been
incorporated since May 15, 1958. The Company manufactures limited-use and
reusable clothing and safety products sold to distributors for end use by
manufacturers, utilities, hospitals, glass handlers and others. Products include
headwear, hoods, coveralls, aprons, lab coats, gloves, and suits for handling
hazardous materials. Most sales come from disposable apparel made of E.I. DuPont
DeNemours Company's Tyvek(R), a spun bonded polyolefin. Products made of
Tyvek(R) accounted for approximately 70%, 67% and 75% of net sales for the years
ended June 30, 2000, 1999 and 1998, respectively. The Company has sales
representatives and independent distributors in the United States and Puerto
Rico.
The Company has incurred a net loss of $1,671,139 in fiscal 2000 and an
unaudited loss of approximately $268,000 in the first quarter of fiscal 2001.
The net loss was primarily due to a negative inventory discrepancy, between the
Company's physical inventory count and the amount recorded on the general
ledger, which was discovered in connection with the completion of the fiscal
2000 year-end closing. Management believes that this discrepancy occurred in the
fourth quarter. The Company is currently investigating the cause of this
discrepancy and has notified its insurance carriers of its intention to file a
claim, although there can be no assurance that the Company will be awarded any
benefit as a result of any claim filed. The Company has negative working capital
and negative cash flows from operations. As a result, the Company is in
technical default of certain loan covenants contained in its line of credit
agreement with Congress Financial Corporation ("Congress"), whereby Congress has
the right to demand repayment of all amounts outstanding under the line. To
date, Congress has not demanded repayment.
Congress has been advised of the net loss and technical defaults that have
caused the Company's current negative working capital position. While there is
no formal agreement, Congress has been providing the Company with an overdraft
facility, and the Company has been engaged in ongoing discussions with Congress
in an effort to obtain additional increases in availability. The Company is also
considering alternative financing sources such as strategic investors and
lenders.
Management has been developing a broad operational plan, which provides for
personnel reductions, alternative sources of lower cost raw materials,
consolidation of certain manufacturing operations, reconfiguration of sales
territories and lower sales commissions. Management believes that with the
successful execution of this plan, and the necessary financing arrangement, they
will have sufficient working capital to continue in operations for the next 12
months. However, there can be no assurance that the Company will be able to
obtain the necessary financing, at favorable terms, needed to implement this
plan. Additionally, even with the necessary financing, due to uncertainties
involved in the execution of this plan, many of which are outside the control of
the Company, there can be no assurance that the Company will be able to
successfully implement this plan. These factors raise substantial doubt as to
the Company's ability to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Worksafe
Industries Inc. and its subsidiaries, all of which are wholly-owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with maturities of
three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market, which represents estimated net realizable value.
6
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
Depreciation and Amortization
Property, plant and equipment are depreciated on a straight-line basis over the
estimated useful lives of the related assets. Leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful
lives or the remaining term of the lease.
Excess of Cost over Net Assets Acquired
The excess of cost over the net assets of a business acquired in April 1997 is
being amortized on a straight-line basis over its estimated useful life of 20
years. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company periodically evaluates this asset for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Management believes that there is no
impairment of this asset as of June 30, 2000.
Fair Value of Financial Instruments
The Company calculates the fair value of financial instruments and includes this
additional information in the notes to financial statements when the fair value
is different than the book value of those financial instruments. When the fair
value approximates book value, no additional disclosure is made. Cash and cash
equivalents, receivables, loans payable and long-term debt are reflected in the
consolidated balance sheets at amounts considered by management to reasonably
approximate their fair value because of their relatively short-term maturities,
recent incurrence or because they bear variable interest rates.
Stock-Based Compensation
The Company complies with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", by continuing to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," while providing the required pro forma disclosures as if the fair
value method had been applied.
Comprehensive Income
The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which requires companies to report all changes in equity,
except those resulting from investments by owners and distributions to owners,
for the period in which they are recognized. Comprehensive income is the total
of net income and all other nonowner changes in equity (or other comprehensive
income) such as unrealized gains/losses on securities classified as
available-for-sale, foreign currency translation adjustments and minimum pension
liability adjustments. Comprehensive and other comprehensive income must be
reported on the face of annual financial statements. For the years ended June
30, 2000, 1999 and 1998, there were no items that gave rise to comprehensive
income.
Segment Information
The Company complies with the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Reportable operating
segments are determined based on the Company's management approach. The
management approach, as defined by SFAS No. 131, is based on the way that the
chief operating decision-maker organizes the segments within an enterprise for
making operating decisions and assessing performance. The Company is organized
and operates in one operating segment, the manufacturing of protective clothing
and safety products that are sold to distributors for end use by manufacturers,
utilities, hospitals and others. As a result, no segment information has been
provided for the years ended June 30, 2000, 1999 or 1998.
7
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
Earnings Per Share
In accordance with SFAS No. 128, "Earnings Per Share," basic net loss per common
share ("Basic EPS") is computed by dividing net loss by the weighted-average
number of common shares outstanding. Diluted net loss per common share ("Diluted
EPS") is computed by dividing net loss by the weighted-average number of common
shares and dilutive common share equivalents and convertible securities then
outstanding.
Common stock equivalents were excluded from the computation for the year ended
June 30, 2000, as the inclusion of their impact would be anti-dilutive. The
number of dilutive common share equivalents included in diluted earnings per
share was 7,206 and 13,257 for the years ended June 30, 1999 and 1998,
respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Recently Issued Accounting Standards
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 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.
Shipping and Handling Costs
In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus
with respect to EITF Issue No. 00-10, "Accounting for Shipping and Handling
Revenues and Costs." The purpose of this issue discussion was to clarify the
classification of shipping and handling revenues and costs. The consensus
reached was that all shipping and handling billed to customers is revenue.
Further, a consensus was reached that the classification of shipping and
handling costs is an accounting policy decision that should be disclosed
pursuant to APB Opinion No. 22, "Disclosures of Accounting Policies." A company
may adopt a policy of including shipping and handling costs in cost of goods
sold. If shipping costs are significant and are not included in costs of goods
sold, a company should disclose both the amounts of such costs and the line
items on the statement of operations that included them.
This issue will require a restatement of prior periods for changes in
classification. This consensus is effective for the Company beginning with the
fourth quarter of fiscal 2001. The Company is in the process of quantifying the
impact of the adoption of this issue, which will not change previously reported
(loss) income from operations or net loss.
8
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
3. DISCONTINUED OPERATIONS
In January 1999, the Company sold its distribution division to Arbill
Industries, Inc. ("Arbill"), realizing net cash proceeds of approximately
$2,094,000. In addition, the Company also received a $315,000 note receivable.
This division specialized in the distribution of industrial safety products
manufactured by third parties. The sale resulted in a gain of approximately
$533,000. As a result of this transaction, the fiscal 1999 and 1998 operating
results, net assets and cash flows of the distribution division are reported as
a discontinued operation.
Summarized financial information for this discontinued operation as of June 30,
1999 and 1998, and for the fiscal years then ended is as follows:
1999 1998
------------ -------------
Net sales $ 4,240,767 $ 9,531,558
Gross profit 569,721 1,553,008
Loss from discontinued operations (1,454,167) (744,063)
Current assets 205,142 4,302,161
Total assets 205,142 4,325,654
Current liabilities -- 1,109,821
Net assets of discontinued operations 205,142 3,215,833
4. INVENTORIES
Inventories consist of the following as of June 30, 2000 and 1999:
2000 1999
----------- -------------
Raw materials $ 981,235 $ 1,571,734
Work-in-process 955,236 1,040,826
Finished goods 3,326,774 1,970,021
----------- -------------
Total $ 5,263,245 $ 4,582,581
=========== =============
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is comprised of the following as of June 30, 2000
and 1999:
Estimated
Useful
2000 1999 Life in Years
----------- ----------- -------------
Land $ 382,000 $ 382,000 N/A
Building and leasehold improvements 936,232 867,009 5 - 40
Machinery and equipment 2,278,193 2,144,065 3 - 10
Furniture and fixtures 262,115 159,196 7 - 10
----------- -----------
3,858,540 3,552,270
Less: Accumulated depreciation and amortization (1,697,417) (1,439,384)
----------- -----------
$ 2,161,123 $ 2,112,886
=========== ===========
Depreciation and amortization expense for property, plant and equipment for the
fiscal years ended June 30, 2000, 1999 and 1998 amounted to approximately
$258,000, $222,000 and $214,000, respectively.
9
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
6. INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes," which requires recognition of deferred tax liabilities and
assets based on differences between the financial accounting and income tax
bases of assets and liabilities using enacted tax rates in effect for the years
in which the differences are expected to reverse.
While SFAS No. 109 requires the recognition of a deferred tax asset for the
benefit of net operating loss carryforwards, it also requires the recognition of
a valuation allowance when it is more likely than not that such benefit will not
be realized. As a result of the Company's history of losses, a full valuation
allowance, equal to the net deferred tax assets, has been recorded as of June
30, 2000 and 1999.
Deferred income taxes relate to the following temporary differences and
carryforwards as of June 30, 2000 and 1999:
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 3,192,000 $ 2,584,000
Allowance for doubtful accounts and credits 44,000 92,000
Tax basis adjustments to inventory 115,000 89,000
Other accruals 30,000 22,000
----------- -----------
3,381,000 2,787,000
----------- -----------
Deferred tax liabilities:
Accelerated depreciation of property and equipment 152,000 55,000
----------- -----------
152,000 55,000
----------- -----------
Balance 3,229,000 2,732,000
Less: Valuation allowance (3,229,000) (2,732,000)
----------- -----------
Net deferred income taxes after valuation allowance $ -- $ --
=========== ===========
Two wholly-owned Puerto Rico-based subsidiaries have been granted exemptions
from paying Puerto Rico income taxes under provisions of the Puerto Rico
Industrial Tax Exemption Act of 1963, provided that such subsidiaries continue
to meet the terms and conditions of their grants. One subsidiary's exemption
expired on June 30, 1999. This subsidiary has applied for an extension of this
exemption and is awaiting approval. If granted, the extension would be for ten
years and would impose an income tax rate of 5% on the taxable income, and may
grant the Company a 75% exemption on the corresponding property tax, municipal
tax and other taxes. The second subsidiary has received a 90% exemption from
Puerto Rico income and property taxes and a 60% exemption from Puerto Rico
municipal income taxes until June 2006. These subsidiaries have elected,
pursuant to Section 936 of the Internal Revenue Code, to receive credits
equivalent to the amount of federal income taxes that would otherwise be due on
their income.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") imposes limitations on
computing the Possession Tax Credit under Section 936 for tax years beginning
after 1993. In addition, the Act makes the 100% dividends received deduction
subject to the Alternative Minimum Tax calculation. The Small Business Job
Protection Act of 1996 further limits the Possession Tax Credit for years
beginning after 2001, with the credit being eliminated in the years beginning
after 2005.
Dividends, if paid by the Puerto Rico-based subsidiaries, are subject to a
withholding tax of 10%. However, no taxes have been provided on their aggregate
undistributed earnings (approximately $194,000 as of June 30, 2000), as it is
management's intention to reinvest such earnings indefinitely.
10
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
The following is a reconciliation between the tax benefit at the federal
statutory tax rate and the effective tax rate:
For the Years Ended June 30,
-------------------------------------------
2000 1999 1998
--------- --------- ---------
Income tax benefit at the statutory rate $(568,000) $(303,000) $(166,000)
Effect of net operating loss of Puerto Rico-based
subsidiaries for which there is no current tax benefit 161,000 177,000 256,000
Effect of domestic net operating loss for which there is no
current tax benefit 407,000 126,000 --
Benefit of utilization of net operating loss carryforwards -- -- (90,000)
--------- --------- ---------
Actual income tax expense $ -- $ -- $ --
========= ========= =========
As of June 30, 2000, the Company has net operating loss carryforwards of
approximately $8,400,000 for federal income tax purposes. The Company's domestic
operations generated taxable income in fiscal 1998, for which it utilized
approximately $337,000 of net operating loss carryforwards. Such carryforwards
expire from 2005 through 2020. As a result of the private placement offering in
June 1996, the amount of the loss carryforwards which can be utilized to offset
future taxable income will be limited to approximately $345,000 per year, plus
any loss carryforwards incurred after June 30, 1996. However, to the extent such
annual limitation is not utilized in any year, it may be further carried forward
until the carryforward would have otherwise expired.
7. LOANS PAYABLE
Loans payable as of June 30, 2000 and 1999 are comprised of borrowings under the
Company's line of credit agreement with Congress Financial Corporation
("Congress").
The Company amended and extended its line of credit agreement with Congress
during June 1999. The line, which expires in October 2002, provides for
borrowings of up to $8,000,000 with interest payable monthly at 1% above the
prime rate (9.5% as of June 30, 2000), plus an unused line fee of 1/4% per year.
Borrowings are limited to 85% of eligible accounts receivable, as defined, and
55% of eligible inventory, as defined. The maximum amount of inventory
borrowings is $3,600,000. The loans are subject to certain working capital and
tangible net worth requirements and are collateralized by all assets of the
Company not previously pledged under other loan agreements. The loan agreement
prohibits the payment of dividends by the Company.
As of June 30, 2000, the Company is in technical default of certain loan
covenants contained in its line of credit agreement with Congress, whereby
Congress has the right to demand repayment of all amounts outstanding under the
line. To date, Congress has not demanded repayment.
11
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
8. LONG-TERM DEBT
Long-term debt is comprised of the following as of June 30, 2000 and 1999:
2000 1999
-------- --------
Mortgage payable, with interest at 9.15% per annum,
collateralized by the underlying premises, improvements and fixtures (a) $650,000 $ --
Mortgage payable, with interest at 12% per annum, collateralized by land,
building and personal property (b) -- 377,426
Mortgage payable, with interest at 1 1/4% above the prime rate,
collateralized by all assets of the Puerto Rico-based subsidiaries (c) -- 29,931
Term loan, with interest at 1 1/4% above the prime rate, collateralized
by all assets of the Company not previously pledged (d) -- 30,759
Guaranteed payments for the 1997 acquisition of the glove manufacturing
division (e) 40,500 100,167
Other 45,800 9,575
-------- --------
Total 736,300 547,858
======== ========
Less: Current portion 43,336 151,411
-------- --------
Noncurrent portion $692,964 $396,447
======== ========
Maturities of long-term debt are as follows:
Year Ending June 30:
2001 $ 43,336
2002 41,879
2003 26,828
2004 24,608
2005 599,649
--------
Total $736,300
========
(a) The mortgage commenced on May 23, 2000, and is payable in monthly
installments of $5,911 including interest at 9.15% per annum, beginning
July 1, 2000 and continuing until May 1, 2005, with a final principal
payment of approximately $584,000 payable on June 1, 2005. Provided that no
defaults occur, the Company has the option to extend the maturity date for
five years. The proceeds received were used, in part, to satisfy an
existing mortgage.
Additionally, under the terms of the mortgage, should Congress demand
repayment of the line of credit (Note 7), the Company would be in default
of the mortgage, which would become due and payable in full.
(b) The mortgage, as amended, with monthly payments of $6,223 including
interest at 12.0% per annum until July 2002, at which point a final
principal payment of approximately $275,000 was payable, was paid in full
in May 2000 with the proceeds from a new mortgage. Approximately 38% of
this mortgage was held by a group of investors which included the spouse of
a certain officer and director, the spouse of another director, a current
director, and a past director of the Company. Interest on the mortgage
aggregated approximately $39,000, $47,000 and $46,000 for the years ended
June 30, 2000, 1999 and 1998, respectively.
(c) The mortgage was payable in monthly installments of $7,690 including
interest, until October 1999. The funds received were used for the 1997
acquisition of the glove manufacturing division.
(d) The term loan was payable in monthly installments of $7,483 including
interest, until October 1999. The funds received were used for the 1997
acquisition of the glove manufacturing division.
12
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(e) This amount is comprised of guaranteed payments due to two individuals in
connection with the 1997 acquisition of the glove manufacturing division.
One individual is entitled to 10% of the glove manufacturing division's
income before taxes, as defined, for the five-year period commencing July
1, 1997, up to a maximum of $180,000, but in no event less than $18,000 per
year. In 1997, the Company accrued for the $90,000 minimum payment. The
second individual entered into a consulting agreement with the Company for
the three-year period commencing April 17, 1997, which called for a fee of
$50,000 per year, payable in monthly installments. In 1997, the Company
accrued for the entire $150,000 required payment, the final payment of
which was made in fiscal 2000. The $240,000 aggregate minimum payments
accrued were due regardless of continued employment. No imputed interest
was recorded on these payments as the effect would not have been material.
9. SHAREHOLDERS' EQUITY
Preferred Stock
In August 1996, the shareholders of the Company approved an amendment to the
Company's Certificate of Incorporation to authorize 1,000,000 shares of
preferred stock. As of June 30, 2000, no preferred shares have been issued.
Common Stock
In October 1996, the Company sold, pursuant to a combination shareholder rights
and public offering, 703,591 units at $5.00 per unit, with each unit consisting
of one share of common stock and one Class B warrant. Each warrant entitled the
holder to purchase one share of common stock at an exercise price of $6.25 per
share during the period from one year to three years after the closing date of
the offering. These warrants expired in October 1999. The Company also sold to
the offering agent/underwriter, for a total value of $7.00, warrants to purchase
70,359 units. The warrants are exercisable at $6.00 per unit until October 2001.
In addition, the Company entered into a one-year consulting agreement with the
offering agent/underwriter for approximately $70,000.
Private Placements
In June 1996, the Company issued, in a private placement, 10 1/2 units at
$57,000 per unit. Each unit consists of 38,000 shares of the Company's common
stock. The net proceeds to the Company, net of fees to the placement agent and
other expenses, were approximately $501,000. The proceeds were used to repay a
$500,000 bridge loan obtained in May 1996. In July 1996, three additional units
were sold for net proceeds of approximately $165,000. In connection with the
foregoing transactions, the Company issued three-year warrants to purchase 2,500
shares of common stock at $10.00 per share, all of which expired in October
1999.
Other Warrants
In May 1996, warrants to purchase 9,003 shares of the Company's common stock
were granted to each of the Company's then President and two of the
Vice-Presidents, in exchange for their guarantees on over-advances by Congress.
The warrants are exercisable until February 23, 2001 at $5.35 per share.
In July 1995, the Company issued to a consulting firm, which was the employer of
a then-new director of the Company, a five-year warrant to purchase 12,500
shares of the Company's common stock at $12.50 per share. This warrant expired
subsequent to June 30, 2000.
In January 1994, a corporate officer/director of the Company purchased a warrant
from a prior lender of the Company, and then sold one-third portions of the
warrant to each of two other corporate officers of the Company. The warrant was
for the purchase of 124,854 shares at $5.62 per share. During fiscal 2000, the
expiration date of this warrant was extended from March 31, 2000 until March 31,
2005. This modification was immaterial to the fair value of the warrant.
13
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
Incentive Stock Option Plans
The Company's 1992 Incentive Stock Option Plan provided for the granting of
options for up to 20,000 shares of the Company's common stock until December
2002. As of June 30, 2000, options to purchase 300 shares at $27.50 per share
are outstanding and exercisable. The Company has agreed not to issue any
additional options under this plan.
The Company's 1994 Incentive Stock Option Plan provides for the granting of
options for up to 10,000 shares of the Company's common stock until January
2004. As of June 30, 2000, options to purchase 8,500 shares at $10.63 per share
are outstanding and exercisable.
In August 1996, the shareholders approved the adoption of the 1996 Incentive
Stock Option Plan, which provides for the granting of options to key employees
for up to 300,000 shares of the Company's common stock until May 2006. As of
June 30, 2000, 277,900 stock options were granted to employees at exercise
prices ranging from $1.30 to $2.63, of which 241,900 are exercisable. Of these
options, 10,000 will vest over the next two years; the remaining options will
vest based upon the Company achieving certain sales and income requirements, or
in five years, whichever is earlier.
Options granted under the incentive stock option plans must be exercised within
such periods, as stated in the plans, and in any event, must be exercised no
later than 10 years after the date they are granted. The plans provide that the
exercise price of the options may not be less than 100% of the fair market value
of common stock at the date of grant, or 110% in the case of an incentive stock
option granted to any employee owning more than 10% of the voting power of all
classes of stock of the Company.
Transactions under the above Incentive Stock Option plans are summarized as
follows:
June 30, 2000 June 30, 1999 June 30, 1998
------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- -------
Outstanding at beginning of year 289,300 $ 2.66 239,900 $ 2.58 241,065 $ 2.66
Granted -- -- 76,200 2.19 1,400 2.58
Forfeited (200) 2.50 (7,000) 2.50 (400) 2.25
Exercised -- -- (3,500) 1.30 -- --
Expired/Canceled (2,400) 2.43 (16,300) 2.44 (2,165) 12.08
------ ------- ------
Outstanding at end of year 286,700 $ 2.66 289,300 $ 2.66 239,900 $ 2.58
======= ======= ======
Exercisable at end of year 250,700 $ 2.65 140,200 $ 2.83 68,300 $ 3.41
======= ======= ======
Weighted-average fair value of
options granted $ -- $2.04 $2.34
Other Stock Options
1996 Stock Options
In August 1996, the shareholders approved the adoption of the 1996 Non-Qualified
Stock Option Plan, which provides for the granting of options for up to 300,000
shares of the Company's stock until August 2006. As of June 30, 2000, 180,000
non-qualified stock options were granted to employees under the 1996
Non-Qualified Stock Option Plan at exercise prices ranging from $2.25 to $3.44
per share, of which 158,292 are exercisable as of June 30, 2000.
14
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1995 Stock Options
In January 1995, the Board of Directors granted, to the Company's then President
and two Vice-Presidents, ten-year non-qualified options to purchase 249,708
shares at $5.17 per share, of which 124,854 are exercisable as of June 30, 2000.
The remaining options are exercisable after five years, but may become
exercisable sooner upon the Company achieving certain pretax earnings targets.
Other non-qualified options outstanding and exercisable as of June 30, 2000,
under prior year grants, aggregate 3,108 shares at exercise prices ranging from
$16.88 to $30.00 per share.
Non-qualified stock option activity is summarized as follows:
June 30, 2000 June 30, 1999 June 30, 1998
----------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- -------
Outstanding at beginning of year 432,816 $ 4.14 376,816 $ 3.84 395,816 $ 4.17
Granted -- -- 56,000 2.38 21,000 3.44
Forfeited -- -- -- -- (32,000) 2.25
Expired/Canceled -- -- -- -- (8,000) 2.25
------ ------- ------
Outstanding at end of year 432,816 $ 4.14 432,816 $ 4.14 376,816 $ 3.84
======= ======= =======
Exercisable at end of year 286,254 $ 3.81 225,654 $ 4.10 159,062 $ 4.86
======= ======= =======
Weighted-average fair value of options granted
$ -- $1.62 $3.13
The following table summarizes information about stock options outstanding as of
June 30, 2000:
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
as of Remaining Exercise as of Exercise
Range of Exercise Prices 6/30/00 Contractual Life Price 6/30/00 Price
------------------------ ----------- ---------------- --------- ----------- --------
$ 1.30 - $ 1.95 25,400 0.15 $1.30 25,400 $1.30
1.96 - 2.94 411,500 6.71 2.48 353,792 2.48
2.95 - 4.43 21,000 7.78 3.44 21,000 3.44
4.44 - 6.65 249,708 4.56 5.11 124,854 5.11
10.00 - 15.01 8,500 4.56 10.63 8,500 10.63
15.02 - 22.52 2,000 5.07 16.88 2,000 16.88
22.53 - 33.80 1,408 4.52 29.47 1,408 29.47
15
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
If the Company had elected to recognize compensation cost for option grants to
its employees, officers and directors under the fair value method of SFAS No.
123, rather than to continue to apply the provisions of APB Opinion No. 25, net
loss and the related per share information would have been reported as indicated
by the following pro forma amounts:
For the Year Ended June 30, 2000 1999 1998
------------------------------------- ------------- ------------- --------------
Net loss:
As reported $ (1,671,139) $ (892,137) $ (488,485)
Pro forma (1,820,187) (1,220,337) (649,562)
Basic and diluted net loss per share:
As reported $ (.99) $ (.53) $ (.29)
Pro forma $ (1.08) $ (.72) $ (.39)
The fair value of each stock option grant is estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
June 30,
-------------------------------------------
2000* 1999 1998
------------ -------------- --------------
Risk-free interest rate -- 4.86% 6.56%
Expected lives -- 6.27 10
Expected volatility -- 82.7% 96.2%
Expected dividend yields -- 0% 0%
* There were no stock option grants during fiscal 2000.
10. COMMITMENTS AND CONTINGENCIES
Rent
The Company is obligated through August 2004 under several non-cancelable
operating leases covering office, factory and warehouse facilities. Minimum
annual rentals under such leases are as follows:
Year Ending June 30:
--------------------
2001 $ 365,383
2002 343,425
2003 236,741
2004 26,081
Rent expense, including month-to-month rentals, was approximately $499,000,
$341,000 and $412,000 for the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.
16
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
Employment Agreements
The Company has employment agreements, which commenced on July 1, 1995, with
three of its officers. On March 1, 1997, these officers were appointed to new
positions with certain changes to their agreements, and two new officers were
elected. The following is a summary of these employment agreements as of June
30, 2000:
Officer Expiration Date Annual Salary
--------------------------------------- --------------- -------------
President (a) July 1, 2001 $ 175,000
Former Senior Vice-President (b) July 1, 2001 $ 50,000
Senior Vice-President and Secretary (c) July 1, 2001 $ 40,000
Vice-President of Finance January 31, 2001 $ 106,000
Vice-President of Manufacturing January 31, 2001 $ 110,000
(a) This officer is entitled to a bonus of 3 1/3% of the Company's income
before taxes and interest and a bonus of 3/4% of net sales in excess
of $20,500,000.
(b) This officer is entitled to a bonus of 3 1/3% of the Company's income
before taxes and interest.
(c) This officer is entitled to a bonus of 3 1/3% of the Company's income
before taxes and interest.
Each of the agreements provides for minimum annual increases of 10%, commencing
at various dates, and has automatic renewal provisions.
In addition, should an unrelated party obtain more than 20% of the Company's
then outstanding stock, other than by transactions initiated by the Company, the
following will occur for officers (a), (b) and (c) above:
(a) Each will be paid a one-time bonus equal to his minimum base salary
for the next three years
(b) All rights (options, warrants, etc.) will become immediately vested
and exercisable
The remaining two officers, should a majority of the Board of Directors be
replaced, other than by voluntary resignation or their demise, terminate their
agreements within six months of such occurrence and receive a one-time bonus of
three times their current salary.
All bonuses for the years ended June 30, 2000, 1999 and 1998 have been waived.
Subsequent to June 30, 2000, the Company terminated the Vice-President of
Manufacturing.
Stock Buy-Back Plan
In September 1999, the Company's Board of Directors approved a buy-back plan of
up to 320,000 shares of the Company's common stock, to be purchased over the
next two years at the discretion of management. Congress has authorized the
Company to expend up to $400,000 for such purchases. As of June 30, 2000, no
such shares have been purchased.
11. PROFIT SHARING PLAN
The Company's qualified profit sharing plan, which is provided for eligible
full-time employees, includes a 401(k) salary deferral feature that requires a
matching contribution from the Company of up to $500 per employee for the 401(k)
feature. It also provides for discretionary profit sharing contributions by the
Company, as approved by the Board of Directors. Contribution expense was
approximately $12,000, $18,000 and $16,000 for the fiscal years ended June 30,
2000, 1999 and 1998, respectively.
17
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
12. LITIGATION
As of June 30, 2000, the Company, together with a multitude of other defendants,
was a defendant in approximately 5,000 lawsuits, in actions by approximately
18,000 first-party plaintiffs alleging exposure to asbestos and products
containing asbestos sold by the Company over unspecified periods of time.
As of June 30, 2000, and since 1981, the Company estimates that approximately
7,000 actions on behalf of approximately 27,000 first-party plaintiffs have been
instituted against it for asbestos-related claims, and that approximately 700
actions and the claims of approximately 3,000 plaintiffs have been terminated
(the foregoing numbers assume the consummation of pending settlements). The
Company estimates that, with the exception of defense costs, a total of
approximately $2,600,000 has been agreed to in settlements to date with regards
to the terminated actions, of which all but approximately $43,000 has been paid
by the Company's insurance carriers. At June 30, 1999, the Company had paid
approximately $50,000 for legal and defense costs, to counsel appointed by the
insurance carriers to defend it.
The Company entered into an agreement with its primary insurance carriers,
whereby its liability is limited to 12% of the cost of the defense liability and
17% of the settlement claim of certain litigation. The agreement, which is
subject to the policy limitations on each insurance policy, may be terminated at
any time upon 90 days notice by any of the parties, provided that termination
may not be effective as to any asbestos action that has already been placed on
the trial calendar, unless it has a scheduled trial date more than 12 months
from the date the notice is given. In May 1991, the Company reached an agreement
with Mount Vernon Fire Insurance Company ("Mount Vernon"), one of its primary
insurance carriers, with respect to its pending and future asbestos litigation.
Mount Vernon agreed to contribute 6.25% to the Company's defense costs and 6.25%
to its indemnity costs for so long a period of time as $100,000 in aggregate has
not been paid for indemnity costs. This agreement applies only to the period
Mount Vernon provided insurance coverage, which was between April 1, 1968 and
April 1, 1969. However, because past results of settlements and defense costs
are not necessarily indicative of future settlements and defense costs, and
because, as of this date, management is still unable to fully ascertain the
extent of insurance coverage, neither management nor counsel is able to predict
the outcome of these matters or the range of any potential liability that might
result. In addition, based on past history, management believes it is likely
that there will be additional asbestos actions against the Company.
To date, the claims settled by one of the Puerto Rico-based subsidiaries have
been paid in full by insurance. One of the carriers covering this subsidiary has
requested a cost sharing agreement with this subsidiary. This request has been
disputed by the subsidiary and is currently being negotiated.
After consultation with counsel, management feels that in the majority of these
matters, the ultimate liability, if any, after available insurance coverage,
would not have a material adverse effect on the Company's financial position.
However, there can be no assurance that the Company's insurance coverage will
adequately cover these cases, or that the Company's insurance will cover
punitive damages, should they be awarded.
The Company is party to other product liability litigation arising in the
ordinary course of business for which management feels it has adequate insurance
coverage.
18
SCHEDULE II
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(in thousands)
- ------------------ --------------------- --------------------- -------------------- ------------------
Column A Column B Column C Column D Column E
- ------------------ --------------------- --------------------- -------------------- ------------------
Additions:
Balance at Charged to costs Balance at
Description beginning of year and expenses Deductions (1) end of year
- ------------------ --------------------- --------------------- -------------------- ------------------
2000
----
Allowance for
doubtful accounts $ 73,000 $ 12,000 $ 4,000 $ 81,000
- ------------------ --------------------- --------------------- -------------------- ------------------
1999
----
Allowance for
doubtful accounts $ 75,000 $ 46,000 $ 48,000 $ 73,000
- ------------------ --------------------- --------------------- -------------------- ------------------
1998
----
Allowance for
doubtful accounts $ 59,000 $ 16,000 $ -- $ 75,000
- ------------------ --------------------- --------------------- -------------------- ------------------
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
This schedule should be read in conjunction with the accompanying consolidated
financial statements and notes thereto.
19