SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C., 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE # 01-06855
WORKSAFE INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1874010
(State or other jurisdiction of (Employer I.D.#)
incorporation or organization)
130 West 10th Street, Huntington Station, N.Y. 11746
(Address of principal executive offices and zip code)
(516) 427-1802
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
YES _X_ NO ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at May 3, 1999
- ----- --------------------------
(Common Stock, par value 1,686,579
$.12 per share)
PART I - FINANCIAL INFORMATION
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 June 30, 1998
-------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 48,694 $ 223,125
Accounts receivable - (less allowance for
doubtful accounts of $30,000 at March 31, 1999
and $46,250 at June 30, 1998) 3,763,836 3,393,608
Inventories - (note 2) 4,544,817 5,757,777
Other current assets 637,996 692,595
Net assets of discontinued operations (note 6) 583,813 4,890,196
----------- -----------
TOTAL CURRENT ASSETS 9,579,156 14,957,301
PROPERTY, PLANT AND EQUIPMENT, net 2,139,129 2,276,677
EXCESS OF COST OVER NET ASSETS ACQUIRED 409,129 426,229
OTHER ASSETS 85,389 24,794
----------- -----------
TOTAL ASSETS $12,212,803 $17,685,001
=========== ===========
See accompanying notes.
2
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 June 30, 1998
-------------- -------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 5,672,237 $ 8,189,842
Current maturities of long-term debt 204,348 277,628
Accounts payable 2,231,527 4,384,580
Accrued expenses 258,199 395,860
------------ ------------
TOTAL CURRENT LIABILITIES 8,366,311 13,247,910
------------ ------------
LONG-TERM DEBT, less current maturities 403,653 538,283
------------ ------------
TOTAL LIABILITIES 8,769,964 13,786,193
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
1,000,000 shares; no shares outstanding
Common stock, $.12 par value; authorized
20,000,000 shares, issued and outstanding
1,686,579 shares at March 31, 1999 and
1,683,079 at June 30, 1998 202,390 201,970
Additional paid-in capital 9,844,338 9,807,708
(Deficit) (6,603,889) (6,110,870)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,442,839 3,898,808
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,212,803 $ 17,685,001
============ ============
See accompanying notes.
3
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Three months ended March 31,
----------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
Net sales from continuing operations $6,264,330 $6,824,077
Cost of sales 5,326,872 5,502,174
Gross profit 937,458 1,321,903
Selling, general & administrative expenses 818,132 902,150
Interest expense (net) 166,410 141,780
Other income (net) (64,269) (18,198)
Net income from continuing operations 17,185 296,171
Net (loss) from discontinued operations -0- (201,166)
Net income 17,185 95,005
Opening (deficit) (6,621,074) (5,549,634)
Closing (deficit) $(6,603,889) $(5,454,629)
Income/(loss) per common share -
Basic:
Income from continuing operations $.01 $.18
(Loss) from discontinued operations -0- (.12)
Net income $.01 $.06
Diluted:
Income from continuing operations $.01 $.16
(Loss) from discontinued operations -0- (.11)
Net income $.01 $.05
Weighted average number of common shares outstanding:
Basic 1,684,246 1,683,079
Diluted 1,704,906 1,755,231
See accompanying notes.
4
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Nine months ended March 31,
----------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
Net sales from continuing operations $17,868,664 $18,112,200
Cost of sales 15,202,755 14,588,258
Gross profit 2,665,909 3,523,942
Selling, general & administrative expenses 2,364,229 2,498,101
Interest expense (net) 418,378 407,693
Other income (net) (79,444) (47,814)
Net (loss) income from continuing operations (37,254) 665,962
Net (loss) from discontinued operations (988,737) (498,206)
Gain from sale of discontinued operations 532,972 -0-
Net (loss)/income (493,019) 167,756
Opening (deficit) (6,110,870) (5,622,385)
Closing (deficit) $(6,603,889) $(5,454,629)
Income/(loss) per common share -
Basic:
(Loss)/income from continuing operations $(.02) $.40
(Loss) from discontinued operations (.59) (.30)
Gain from sale of discontinued operations .32 -0-
Net (loss)/income $(.29) $.10
Diluted:
(Loss)/income from continuing operations $(.02) $.39
(Loss) from discontinued operations (.59) (.29)
Gain from sale of discontinued operations .32 -0-
Net (loss)/income $(.29) $.10
Weighted average number of common shares outstanding:
Basic 1,683,468 1,683,079
Diluted 1,683,468 1,707,143
See accompanying notes.
5
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31,
------------------------------
1999 1998
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) / income from continuing operations $ (37,254) $ 665,962
Adjustments to reconcile net (loss) income from
continuing operations to net cash effect of operating
activities:
Depreciation and amortization 203,330 175,898
Stock Based Compensation 32,500 -0-
Net changes in operating assets and liabilities:
Accounts receivable (370,228) (1,874,284)
Inventories 1,212,960 (2,212,621)
Other current assets 264,599 9,083
Other assets 9,405 12,332
Accounts payable (2,188,386) 1,554,792
Accrued expenses (137,661) 4,615
Total adjustments (973,481) (2,330,185)
Net cash (used in) operating activities of continuing
operations (1,010,735) (1,664,223)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (93,824) (230,161)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (207,910) (205,412)
Borrowings under line of credit agreement 24,202,404 25,949,928
Repayments under line of credit agreement (26,720,009) (23,707,398)
Proceeds from exercise of options 4,550 -0-
Net cash (used in) provided by financing activities of
continuing operations (2,720,965) 2,037,118
Net cash (used in)/provided by continuing operations (3,825,524) 142,734
Net cash provided by (used in)/discontinued operations 3,651,093 (160,225)
Net decrease in cash (174,431) (17,491)
CASH, beginning of period 223,125 112,258
CASH, end of period $ 48,694 $ 94,767
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 688,672 $ 606,178
Income taxes $ 2,391 $ 9,190
See accompanying notes.
6
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Worksafe Industries Inc. ("Worksafe"),
contain all adjustments (consisting of only normal accruals) necessary to
present fairly the consolidated balance sheets as of March 31, 1999 and
June 30, 1998 (audited) and the related statements of operations and
deficit and cash flows for each of the three month and nine month periods
ended March 31, 1999 and 1998.
The results of operations for the three and nine month periods ended March
31, 1999 and 1998 are not necessarily indicative of the results for the
entire year.
The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial
statements prepared in conformity with generally accepted accounting
principles. Such disclosures were included with the consolidated financial
statements of Worksafe at June 30, 1998 and included in its annual report
on Form 10-K. Such statements should be read in conjunction with the data
herein.
2. Inventories
Inventories consist of the following:
March 31, 1999 June 30, 1998
-------------- -------------
Raw materials $1,580,690 $1,579,096
Work-in-process 685,234 802,011
Finished goods 2,278,893 3,376,670
Total $4,544,817 $5,757,777
3. Litigation
Worksafe is a party to various asbestos lawsuits alleging damages from
exposure to asbestos products sold by Worksafe. Refer to Part II, Other
Information, Item I "Legal Proceedings" in this Form 10-Q, as well as
Worksafe's Forms 10-Q of September 30, 1998 and December 31, 1998 and its
Note 11 to the June 30, 1998 Audited Consolidated Financial Statements
regarding the asbestos litigation.
4. Net Income/(Loss) Per Common Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", basic earnings per common share amounts were
computed by dividing net earnings by the weighted average number of common
shares outstanding, excluding any potential dilution. Diluted earnings per
common share amounts are computed by reflecting potential dilution from the
exercise of stock options. There were
7
20,660 shares of common stock subject to stock options included in the
computation of diluted earnings per share for the three months ended March
31, 1999. Diluted earnings per share for the nine months ended March 31,
1999 does not include the impact of stock options then outstanding as their
inclusion would be anti-dilutive. The number of shares of common stock
subject to stock options included in diluted earnings per share were 72,152
and 24,064 for the three and nine months ended March 31, 1998.
5. Comprehensive Income
In the first quarter of fiscal 1999, Worksafe adopted SFAS No. 130,
"Reporting Comprehensive Income", which requires companies to report all
changes in equity during a period, except those resulting from investments
by owners and distributions to owners, in a financial statement for the
period in which they are recognized. Comprehensive income is the total of
net income and all non-owner changes in equity (or other comprehensive
income) such as unrealized gains/losses on securities available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive income must be reported on the face of the
annual financial statements or in the case of interim reporting, in the
footnotes to the financial statements. For the three and nine months ended
March 31, 1999 and 1998, Worksafe's operations did not give rise to items
that may be included in comprehensive income which were not already
included in net income. Therefore, Worksafe's comprehensive income is the
same as its net income for all periods presented.
6. Discontinued Operations
Effective December 31, 1998, Worksafe sold certain assets, including
inventory and certain fixed assets of its distribution division to Arbill
Industries, Inc. ("Arbill"). As a result of this transaction, the Company
reported a gain of approximately $533,000, after related costs. The
purchase price for these assets was approximately $2,494,000, not including
payments for rent, open receivables and miscellaneous other items. The
proceeds of the transaction, which were received in January 1999, except
for $315,000 which will be paid over eighteen months, were used to reduce
Worksafe's loans payable to Congress Financial Corporation. As a result of
this transaction, the operating results of this division have been
classified as discontinued operations.
The summarized financial information for the discontinued operations is as
follows:
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
1999 1998 1999 1998
--------- ------------- ----------- -----------
Net Sales -- $ 2,439,556 $ 4,240,767 $ 6,964,100
Cost of Sales -- 2,031,050 3,671,046 5,771,353
Gross Profit -- 408,506 569,721 1,192,747
Expenses -- 609,672 1,558,458 1,690,953
Net (loss) -- $ (201,166) $ (988,737) $ (498,206)
8
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND CONSOLIDATED RESULTS OF OPERATIONS
Continuing Operations
Worksafe's continuing operations now consist of its manufacturing segment which
produces disposable and reusable industrial apparel and protective knit gloves.
Worksafe maintains facilities for warehousing and production in Puerto Rico,
Alabama, Mexico (a contractor), Texas, California, Louisiana and Minnesota.
The accompanying financial statements 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
Net sales for the three months ended March 31, 1999 were $6,264,000 as compared
to $6,824,000 for the three months ended March 31, 1998, a decrease of 8.2%. Net
sales for the nine months ended March 31, 1999 were $17,869,000 compared with
net sales for the period ended March 31, 1998 of $18,122,000, a decrease of
1.4%.
The decrease in sales in the third quarter of fiscal 1999 was due to the fact
that manufacturing inventory which normally would have been sold directly to
customers in January was instead transferred as part of the second quarter
transaction with Arbill, who in turn sold the inventory to their customers.
Worksafe's gross margin decreased to 15.0% for the third quarter of fiscal 1999
from 19.4% for the third quarter in fiscal 1998 and the gross margin for the
nine months ended March 31, 1999 decreased to 14.9% from 19.5% for the similar
period in the prior year. These reductions are the continuing results of the
competitive environment in the marketplace. In a continued effort to increase
margin levels, Worksafe is taking major steps to reduce overhead expenses and
increase efficiencies in material utilization.
Selling, general and administrative expenses for the quarter ended March 31,
1999 were approximately $818,000 (or 13.1% of sales) compared to approximately
$902,000 (or 13.2% of sales) for the same period last year. These expenses for
the nine months ended March 31, 1999 were approximately $2,364,000 (or 13.2% of
sales) as compared to approximately $2,498,000 (or 13.8% of sales) for the same
period in the prior year. These decreases as a percentage of sales were due to
continuing cost reductions.
Interest expense was approximately $166,000 for the third quarter of fiscal
1999, an increase of approximately $25,000 when compared to the same quarter of
fiscal 1998. For the nine months ended March 31, 1999, interest expense was
approximately $418,000 compared to approximately $408,000 in the same period in
the prior year. These increases were principally due to higher average
borrowings for the manufacturing division.
9
Liquidity and Capital Resources
Worksafe had working capital inclusive of net assets of discontinued operations
as of March 31, 1999 of approximately $1,213,000 as compared to approximately
$1,709,000 as of June 30, 1998. A substantial portion of Worksafe's working
capital consists of inventory, which was approximately $4,545,000 and $5,758,000
as of March 31, 1999 and June 30, 1998, respectively. Although the manufacturing
division maintains a minimum level of inventory for its basic products, its back
order position will keep inventory at lower levels, thereby having a positive
effect on liquidity. Worksafe believes that its current working capital position
will be sufficient to satisfy its needs for the next twelve months.
The amounts outstanding under Worksafe's loan agreement with Congress Financial
Corporation ("Congress") at March 31, 1999 and June 30, 1998 were approximately
$5,672,000 and $8,190,000, respectively. The Company had $134,000 available for
borrowing at March 31, 1999.
Net cash used in operating activities was principally a result of an increase in
accounts receivable and a decrease in accounts payable and accrued expenses,
which was partially offset by a decrease in inventories. Cash flows used in
investing activities was for the purchase of property, plant and equipment. Cash
flows used in financing activities were principally a result of net paydowns of
Worksafe's loan with Congress. During January 1999, Worksafe received proceeds
from Arbill of approximately $2.1 million which was used to reduce its loan with
Congress.
At the present time, Worksafe, together with a variety of defendants, is party
to various asbestos-related lawsuits involving a number of plaintiffs alleging
damages from exposure to asbestos products sold by Worksafe.
Worksafe may become a party to additional asbestos-related actions
in the future. Worksafe is also party to other non-asbestos-related litigation.
Worksafe cannot, at this time, determine the outcome of these uncertainties. To
date, Worksafe's insurance coverage has been adequate and Worksafe's costs
relative to asbestos litigation has not been material.
Year 2000
The Year 2000 issue results from the inability of some computer programs to
identify the year 2000 properly, potentially leading to errors or system
failure. A company's business may be adversely affected if it, or any of its
suppliers, customers or other third parties with whom it transacts business
(including banks and governmental agencies), have not resolved the Year 2000
issue in a timely manner.
The Company's internal computing systems are primarily limited to hardware and
software for its financial systems, such as general ledger, accounts receivable
and accounts payable systems, and word processing. The Company believes that it
could replace any of its software or systems, if necessary, quickly and at
reasonable expense.
10
The Company has completed its internal review with respect to Year 2000 issues.
The Company does not believe Year 2000 issues, within its internal information
systems, will have a material adverse effect on the Company's business,
financial condition or results of operations. The Company believes that its
internal computer systems used are currently Year 2000 compliant.
The Company has completed its review of the Year 2000 readiness of its customers
and vendors and believes, based upon such review, that such parties should not
cause a material disruption in the Company's business due to Year 2000 issues.
To date, the cost of the Company's Year 2000 assessment and compliance efforts
has not been material to the Company's results of operations or liquidity. The
Company is not aware, at this time, of any Year 2000 non-compliance that will
materially affect the Company.
Risks and Other Considerations
Reference is made to "Risks and Other Considerations" set forth in Item 7,
Management's Discussion and Analysis in Worksafe's Form 10-K for the year ended
June 30, 1998.
11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended March 31, 1999 approximately 628 asbestos actions
involving approximately 1193 plaintiffs were instituted against the Company and
Puerto Rico Safety Equipment Corporation. The actions are all pending in the
Supreme Court of the State of New York within the City of New York and Superior
Court of New Jersey Law Division Middlesex County and involve a multitude of
defendants. They are either actions, pursuant to standard complaints, for
personal injury or wrongful death setting forth a number of causes of action in
amounts of up to $10,000,000 for compensatory damages and $10,000,000 for
punitive damages. All of the foregoing actions have been submitted to the
Company's and Puerto Rico Safety Equipment Corporation's insurance carriers for
defense. A schedule of these cases is annexed hereto as Exhibit 99.06.3.
Reference is also made to the Company's Form 10-K for June 30, 1998 and its form
10-Q's for September 30, 1998 and December 31, 1998 regarding asbestos actions
against the Company.
The registrant was advised on May 6, 1999 by the attorneys appointed by its
insurance companies that a settlement of a number of actions has been reached
pursuant to that settlement made in fiscal 1994 (see Item 3 Form 10-K June 30,
1998) with respect to cases brought by one firm of attorneys against Eastco
Industrial Safety Corp., now known as Worksafe Industries Inc. Pursuant thereto
in 11 actions involving 294 plaintiffs, Eastco Industrial Safety Corp. will be
dismissed. The registrant's out of pocket cost of this settlement will be
$3,375.75. In addition thereto, in 18 actions involving 230 plaintiffs, Eastco
Industrial Safety Corp. was dismissed without any payment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
99.06.3 Schedule of asbestos actions filed against the Company and Puerto
Rico Safety Equipment Corporation during the quarter ended March
31, 1999.
(B) On January 26, 1999 a Form 8-K under Item 2 for the sale of certain assets
of the registrant's distribution business on January 11, 1999, effective the
close of business on December 31, 1998 and under Item 5 with respect to the
Company's consummation of Amendment No. 9 to the Company's financing agreements
with Congress. A Pro-Forma Consolidation Balance Sheet as at September 30, 1998
and Pro-Forma Consolidation Statement of Operations for the year ended June 30,
1998 and three months ended September 30, 1998 were included under Item 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated May 17, 1999
WORKSAFE INDUSTRIES INC.
By: /s/ LAWRENCE DENSEN
-----------------------------
LAWRENCE DENSEN, PRESIDENT
& CHIEF EXECUTIVE OFFICER
By: /s/ ARTHUR J. WASSERSPRING
-----------------------------
ARTHUR J. WASSERSPRING,
VICE PRESIDENT OF FINANCE/
CHIEF FINANCIAL OFFICER