As filed with the Securities and Exchange Commission on , 1996
Registration No. _________
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EASTCO INDUSTRIAL SAFETY CORP.
(Exact name of registrant as specified in its charter)
New York 5098 11-1874010
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
130 West 10th Street
Huntington Station, New York 11746
(516) 427-1802
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive office)
Mr. Alan E. Densen
President
130 West 10th Street
Huntington Station, New York 11746
(516) 427-1802
(Name, address, including zip code, and telephone number
including area code, of agent for service)
Copies To:
Herbert W. Solomon, Esq. Lester Morse, Esq.
Seth I. Rubin, Esq. Steve Morse, Esq.
Hollenberg Levin Solomon Ross Lester Morse, P.C.
Belsky & Daniels, LLP 111 Great Neck Road
585 Stewart Avenue Great Neck, New York 11021
Garden City, New York 11530
(516) 745-6000 (516) 487-1446
fax (516) 745-6642 fax (516) 487-1452
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. [X]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Class Amount Offering Aggregate Amount of
of Securities to to be Price Per Offering Registration
be Registered Registered(1) Unit (1) Price(1) Fee
- ---------------------------------------------------------------------------------------------------------------------------
Rights, each right ("Right")
consisting of one share of
common stock (the "Common
Stock") and one class B
redeemable Common Stock
purchase warrant (the Class B
Warrants")(2)............ 703,591 ---- ---- ----
Common Stock issuable
upon exercise of Rights(2) 703,591 $5.00 $3,517,955.00 $1,231.28
Class B Warrants issuable
upon exercise of Rights(2)(3) 703,591 ---- ---- ----
Common Stock issuable
upon exercise of Class B
Warrants (3)............. 703,591 $6.25 $4,397,443.70 $1,539.11
Underwriter's Warrants... 70,359 $.0001 $7.04 $ 1.00
Common Stock and Class B
Warrants issuable
upon exercise of
Underwriter's Warrants(3) 70,359 $6.00 $ 422,154.00 $ 147.15
Class B Warrants issuable
upon exercise of Class B
Warrants................. 70,359 $6.25 $ 439,743.75 $ 153.91
Common Stock sellable by
Selling Stockholders..... 513,000 $8.00 $4,104,000.00 $1,436.40
Optional Units........... 300,000 $5.00 $1,500,000.00 $ 525.00
Common Stock issuable upon
exercise of Optional Units(3) 300,000 ---- ---- ----
Warrants issuable upon
exercise of Optional Units 300,000 ---- ---- ----
Common Stock issuable upon
exercise of Warrants
contained in Optional Units(3) 300,000 $6.25 $1,875,000.00 $ 656.25
------
Total ................................................................................................ $5,690.10
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes unsubscribed Rights and Common Stock and Class B Warrants
which may be sold to Royce Investment Group, Inc. under the Standby
Agreement.
(3) Includes such undetermined additional shares as may become issuable
pursuant to the anti-dilution provisions of the Class B Warrants and
Underwriter's warrants and Optional Units.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
EASTCO INDUSTRIAL SAFETY CORP.
Cross Reference Sheet Showing Location
in Prospectus of Information
Required by Items of Form SB-2
Item and Heading Location in Prospectus
1. Front of the Registration Cover Page of Prospectus
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside
Cover Pages of Prospectus Back Cover Pages of Prospectus
3. Summary Information and Prospectus Summary;
Risk Factors Risk Factors
4. Use of Proceeds Prospectus Summary;
Use of Proceeds
5. Determination of Offering Price Underwriting; Plan of Distribution(*)
6. Dilution Dilution
7. Selling Security Holders Concurrent Registration of Common
Stock; Selling Stockholders(*)
8. Plan of Distribution Plan of Distribution(*)
9. Legal Proceedings Business - Legal Proceedings
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Principal Shareholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts Legal Matters; Experts
and Counsel
14. Disclosure of Commission Management -
Position on Indemnification Indemnification of
for Securities Act Liabilities Directors and Executive Officers
15. Organization Within Last Five Not Applicable
Years
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Management's Discussion
Analysis or Plan of Operation and Analysis of Financial
Condition and Results of
Operations
18. Description of Property Business - Properties
19. Certain Relationships and Certain Transactions
Related Transactions
20. Market for Common Equity and Market Information;
Related Stockholder Matters Dividend Policy
21. Executive Compensation Management-Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements Not Applicable
with Accountants on Accounting
and Financial Disclosure
- ----------------------------------
* Selling Shareholders Prospectus Only
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to
be used in connection with an offering by the Company of Units, each
consisting of one share of Common Stock and one Class B Redeemable Common
Stock Purchase Warrant (the "Prospectus") and one to be used in connection
with the sale of Common Stock by certain selling shareholders (the "Selling
Shareholders Prospectus"). The Prospectus and the Selling Shareholders
Prospectus will be identical in all respects except for the alternate pages
for the Selling Shareholders Prospectus included herein which are labeled
"Alternate Page for Selling Shareholders Prospectus". [This Registration
Statement assumes: (i) a Subscription Price of $5.00 and an Exercise Price of
$6.25 per Warrant; (ii) the effectiveness of the Company's one-for-ten reverse
split being submitted to the shareholders of the Company for approval on
August 12, 1996; (iii) approval and authorization of the issuance of preferred
stock by the shareholders of the Company for approval on August 12, 1996; and
(iv) the approval of the 1996 Incentive Stock Option Plan and the 1996
Non-Qualified Stock Option Plan being submitted to the shareholders of the
Company for approval on August 12, 1996.]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This Prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there
be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
Subject to Completion Dated , 1996
703,591 Units
$5.00 per Unit
EASTCO INDUSTRIAL SAFETY CORP.
Each unit ("Unit") consists of one share of common stock $0.12 par
value ("Common Stock") and one Class B Redeemable Common Stock Purchase
Warrant ("Class B Warrant"). [This Registration Statement assumes a
Subscription Price of $5.00 and an Exercise Price of $6.25 per Warrant and
also the effectiveness of the Company's one-for-ten reverse split being
submitted to the shareholders of the Company for approval on August 12, 1996.]
Eastco Industrial Safety Corp. (the "Company") is granting to all
holders of its outstanding common stock of record on ____________ ("Record
Date"), in those states where qualified, or exempt from qualification, (see
page ____ for list of such states), the nontransferable right ("Rights") to
subscribe for Units, at the subscription price set below on the basis of 4
Units for every 5 shares of Common Stock owned on the Record Date. No
fractional Rights or Units will be issued. Rights and Units will be rounded to
the nearest lower whole number. Inasmuch as the Rights are not transferable,
there will be no market for the Rights, nor will Royce Investment Group, Inc.
(the "Underwriter") be purchasing any Rights.
The subscription period for the Rights will expire at 5:00 p.m. New
York Time on _________, 1996 ("Expiration Date"). Any Units not subscribed for
pursuant to the exercise of Rights will be sold to the Underwriter ("Standby
Offering") at a Subscription Price under a Standby Agreement between the
Company and the Underwriter which is identical to the price under the offering
for the Rights. The term "Offering" as hereinafter utilized in this Prospectus
includes the offering in connection with the Rights, the Standby Offering and
the offering of the Optional Units as hereinafter defined. The Underwriter
will offer to sell the components of the Units to the public at prices which
may exceed the highest asked price as reported on the NASDAQ Small-Cap Market.
No Units and/or components thereof will be offered by the Underwriter to the
public until at least two business days after the Expiration Date of the
Rights Offering. See "The Offering" and "Underwriting".
Each Class B Warrant entitles the holder to purchase one share of
Common Stock commencing eighteen months after the date of this Prospectus (the
date of the
(continued on following page)
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AS
DESCRIBED HEREIN. FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES. SEE "RISK
FACTORS" BEGINNING ON PAGE __ AND "DILUTION" BEGINNING ON PAGE __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
=============================================================================
Subscription Price Standby Proceeds to
and Price to Public Fees(1)(2) Company(1)(2)(3)
- -----------------------------------------------------------------------------
Per Share..... $5.00 $.50 $4.50
Total......... $3,517,955 $351,795.50 $3,166,159,50
=============================================================================
ROYCE INVESTMENT GROUP, INC.
The date of this Prospectus is __________, 1996
Prospectus is sometimes referred to herein as the "Effective Date") until the
close of business on the third year after the date of this Prospectus at an
exercise price of $6.25 per share subject to adjustment in certain
circumstances pursuant to anti-dilution provisions therein. The Common Stock
and Class B Warrants are immediately detachable from the Units and separately
tradeable. See "Description of Securities - Class B Warrants" for a discussion
of the Company's right to redeem the Class B Warrants.
- ----------------------------
(1) Represents a 10% standby fee of $351,795.50 ($.50 per share) but does
not include a 3% nonaccountable expense allowance of $105,538.65
($.15 per share) payable to the Underwriter in connection with this
Offering unless the Standby Offering is terminated pursuant to the
terms of the Standby Agreement. Before deducting approximately
$350,000 for printing, legal fees, accounting and other related
expenses of the Offering. See "Underwriting".
(2) Does not include additional compensation to the Underwriter
consisting of (i) an option (the "Underwriter's Warrant" or
"Underwriter's Purchase Option"), sold to the Underwriter for nominal
consideration, entitling the Underwriter to purchase one Unit for
each ten Units sold in the Offering, at a price of $6.00 per Unit,
subject to the anti-dilution provisions thereof, for a period of four
years commencing one year after the Effective Date; and (ii) a one
year financial consulting agreement providing for fees totaling 2% of
the proceeds of the Offering, payable on the closing of the Offering
(the "Closing") and the Optional Units. The Company has also agreed
to pay the Underwriter a warrant solicitation fee of 7% of the
exercise price for each Class B Warrant exercised during the period
commencing one year after the Effective Date, and to indemnify the
Underwriter against certain liabilities, including those arising
under the Securities Act of 1933, as amended (the "Securities Act").
See "Underwriting".
(3) In the event that the number of unsubscribed Units to be purchased by
the Underwriter is less than 300,000 Units, the Underwriter will have
the right but not the obligation to purchase a minimum of 300,000
Units at the Subscription Price less a 10% discount and 3%
nonaccountable expense allowance within 30 days of the Closing. Such
additional Units are herein referred to as the "Optional Units".
The Company's Common Stock is traded on the over-the-counter market
on NASDAQ Small-Cap Market under the symbol ESTO. Upon completion of this
Offering, the Class B Warrants will be listed on NASDAQ Small-Cap Market under
the symbol ESTOZ. The Company will not apply for listing of the Units on
NASDAQ. However, it is possible that members of the NASD will seek to have the
Units listed on the NASD Electronic Bulletin Board, or if in existence in the
National Quotation Bureau's pink sheets at some time in the future. On
__________, 1996, the reported closing sale price for the Common Stock as
reported on such system was $______ per share. The purchase price of the Units
and the Exercise Price of the Class B Warrants for each of the offerings have
been arbitrarily determined through negotiation between the Company and the
Underwriter, was set at approximately 60-70% of the average closing price as
reported by NASDAQ for the ten business days preceding the Effective Date, and
may bear no relationship to current market price, earnings, assets or other
recognized criteria of value applicable to the Company. The Company is unable
to predict the impact of the Offering upon the market price of the stock.
There can be no assurances that shareholders who purchase Units under the
Rights Offering and/or investors who purchase shares under the Standby
Offering will be able to sell such shares at the price they purchased the
shares or at any price. See "Underwriting" and "Market Information".
-------------------------------------------
2
It is expected that certificates for such shares will be ready for
delivery on or about the seventh calendar day following the Expiration Date.
The issuance of the Common Stock at below-market price will have the effect of
adding to the number of shares issuable under certain outstanding options and
warrants. See "Management".
RESTRICTIONS IN CERTAIN STATES
THIS OFFERING WITH RESPECT TO THE SHARES TO BE ISSUED UPON THE EXERCISE OF THE
RIGHTS HAS BEEN QUALIFIED OR IS BELIEVED TO BE EXEMPT FROM QUALIFICATION IN THE
FOLLOWING JURISDICTIONS:__________________________________________________
RESIDENTS OF OTHER JURISDICTIONS MAY NOT PURCHASE THE COMMON STOCK OFFERED
HEREBY UNLESS THEY CAN DEMONSTRATE TO THE SATISFACTION OF THE COMPANY THAT
THEY SATISFY CERTAIN SPECIFIC CRITERIA FOR EXEMPTION SET FORTH IN THE
APPLICABLE STATES SECURITIES LAWS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OTHER THAN THOSE TO WHICH IT SPECIFICALLY RELATES, OR A SOLICITATION OF
AN OFFER TO BUY FROM ANY PERSON OR ENTITY IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS UNLAWFUL.
3
STATEMENT OF AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities and Exchange Act of 1934 and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission") under the File No. 0-8027. Such reports, proxy
statements and other information filed by the Company can be inspected at the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates, and at the following Regional Offices of the Commission, Chicago
Regional Office, 219 South Dearborn Street, Chicago, Illinois and New York
Regional Office, 7 World Trade Center, New York, New York 10007.
The Company currently files its reports electronically by EDGAR. The
Company distributes annual reports containing audited financial statements to
its shareholders.
4
PROSPECTUS SUMMARY
The following is a summary as of the date hereof of certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information and Consolidated Financial Statements, including the
Notes thereto, appearing elsewhere in this Prospectus. All shares and shares
issuable under outstanding warrants and options in this Prospectus have been
adjusted for a one-for-ten reverse stock split approved by the shareholders of
the Company on August 12, 1996.
The Company
Eastco Industrial Safety Corp. (the "Company" and sometimes "Eastco")
is a corporation organized and existing under the laws of the State of New
York, having been incorporated on May 15, 1958. The Company, through its
wholly-owned subsidiaries, Disposable Safety Wear, Inc. ("Disposable"), Safety
Wear Corp. ("Safety Wear"), Puerto Rico Safety Equipment Corporation ("Puerto
Rico Safety Equipment"), and Puerto Rico Safety Corp. ("Puerto Rico Safety"),
manufactures industrial protective clothing products and distributes a wide
range of industrial safety products. The Company's Manufacturing Operations
sells its products to distributors. The Company's Distribution Operations
sells its products to "end users," including manufacturing companies and
service businesses, public utilities, fisheries, pharmaceutical plants, the
transportation industry and companies engaged in hazardous materials
abatement. The Company's executive offices are located at 130 West 10th
Street, Huntington Station, New York 11746 and its telephone number is (516)
427-1802.
Manufacturing Operations
Manufactured products are sold under the "Charkate / Worksafe",
"Charkate", "Worksafe" and "Cover-up" trade names. The Company, through
Disposable, Safety Wear and Puerto Rico Safety Equipment, manufactures
disposable and reusable industrial protective apparel. Disposable protective
products items include coveralls, shirts, pants, hats, hoods, aprons, smocks,
lab coats, hazardous material handler suits, examination gowns, sleeves, shoe
covers and related items. Disposable clothing is designed to protect the user
from, among other things, splash, dirt, contamination and against a wide range
of hazardous substances. Disposable clothing is made primarily of a spun
bonded polyolefin produced solely by Dupont under the trade name Tyvek(R).
Reusable industrial protective clothing consists of 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. Specific products manufactured 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.
The Company also manufactures welding blankets, curtains and screens.
The Company's Manufacturing Operations and warehousing are located in
Puerto Rico, Alabama, Texas and California and are primarily directed from the
Company's offices in New York. The Company's products are sold primarily in
the United States and Puerto Rico. In addition, manufactured products are sold
to "end-users" through the Company's Distribution Operations (the "Eastco
Division") in the Northeastern region of the United States and Puerto Rico.
Distribution Operations
The Company, primarily through its Eastco Division, distributes
industrial
5
safety products to "end-users" made by the Charkate / Worksafe division as
well as by non-affiliated companies. These products include hard hats,
protective glasses, ear muffs, ear plugs, respirators, goggles, face shields,
rainwear, protective footwear, first-aid kits, monitoring devices, signs and
related products. These products are sold to manufacturing companies and
service businesses, including public utilities, fisheries, hospitals,
pharmaceutical plants, the transportation industry and companies engaged in
hazardous materials abatement.
The Company supplies a variety of items which may be used during the
removal and/or encapsulation of hazardous materials in office buildings,
chemical plants, refineries, electric generating plants and schools. Abatement
products sold by the Company include in the largest part, items made by other
companies, such as negative air machines, respirators, air filtration
equipment, vacuums, polybags and sheetings, decontamination showers, signs,
tools, pumps, sprayers and related equipment. The Company does not engage in
the removal or encapsulation of hazardous materials.
The Company's Distribution Operations are primarily directed from the
Company's offices in New York. The Company also has facilities for warehousing
and distribution of its non-manufactured products in Puerto Rico, Connecticut
and Florida. Items distributed are sold primarily in the Northeastern region
of the United States.
The Offering
Securities Offered 703,591 Units. Each Unit consist of
one share of Common Stock and one
Class B Warrant. See "Description of
Securities".
Subscription Price $5.00 per Unit (the "Subscription
Price").
Common Stock Outstanding
Prior to the Offering(1) 879,488 shares of Common Stock.
Common Stock Outstanding
After the Offering(1) 1,583,079 shares of Common Stock.
Terms of Rights Offering(3) Holders of record on ___________ of the
outstanding Common Stock may subscribe to
purchase Units on the basis of 4 Units for
each 5 shares of Common Stock owned on the
Record Date.
Expiration of Offering ________ at 5:00 p.m. New York Time.
Payment must be received by American
Stock Transfer & Trust Co. (the
"Subscription Agent") by this time.
Standby Offering(3) The Underwriter will offer to sell the
components of the Units at a price
which may exceed the highest asked
price as reflected on NASDAQ. No
Units and/or components thereof will
be offered by the Underwriter to the
public until at least two business
days after the Expiration Date of the
6
Rights Offering. See "The Offering" and
"Underwriting".
Class B Warrants to be
Issued in the Offering (2) 703,591 Class B Warrants.
Exercise Terms........ Each Class B Warrant entitles the
holder thereof to purchase one share
of Common Stock for $6.25 (the
"Exercise Price"), during the period
commencing eighteen months after the
Effective Date, subject to adjustment
in certain circumstances. See
"Description of Securities - Class B
Warrants".
Expiration Date........ __________, 1999 (three years after
the Effective Date).
Redemption............. Redeemable by the Company, in whole or
in part, at a price of $.01 per Class
B Warrant commencing eighteen months
after the Effective Date (or sooner
with the consent of the Underwriter);
provided that: (i)prior notice of not
less than 30 days is given to the
Class B Warrantholders; and (ii)the
closing high bid price of the
Company's Common Stock, for the 15
consecutive trading days ending on the
third day prior to the date on which
the Company gives notice, has been at
least $9.375 per share (to be adjusted
for any stock dividends and stock
splits, and which may be adjusted to
150% of the exercise price of the
Class B Warrants, if such exercise
price is changed). See "Description
of Securities - Class B Warrants".
Use of Proceeds The Company intends to use the net
proceeds of this Offering, amounting
to approximately $2,710,000 for paydown
of the amount outstanding on its line
of credit thereby increasing the
amount available under such line of
credit for future working capital and
other needs such as acquisitions. See
"Use of Proceeds".
Risk Factors The securities offered hereby involve
a high degree of risk and immediate
substantial dilution. See "Risk
Factors" and "Dilution".
NASDAQ Symbols Common Stock: ESTO
Class B Warrants: ESTOZ
- ------------
(1) Does not include Common Stock which may be issued upon the exercise
of any
7
options or warrants currently outstanding. The Company currently has
outstanding options and warrants to purchase 633,935 shares of Common
Stock exercisable at prices between $5.168 and $30.00 per share.
(2) Does not include Common Stock which may be issued upon exercise of
Underwriter's Purchase Option and Optional Units.
(3) Since the Company's shares are to a large extent in the names of
brokers, banks, and trust companies who may not be the beneficial
holders of such securities and/or nominees, the Company is unable to
determine the number of beneficial holders (and the amount of shares
owned by such persons) that reside in states where this Offering is
being made. Accordingly, there can be no assurances given that any of
the Units offered hereby will be subscribed for by shareholders and
in this event absent the market-out provision, the Underwriter will
be obligated to purchase all unsubscribed Units. Should the
Underwriter not purchase the unsold Units in accordance with the
market-out provision, shareholders who have exercised the Rights will
not have a right to cancel their subscription and under such
circumstances, the Company will retain the monies from the Rights
subscribed for. See "Underwriting".
8
SUMMARY FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of the Company's financial information
extracted from the indicated year end Consolidated Financial Statements of the
Company, and is qualified in its entirety by the detailed financial
information appearing in the Consolidated Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The unaudited Consolidated Financial Statements of the
Company for the interim periods ended March 31, 1996 and 1995, have been
prepared by management from the books and records of the Company and reflect,
in the opinion of management, all adjustments (consisting of normally
occurring accruals), necessary for a fair presentation of the financial
position, results of operations, and changes in the financial position of the
Company, as at the periods indicated therein. Results from interim periods are
not necessarily indicative of results which can be expected for the entire
year.
Statement of Operations Data:
Year Ended June 30, Nine Months Ended March 31,
------------------- ---------------------------
1995 1994 1996 1995
---- ---- ---- ----
Net sales $24,024,897 $20,745,809 $19,739,719 $17,365,091
Cost of sales 19,254,571 17,372,063 15,624,922 13,887,720
----------- ----------- ----------- -----------
Gross profit 4,770,326 3,373,746 4,114,797 3,477,371
----------- ----------- ----------- -----------
Selling, general
and administrative
expenses 4,148,517 4,709,037 3,431,369 3,183,097
Interest 583,665 1,391,777 599,496 405,081
Other income (NET) (39,793) (15,690) (52,822) (96,654)
Settlement with
former underwriter - - 78,000 -
----------- ----------- ----------- -----------
Total expenses 4,692,389 6,085,124 4,056,043 3,491,524
----------- ----------- ----------- -----------
Net income (loss) $ 77,937 $(2,711,378) $ 58,754 $ (14,153)
========== ========== ========== ==========
Net income (loss) per
share(1):
Primary $ .20 $ (20.76) $ .13 $ (.04)
========== ========== ========== =========
Assuming full dilution $ .17 $ (20.76) $ .13 $ (.04)
========== ========== ========== =========
Average number of shares
used in computing per share
amounts:
Primary 392,529 130,585 447,343 347,738
========== ========== ========== =========
Assuming full dilution 471,698 130,585 447,343 347,738
========== ========== ========== =========
9
SELECTED CONSOLIDATED FINANCIAL DATA (Cont'd)
Consolidated Balance Sheet Data:
As at June 30, As at March 31, 1996
-------------- --------------------
(Unaudited)
Pro- As
1993 1994 1995 Actual Forma(2) Adjusted(3)
---- ---- ---- ------ -------- -----------
Current
Assets $ 8,645,332 $7,557,319 $ 9,265,149 $10,729,579 $11,065,649 $11,065,649
Current
Liabilities 8,688,765 6,515,503 8,200,620 9,513,617 9,263,617 6,552,996
Working Capital
(Deficiency) (43,433) 1,041,816 1,064,529 1,215,962 1,802,032 4,512,653
Total
Assets 10,297,088 9,001,756 10,716,048 12,167,280 12,463,982 12,463,982
Long-
Term Debt 909,246 538,544 489,782 448,488 448,488 448,488
Total
Liabilities 9,663,011 7,054,047 8,690,402 9,962,105 9,712,105 7,001,484
Shareholders'
Equity 634,077 1,947,709 2,025,646 2,205,175 2,751,877 5,462,498
(1) Adjusted to give retroactive effect to a 1 for 10 reverse stock split
effective August 12, 1996.
(2) Adjusted to give effect to 26,174 shares issued on the conversion of
$150,000 of the convertible subordinated debenture payable and the
buyback and retirement of 21,374 shares for $180,000; payment of
$120,000 for the remaining balance of the debenture with the
additional $20,000 plus $15,573 of deferred financing costs being
charged to earnings; and the issuance of 513,000 shares in a private
placement with net proceeds of approximately $666,695.
(3) Adjusted to give effect to shares issued in the Rights Offering and
the sale of units offered and the receipt of $2,710,621 in net proceeds
and their initial application.
10
RISK FACTORS
The securities offered hereby are highly speculative and should be
purchased only by persons who can afford to lose their entire investment in
the Company. Each prospective investor should carefully consider the following
risk factors, as well as all other information set forth elsewhere in this
Memorandum:
History of Previous Significant Losses. Although for the fiscal year
ended June 30, 1995, the Company had net income of $77,937, the Company
incurred losses of $2,711,378, $858,326, $1,362,761 and $1,388,831,
respectively, for the fiscal years ended June 30, 1994, 1993, 1992 and 1991.
For the nine months ended March 31, 1996, the Company had a net income of
$58,754 compared to a net loss of $14,153 for the nine months ended March 31,
1995. Other than for the fiscal year ended June 30, 1995, the Company has not
had a profitable fiscal year since its fiscal year ended June 30, 1989. There
can be no assurances that the Company will be profitable or will not incur
losses in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Consolidated Financial Statements".
Lending Arrangements; Liens on the Company's Assets. The Company is
dependent upon its revolving line of credit with Congress Financial
Corporation ("Congress"), which as revised during July, 1996, expires October
1, 1999, except that Congress at its sole option may extend the termination
date to October 1, 2000. The line of credit was increased from $6,000,000 to
$9,000,000 as of July, 1996. Interest is payable monthly at 1.25% (previously
2.25%) over the prime rate, with provision to further reduce such rate to 1%
over the prime rate upon consummation of this Offering no later than December
31, 1996. Borrowings are currently limited to 55% of the Company's eligible
inventory and 85% of the Company's eligible accounts receivable. The amounts
outstanding under the line of credit at June 30, 1995 and June 30, 1994, were
$4,829,000 and $3,184,000, respectively. As of June 30, 1996, the amount
outstanding on the line of credit was $5,558,000, with an availability of
borrowing $51,000 based upon accounts receivable and inventory at that date.
The loan is subject to certain working capital and net worth covenants and is
collateralized by all of the Company's assets not previously pledged under
other loan agreements. Although the Company will use substantially all of the
net proceeds of this offering to reduce outstanding indebtedness under its
credit facility (See "Use of Proceeds"), the Company will, in all likelihood,
draw down funds under such facility in the future in order to continue to
finance its operations. In the event that the Company is unable to obtain
financing from its principal lender or alternative sources of financing, or if
able to do so but not on favorable terms, the Company's ability to operate
profitably could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In September 1993, the Company received an overadvance of $500,000 from
Congress. In connection therewith, Messrs. A. Densen, L. Densen and A. Towell,
directors and executive officers of the Company, obtained a $250,000 junior
participation in the loans made to the Company from Congress by advancing
$250,000 of their funds to Congress. $250,000 of this overadvance has been
repaid to Congress. $35,000 has been repaid to L. Densen. The balance of
$215,000 will be repaid by Congress, at its option, to Messrs. A. Densen and A.
Towell, subject to the availability of funds under the revolving line of credit.
The effect of the application of the proceeds of this Offering to the reduction
of the monies owed to Congress should have the effect of enabling the balance
of the overadvance of $215,000 to be repaid to Messrs. A.Densen and A. Towell.
In addition, 130 West 10th Street Associates, LLC ("Associates"), a New
York limited liability Company consisting of a group of investors (including
wives
11
of two directors and officers of the Company and a present director of the
Company), holds a first mortgage on the property containing the Company's
executive offices and warehouse located in Huntington Station, New York, as
well as a secondary lien on all of the Company's assets. This mortgage comes
due on June 30, 1997 in the amount of $433,737.35 and the Company at such time
will be required to either satisfy, extend or obtain a replacement for this
mortgage. Although there can be no assurances, the Company believes that it
will be able to extend or replace this mortgage.
In the event that the Company fails to comply with its obligations, the
Company's indebtedness could be declared immediately due and payable and, in
certain cases, the Company's assets could be foreclosed upon. Moreover, to the
extent that all of the Company's assets continue to be pledged to secure
outstanding indebtedness, such assets are unavailable to secure additional
debt financing, which may adversely affect the Company's ability to borrow in
the future.
Asbestos Litigation Against the Company. The Company, in the past,
manufactured certain products made of asbestos. Such use was terminated by the
Company in the mid-1980's. It has been alleged that asbestos is a cause of
cancer, such as asbestosis, mesothelioma, and other related diseases, the
symptoms of which may not appear for twenty or more years. Since the early
1980's, numerous lawsuits have been instituted against the Company by persons
who have been exposed to asbestos and asbestos products.
As of June 30, 1996, the Company estimates that it is a party to
approximately 280 cases with respect to exposure to asbestos involving
approximately 1300 plaintiffs. All of the actions against the Company to date
have been brought by non-employees of the Company and are based upon personal
injury claims.
These actions are pending in the states of New York, New Jersey, and
Pennsylvania. The number of first-party plaintiffs include, in various
instances, spouses of said plaintiffs. 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. Each
seeks varying amounts of damages, usually unlimited, or for each plaintiff as
high as $10,000,000 for compensatory damages and $20,000,000 for punitive
damages.
From 1981 through June 30, 1996, the Company estimates that approximately
900 actions on behalf of approximately 7500 first-party plaintiffs have been
instituted against it concerning asbestos-related claims, and that the claims
of approximately 6200 plaintiffs have been terminated against the Company. The
Company estimates that, with the exception of defense costs, a total of
approximately $1,500,000 has been paid, or agreed to be paid, in settlements
to date with regard to the terminated actions, of which all but approximately
$45,000 has been or will be paid by the Company's insurance carriers. Through
June 30, 1996, the Company has paid less than approximately $35,000 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 Company is unable to
predict.
The existence of the asbestos litigation may have an adverse effect upon
the financial liquidity of the Company in the future. The Company is unable to
predict the outcome of this uncertainty or the total extent to which its
insurance carriers will provide coverage. Based upon prior experience, the
12
Company believes that additional claims will be filed in the future. Further,
the Company's independent auditors report emphasizes the uncertainties of
these matters. See "Legal Proceedings" for a description of asbestos and other
litigation pending against the Company.
Insurance Coverage Applicable to Asbestos Litigation. For the period
commencing April 1, 1968 to April 1, 1969 and March 11, 1971 to November 27,
1985, the Company believes that it has various policies of primary insurance
in different amounts which would protect it against liability for
asbestos-made, product-related personal injuries. The policies range in
amounts from $50,000 to $1,000,000 on an annual basis. The Company also
believes that since August 10, 1972 to on or about August 11, 1986 it has had
various policies for excess coverage applicable to asbestos claims on an
annual basis. 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 and approximately
thirty-six months in the excess coverage between August 10, 1972 and August
11, 1986. The policies of insurance are not applicable to all of the
subsidiaries of the Company, which have varying coverage, and such
subsidiaries may also be without coverage for various times of their doing
business. Not all of these policies are in the possession of the Company.
Effective June 26, 1990, an agreement between Eastco and its primary
insurance carriers dated March 26, 1990 became effective. Eastco entered into
this agreement in an effort to resolve uncertainties as to its insurance
coverage which will cover asbestos claims against the parent Company, Eastco,
where any exposure to asbestos is alleged during the period 1971 to 1985,
inclusive. Pursuant to this agreement, the Company is obligated to share in
the payment of asbestos-related claims against Eastco. Pursuant to the
agreement, the Company 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 parties to the agreement. The agreement is
subject to policy limitations of each insurance policy. The agreement may be
terminated at any time upon ninety (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 twelve (12) months from the date the notice of termination is
given. The Company is aware of only one case pending against it which is on
the trial calendar.
Effective during May, 1991, the Company entered into a Settlement
Agreement and Release with Mount Vernon Fire Insurance Company. The Company
discontinued its action against Mount Vernon, which agreed that, subject to
the terms of the agreement, Mount Vernon would reimburse the Company (where
applicable) for 6.25% of attorneys' fees (52.08% of the Company's 12% share
referred to in the agreement in the previous paragraph) and 6.25% of
indemnification costs (36.76% of the Company's 17% share referred to in the
agreement in the previous paragraph). The agreement is not applicable to any
asbestos actions against the Company where no exposure is alleged to products
manufactured or distributed by Eastco between April 1, 1968 and April 1, 1969.
The agreement may be terminated at any time upon 90 days' notice, but such
notice is not applicable to asbestos actions placed on a trial calendar,
unless such has a trial date more than twelve months from the date the notice
of termination is given. The agreement provides that the limit available under
the policy is $100,000 plus attorneys' fees while the agreement is in effect
and is applicable only to the parent Company, Eastco. Approximately $25,000
has been reimbursed by Mount Vernon Fire Insurance Company as of June 30, 1996
for indemnification.
The Company is unable to ascertain the total extent of insurance
applicable to asbestos claims against it or the extent to which its insurance
carriers will
13
provide coverage. The two agreements referred to above between the Company and
the insurance carriers may not be applicable to Puerto Rico Safety Equipment,
which is covered by other insurance. To date, the claims settled by Puerto
Rico Safety Equipment have been paid in full by insurance. 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 March 11, 1971 to July 23, 1986 with various gaps.
The Company'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 the defendant for wrongs 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 thereto, is required for a
court to award punitive damages. The Company is unable to specify whether its
actions would give rise to punitive damages. It believes that its actions
should not give rise to punitive damages. There, however, can be no assurance
that this will be the case. See "Legal Proceedings".
Government Regulation; No Assurance Of Compliance with OSHA. The
Company's manufacturing facilities are subject to regulation and inspection
standards established by the Occupational Safety and Health Administration
("OSHA"), which were enacted, in part, to require employers to supply
protective clothing in certain work environments. To date, the Company's
manufacturing facilities have not been inspected for compliance with the
standards established by OSHA. Although the Company believes that it is in
material compliance with current standards, there can be no assurance that any
inspection will not reveal that the Company has failed to comply with the
standards established by OSHA and that, as a result, the Company may be
required to expend sums, which can be costly, to assure compliance with OSHA
regulations.
Need for Substantial Inventories. The Company is required to maintain
substantial inventories for both its Manufacturing Operations and its
Distribution Operations in order to meet the immediate requirements of its
customers who require products on short notice and who do not maintain an
inventory of such products. The Company had inventory of approximately
$5,391,000, $4,364,000 and $3,166,000 as of March 31, 1996, June 30, 1995 and
June 30, 1994, respectively. Although the Company believes it currently
maintains sufficient inventories, prior to a 1994 public offering (the "1994
14
Offering"), the Company experienced periods where it did not have sufficient
working capital to maintain its inventories to meet the demands of certain of
its customers. There can be no assurance that the Company will be able to
maintain sufficient inventories or the Company will not return to periods
where there is insufficient working capital to maintain its inventories to
meet the needs of its customers.
Dependence Upon DuPont For Supply of Tyvek(R). The Company is not
dependent upon any one company for a source of supply of raw materials for its
manufacturing operations other than DuPont, which supplies the Company with
Tyvek(R), a raw material which is used in various lines of its disposable
products. Products utilizing Tyvek(R) accounted for approximately 35% and 29%
of consolidated sales for the fiscal years ended June 30, 1995 and June 30,
1994, respectively and approximately 42% for the nine months ended March 31,
1996. Management believes that its current relationship with DuPont is
satisfactory. The Company has no contract with DuPont for the supply of such
raw material; therefore, DuPont could terminate its relationship with the
Company at any time. The Company does not believe that an alternative source
exists for the supply of Tyvek(R). Accordingly, the loss of DuPont as a
supplier of Tyvek(R) would have a material adverse effect on the Company's
operations.
No Dividends. The Company intends to retain future earnings to finance
future growth. Accordingly, any potential investor who anticipates the need
for dividends for his investment should not purchase any of the securities
offered hereby. In addition, the Company's agreement with Congress contains
restrictions which prohibit the Company from paying cash dividends.
Competition. The market for industrial protective clothing products and
industrial safety products is extremely competitive. The Company faces
competition in all of its product markets from large, established companies
that have greater financial, managerial, sales and technical resources than
the Company, and some of the Company's product markets are dominated by such
larger companies. Where larger competitors offer products that are directly
competitive with the Company's products, particularly as part of an
established line of products, there can be no assurance that the Company can
successfully compete for sales and customers. Larger competitors also may be
able to benefit from economies of scale or to introduce new products that
compete with the Company's products. There can be no assurance that the
Company can successfully compete in any of its product markets.
Limitation on Net Operating Loss Carryforwards. As of June 30, 1995, the
Company had Federal net operating loss carryforwards for income tax purposes
of approximately $5,410,000 which expire through the year 2009. These
carryforwards are subject to limitations on the amount that can be utilized by
the Company in a fiscal year due to "change of ownership" rules as defined by
applicable Federal tax statutes. The amount of income which may be offset
after an ownership change is determined by multiplying the fair market value
of the Company at the time of the ownership change by the long-term tax exempt
rate. To the extent that such annual limitation is not utilized, it may be
further carried forward until the carryforward would have otherwise expired. A
"change in ownership" occurred upon the completion of the 1994 Offering. Based
upon the number of shares offered in the 1994 Offering and the applicable
long-term tax exempt rate, the Company's ability to utilize its net operating
carryforward losses in future years was limited to approximately $380,000 per
year. The carryforwards available to be utilized for the year ending June 30,
1996 approximate $1,584,000. A change in ownership may also occur upon the
15
completion of this Offering and the Company's ability to utilize its net
operating loss carryforwards could be further limited.
Reliance on Current Management. The Company's current operations and
future success is greatly dependent upon the services of Mr. Alan Densen, its
President, Lawrence Densen, its Senior Vice President and Anthony P. Towell,
its Vice President of Finance. The loss of services of any of the foregoing,
who are each employed under written agreements for five year terms, could have
a material adverse effect on the Company.
Control By Management. As of the date of this Prospectus, the Company's
executive officers and directors own of record and beneficially, an aggregate
of approximately 23% of the Company's outstanding Common Stock and may be in a
position to have significant influence over the outcome of all matters
submitted to stockholders for approval, including the election of directors of
the Company, as a result of their control of such shares which will vote on
all matters. The Company's Board of Directors is divided into two classes,
each of which generally serves for a term of two years, with only one class of
directors being elected in each year. A classified board under certain
circumstances could discourage, prevent or delay a change in control of the
Company, which could have the effect of discouraging bids for the Company and
thereby prevent shareholders from receiving the maximum value for their
shares. In addition, there are provisions in the employment agreements with
Messrs. A. Densen, A. Towell and L. Densen, that provide for them to receive
immediately a lump sum payment of three years' compensation as well as
severance pay should a "Change in Control" occur, which also could have a
similar effect of deterring bids for the Company. Messrs. A. Densen, L.
Densen, and A. Towell, in modification agreements to their employment
agreements, have waived: (i) their right to bonuses based upon the Company's
earnings or sales for the fiscal years ended June 30, 1996 and June 30, 1997;
(ii) their exercise rights on options and warrants and repayment of their junior
participation interests with Congress and compensation payable in the event of
a Change in Control with respect to the Offerings; and (iii) their right to
terminate their relationship with the Company, as per the terms of their
respective employment agreements. The modification agreements provide that their
right to terminate their employment agreements shall not be waived in the event
that there is a material breach of such agreements by the Company. See
"Management".
Outstanding Options and Warrants. As of the date hereof, there are
633,935 shares of Common Stock subject to issuance upon currently outstanding
options and warrants at exercise prices between $5.168 and $30.00 per share. To
the extent that outstanding options and warrants are exercised, additional
equity investment funds will be paid into the Company at the expense of
dilution to the interests of the Company's shareholders. Moreover, the terms
upon which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of outstanding options and warrants can
be expected to exercise or convert them at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable
to the Company than those provided in such securities.
Non-Registration in Certain Jurisdictions of Shares Underlying the Class
B Warrants. Although the Units will not knowingly be sold to purchasers in
jurisdictions in which they are not registered or otherwise qualified for
sale, purchasers may buy Units or Class B Warrants in the aftermarket or may
move to jurisdictions in which the shares of Common Stock issuable upon
exercise of the Class B Warrants are not so registered or qualified during the
period that the
16
Class B Warrants are exercisable. In such event, the Company would be unable
to issue shares to those persons desiring to exercise their Class B Warrants
unless and until the shares could be registered or qualified for sale in the
jurisdiction in which such purchasers reside, or an exemption to such
qualification exists in such jurisdiction. If the Company were unable to
register or qualify the shares in a particular state and no exemption to such
registration or qualification was available in such jurisdiction, in order to
realize any economic benefit from purchase of the Class B Warrants, a holder
might have to sell the Class B Warrants rather exercise them. No assurance can
be given, however, as to the ability of the Company to effect any required
registration or qualification of the Units, Common Stock or Class B Warrants
in any jurisdiction in which qualification of registration has not already
become effective. See "Description of Securities - Class B Warrants."
Current Prospectus and State Blue Sky Registration Required to Exercise
Class B Warrants. Holders of the Class B Warrants will have the right to
exercise the Class B Warrants for the purchase of shares of Common Stock only
if a current prospectus relating to such shares is then in effect and only if
the shares are qualified for sale under the securities laws of the applicable
state or states. The Company has undertaken and intends to file and keep
current the Prospectus which will permit the purchase and sale of the Common
Stock underlying the Class B Warrants, but there can be no assurance that the
Company will be able to do so. Although the Company intends to seek to qualify
for sale the shares of Common Stock underlying the Class B Warrants in those
states in which the securities are to be offered, no assurance can be given
that such qualification will occur. The Class B Warrants may be deprived of
any underlying shares which are not, or cannot be, registered in the
applicable states. See "Description of Securities - Class B Warrants."
Penny Stock Regulation. The Commission has adopted rules that regulate
broker-dealer practices in connection with transactions in "penny stocks."
Penny stocks generally are equity securities with a price of less than $5.00
(other than securities registered on certain national securities exchanges or
quoted on the NASDAQ system, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny stocks and the nature and level risks in the penny
stock market. The broker-dealer must also provide the customer with current
bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and broker-dealer and salesperson
compensation information must be given to the customer orally or in writing
prior to effecting the transaction and must be given in writing before or with
the customer's confirmation. In addition, the penny stock rules require that
prior to a transaction of a penny stock not otherwise exempt from such rules,
the broker-dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may have
the effect
17
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules. If the Company's securities
become subject to the penny stock rules, investors in this offering may find
it more difficult to sell such securities.
Although the Company believes that its securities will, as of the date of
this Prospectus, be outside the definitional scope of a penny stock, as it
will be listed on NASDAQ, in the event the Common Stock were subsequently to
become characterized as a penny stock, the market liquidity for the Company's
securities could be severely affected. In such event, the regulations on penny
stocks could limit the ability of broker-dealers to sell the Company's
securities, and thus, the ability of purchasers in this offering to sell their
securities in the secondary market.
Relationship of Underwriter to Trading. The Underwriter may act in a
brokerage capacity with respect to the purchase or sale of the Units, Common
Stock or Class B Warrants in the over-the-counter market where each will
trade. The Underwriter also has the right to act as the Company's exclusive
agent in connection with any future solicitation of warrantholders to exercise
their Class B Warrants. Unless granted an exemption by the Commission from
Rule 10b-6 promulgated under the Exchange Act, the Underwriter and any
soliciting broker-dealers will be prohibited from engaging in any
market-making activities or solicited brokerage activities with regard to the
Company's securities during a period beginning two or nine business days,
whichever is applicable, prior to the commencement of any such solicitation
and ending on the later of the termination of such solicitation activity or
the termination (by waiver or otherwise) of any right that the Underwriter and
soliciting broker-dealers may have to receive a fee for soliciting the
exercise of the Class B Warrants. As a result, the Underwriter and soliciting
broker-dealers may be unable to continue to make a market for the Company's
securities during certain periods while the Class B Warrants are exercisable.
Such a limitation, while in effect, could impair the liquidity and market
price of the Company's securities. See "Underwriting."
No Public Market for the Company's Units and Warrants; Possible
Volatility of Stock Price; Arbitrary Determination of Subscription Price. The
Common Stock and Class B Warrants are immediately detachable from the Units
and separately tradeable. The Company will not apply for a listing of the
Units on NASDAQ and as a result, such Units are not likely to be tradeable,
although it is possible that members of the NASD will seek to have the Units
listed on the NASD Electronic Bulletin Board or, if in existence, in the
National Quotation Bureau's pink sheets at some time in the future. Prior to
this Offering, there has been no public market for the Class B Warrants, and
there can be no assurance that a market will develop at the conclusion of the
Offering, or if developed, that it will be sustained. In addition, if any
market does develop, the market price of these securities might be volatile.
Factors such as announcements by the Company or its competitors concerning
proposed plans, procedures and proposed government regulations, losses and
litigation may have a significant effect on the market price of the Company's
securities. Changes in the market price of the Company's securities may have
no connection with the Company's actual financial results.
18
In addition, the stock market has experienced extreme price and volume
fluctuations which have particularly affected the market prices for many
companies and which have often been unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect
the market price of the Company's securities. The Underwriter has the right to
request the de-listing from NASDAQ of the Warrants which will likely have an
adverse effect upon their trading.
Underwriter's Warrants, Optional Units, and Registration Rights. The
Company will sell to the Underwriter, for nominal consideration, Underwriter's
Warrants to purchase one Unit for each ten actually sold in the Offering at an
exercise price of $6.00, regardless of the number of Units purchased by the
Underwriter. The Underwriter's Warrants may not be sold, transferred, assigned
or hypothecated for a period of one year from the Effective Date, except to
officers of the Underwriter and members of the selling group, as well as their
officers and partners. Exercise of the Underwriter's Warrants, which may be
effected at any time, either in whole or in part, beginning 12 months after
the Effective Date and not more than four years thereafter, may dilute the
value of the Common Stock, may adversely affect the Company's ability to
obtain equity capital, and, if the Common Stock issuable upon the exercise of
the Underwriter's Warrants is sold in the public market, may adversely affect
the market price of the Common Stock. The Units issuable upon exercise of the
Underwriter's Warrants, the Common Stock and Class B Warrants comprising such
Units, and the Common Stock issuable upon exercise of the Class B Warrants,
have been included in the Registration Statement of which this Prospectus
forms a part. The Company has an obligation to keep such registration
statement current, which could result in substantial expense to the Company.
This obligation is in addition to the demand registration rights granted to
the Underwriter in connection with the Offering. In the event that the number of
the unsubscribed Units to be purchased by the Underwriter is less than 300,000
Units, the Underwriter will have the right but not the obligation to purchase a
minimum of 300,000 of these Optional Units. Any profit received by the
Underwriter either from the sale of the Underwriter's Warrants or from the
sale of the shares of Common Stock purchasable upon exercise of the
Underwriter's Warrant may be deemed additional underwriting compensation. See
"Underwriting" with respect to these and other rights to compensation that the
Underwriter has.
State Securities Laws. The Offering with respect to the exercise of
Rights has been qualified or is exempt from qualification in the following
jurisdictions: __________________________________________. Residents of other
jurisdictions may not purchase Units or exercise Class B Warrants unless they
can demonstrate to the Company that under the particular state's securities
laws, an exemption is available for their transaction. This Prospectus does
not constitute an offer other than those to which it specifically relates, or
a solicitation of an offer to buy from any person or entity in any
jurisdiction in which such offer or solicitation is unlawful. See "The
Offering Restrictions in Certain States."
Firm Commitment by Underwriter. In the event that all of the shares
offered hereby are not sold pursuant to the exercise of Rights, the
Underwriter has agreed, on a firm commitment basis, to take and pay for all of
the unsold shares, except if, in the reasonable judgment of the Underwriter,
it is impracticable to consummate the Standby Offering under normal "market
out"
19
conditions, such as (i) the Company having sustained a material loss of
whatsoever nature, which, in the sole and absolute opinion of the Underwriter,
substantially affects the value of the property of the Company or materially
interferes with the operation of the business of the Company, (ii) any
material adverse change in the business, property or financial condition of
the Company, (iii) trading in securities on the New York Stock Exchange, the
American Stock Exchange or NASDAQ System having been suspended or limited or
minimum prices having been established on either such Exchange or System, (iv)
a banking moratorium having been declared by either federal or state
authorities, (v) an outbreak of major hostilities or other national or
international calamity having occurred, (vi) any action having been taken by
any government in respect of its monetary affairs which, in the reasonable
opinion of the Underwriter, has a material adverse effect on the United States
securities markets; (vii) any action, suit or proceeding at law or in equity
against the Company, or by any Federal, State or other Commission, board or
agency wherein any unfavorable decision would materially adversely effect the
business, property, financial condition or income of the Company; or (viii)
due to conditions arising subsequent to the execution hereof, the Underwriter
reasonably believes that, as a result of material and adverse events affecting
the market for the Company's Common Stock or the securities markets in
general, it is impracticable or inadvisable to proceed with the Standby
Offering. Accordingly should the Underwriter not purchase the unsold shares in
accordance with the market out conditions, shareholders who have exercised the
Rights will not have a right to cancel their subscription and under such
circumstances, the Company will retain the monies from the Rights subscribed
for. The Rights Offering is distinct and separate from the Standby Offering
under which the Underwriter has a "market out" right of cancellation as
described above. In such event, investors may be vulnerable to illiquidity
and/or a loss of their entire investment. See "The Offering" and
"Underwriting".
Tax Incentives. 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 Company. If the
conditions of Section 936(a)(2) are satisfied, the Section 936 credit equals
the portion of the United States income tax that is 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 payable by each subsidiary to the Company from operations
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") imposes new limitations on computing the Possession Tax
Credit under Section 936 for tax years beginning after 1993. There are two
methods for determining the credit under the new law. Under the first method,
the amount of the credit may be determined by using the so-called economic
activity limit. This attempts to limit the credit by applying various
percentages to possession-based compensation, depreciation and taxes paid or
accrued. Alternatively, the Company may make an irrevocable election when it
files its June 30, 1996 federal income tax return to have present rules apply,
but to phase out the credit to 60% of the 1994 level, and further phase down
by 5% per year to 40% in 1998 and years thereafter. Since the credit is a
function of future earnings, if any, the effect of such limitations cannot be
determined at the present time. In addition, the Omnibus Act makes the 100%
dividends received deduction subject to the Alternative Minimum Tax
Calculation. No dividends have been declared on the aggregate undistributed
earnings of Puerto Rico Safety Equipment and Disposable (which through June
30, 1995, aggregates approximately $2,458,000) and none are intended to be
declared because it is management's intention to reinvest the earnings from
such subsidiaries indefinitely. The Company believes that based upon current
operations, the
20
Omnibus Act will not have a material effect on the Company for the foreseeable
future.
As Puerto Rico tax exemptions are reduced or expire, the Company may be
required to pay taxes on income earned in Puerto Rico. The Company is unable
to predict the amount of such impact after such exemptions are reduced or
expire. See "Management's Discussion of Analysis of Financial Condition and
Results of Operations."
Shares Eligible for Future Sale. Of the 879,488 shares of Common Stock of
the Company outstanding as of the Effective Date, which includes the 513,000
shares to be registered and sold herewith, ____ shares are restricted
securities, as that term is defined in Rule 144 promulgated under the
Securities Act of 1933 (the "Securities Act"). 399,000 shares have been
registered for sale concurrently herewith subject to an agreement with the
Underwriter not to sell such shares for a period of three months without the
prior written consent of the Underwriter, and 114,000 shares have been
registered for sale concurrently herewith subject to an agreement with the
Underwriter not to sell such shares for a period of nine months without the
prior written consent of the Underwriter. Of the 879,488 shares, ________
shares are owned by affiliates of the Company, as that term is defined under
the Securities Act. Absent registration under the Securities Act, the sale of
such shares is subject to Rule 144, as promulgated under the Securities Act.
In general, under Rule 144, subject to satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted shares of Common Stock for at least two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or if the Common Stock is quoted on NASDAQ, the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of the Company for at least three months immediately
preceding the sale and who has beneficially owned the shares of Common Stock
for at least three years is entitled to sell such shares under Rule 144
without regard to any of the volume limitations described above. The Company's
executive officers and directors have agreed not to sell their shares for a
period of eighteen months from the Effective Date without the prior consent of
the Underwriter. The Underwriter may consent to the sale of such shares at any
time, in its sole discretion, upon the request of the holder. The
Underwriter's decision to consent will be based upon the current market
conditions, liquidity of the Common Stock, as well as such other factors the
Underwriter deems appropriate. No public announcement will be made with
respect to the foregoing. See "Shares Eligible for Future Sale".
21
USE OF PROCEEDS
The net proceeds from the sale of the Units will be approximately
$2,710,621. The Company intends to use the net proceeds of this Offering for
paydown of the amount outstanding on its line of credit thereby increasing the
amount available under such line of credit for future working capital and
other needs such as acquisitions. Although the Company may use substantially
all of the net proceeds of this offering to reduce outstanding indebtedness
under its credit facility, the Company will, in all likelihood, draw down
funds under such facility in the future in order to continue to finance its
operations. The proceeds of the Company's line of credit with Congress are
used for working capital and general corporate purposes which includes
salaries, purchase of inventory, marketing, and other applicable corporate
expenses. The effect of the application of the proceeds of this Offering to
the reduction of the monies owed to Congress should have the effect of
enabling the balance of the overadvance of $215,000 to be repaid to Messrs.
A.Densen and A. Towell.
DILUTION
As of March 31, 1996, the Company had a pro forma net tangible book value
of $2,741,942 or $3.12 per share. The pro-forma net tangible book value per
share as of March 31, 1996 represents the Company's tangible pro-forma assets
less the total pro-forma liabilities. The pro-forma net tangible book value
gives effect to the 513,000 shares issued in the private placement and the
5,000 shares issued, as well as the additional charges to earnings related to
the settlement of the subordinated convertible debentures payable. See
"Certain Relationships and Related Transactions" and Note 12 to Notes to
Consolidated Financial Statements. After giving effect to the 703,591 shares
issued in the Rights Offering and sale of Units offered hereby, the pro-forma
net tangible book value, as adjusted, as of March 31, 1996 would have been
$5,452,563 or $3.44 per share after the receipt of the net
proceeds. This represents an immediate increase in the pro-forma net tangible
book value of $.32 per share to existing stockholders and an immediate
dilution of $1.56 per share to new stockholders purchasing shares of common
22
stock offered hereby, as illustrated in the following table:
Offering Price $5.00
Pro-forma net tangible value as
of March 31, 1996 $3.12
Increase in pro-forma net tangible
book value attributable to new
stockholders .32
-----
Pro-forma net tangible book value 3.44
after the offering -----
Dilution of new stockholders $1.56
=====
23
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996: (i) on an historical basis; (ii) on a pro-forma basis giving
effect to the settlement of the convertible subordinated debenture payable and
the sale of 513,000 shares in a private placement; and (iii) on such pro-forma
basis as adjusted giving effect to the Rights Offering and the sale of Units
and the application of the proceeds therefrom. This table should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
As of March 31, 1996
--------------------
Pro-Forma
Actual Pro-Forma (1) As Adjusted (2)
------ ------------- -----------
Current Liabilities:
Convertible Subordinated
Debenture Payable $ 250,000 $ - $ -
Loans Payable 5,991,587 5,991,587 3,280,966
---------- ---------- -----------
Total $6,241,587 $5,991,587 $ 3,280,966
========== ========== ===========
Long-Term Debt $ 448,488 $ 448,488 $ 448,488
---------- ---------- -----------
Stockholders' Equity:
Common Stock, $.12 par value;
authorized 20,000,000 shares;
issued and outstanding;
361,488 actual outstanding, 43,379
879,488 pro-forma outstanding, 105,539
1,583,079 pro-forma as
adjusted outstanding 189,970
Additional paid-in capital 6,343,634 6,869,502 9,495,692
Accumulated Deficit (4,181,838) (4,223,164) ( 4,223,164)
---------- --------- ----------
Total Stockholders'
Equity 2,205,175 2,751,877 5,462,498
---------- --------- ----------
Total Capitalization $2,653,663 $3,200,365 $ 5,910,986
========== =========== ===========
- ----------------------
(1) Adjusted to give effect to the $150,000 conversion of the convertible
subordinated debenture into 26,374 shares of common stock and the
repurchase and retirement of 21,374 shares for $180,000; payment of
$120,000 for the balance remaining with the additional $20,000 plus
$15,573 of deferred financing costs being charged to earnings and the
issuance of 513,000 shares in a private placement with net proceeds
of approximately $666,695. See Note 12 in the "Consolidated
Financial Statements" and "Certain Relationships and Related
Transactions".
(2) Adjusted to give the effect to shares issued in the rights offering
and the sale of units offered hereby and the receipt of
$2,710,621 in net proceeds and their initial application.
24
MARKET INFORMATION
The principal market on which the Common Stock of the Company is traded
is the over-the-counter market. The Common Stock is traded on NASDAQ on the
Small-Cap Market and its symbol is ESTO. The following chart sets forth the
high and low sales price as determined from NASDAQ for the Common Stock for
the periods indicated as adjusted for its reverse 1 for 10 stock split
effective August 12, 1996:
High Low
---- ---
Fiscal Year Ended June 30,
1995
----
First Quarter $ 17.50 $ 8.75
Second Quarter 14.38 5.63
Third Quarter 16.25 7.50
Fourth Quarter 17.50 10.00
1996
----
First Quarter $ 20.00 $15.00
Second Quarter 20.63 11.25
Third Quarter 14.38 7.50
Fourth Quarter 14.38 6.25
1997
----
First Quarter (July 1, $ 10.00 $ 6.88
1996 through July 29,
1996)
The approximate number of holders of record of the Common Stock, as of
July 23, 1996 was 229. The Company believes there are in excess of 1,500
beneficial holders of the Common Stock. On July 29, 1996, the closing price of
the Common Stock was $8.125.
DIVIDEND POLICY
The payment by the Company of dividends, if any, rests within the
discretion of the Board of Directors and, among other things, will depend upon
the Company's earnings, capital requirements and financial condition, as well
as other relevant factors. The Company has not declared any dividends since
inception, and has no present intention of paying any dividends on its Common
Stock in the foreseeable future, as it intends to reinvest its earnings, if
any, in the Company's business. In addition, the Company's lending arrangement
with Congress prohibits the payment of dividends without their consent.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nine Months Ended March 31, 1996 Compared to Nine Months Ended March 31, 1995
The Company's net income for the nine months ended March 31, 1996 was
$58,754 compared to a net loss of $14,153 for the nine months ended March 31,
1995.
Consolidated net sales for the nine months ended March 31, 1996 were
$19,739,719, an increase of 13.7% from the comparable sales for the period
ended March 31, 1995 of $17,365,091. In the nine months ended March 31, 1996
distribution sales were $6,654,000, a decrease of $19,000 (or 0.3%) compared
to the same nine months in the prior year, while the manufacturing sales
increased 22.4% to $13,086,000 from $10,692,000 for the same period in the
prior year. The overall increase in sales is due to the improvement in the
Company's inventory position, as well as the continued improvement in overall
industry conditions.
The Company's gross profit margin for the nine months ended March 31,
1996 rose to 20.8% from 20.0% for the similar period in the prior year. The
Company believes that the continued increase in gross profit is primarily the
result of efficiencies in production, improved purchasing and improved
industry conditions.
Selling, general and administrative expenses for the nine months ended
March 31, 1996 were $3,431,369 (or 17.4% of sales) as compared to $3,183,097
(or 18.3% of sales) for the same period in the prior year. This decrease in
selling, general and administrative expenses as a percentage of sales was due
to the increase in sales volume, as well as the effect of the Company's
continuing cost reductions.
Interest expense was $599,496 for the nine months ended March 31, 1996
compared to $405,081 in the same period in the prior year. This increase was
due to increased borrowings during the current period for working capital.
Fiscal Year 1995 Compared to Fiscal Year 1994
The Company's net income for fiscal 1995 was $78,000 compared to a net
loss of $2,711,000 for fiscal 1994. Fiscal 1995 was the first profitable year
for the Company since fiscal 1989.
Consolidated net sales during fiscal 1995 increased by 15.8% to
$24,025,000 from $20,746,000 during fiscal 1994. In fiscal 1995, Distribution
Operations revenues increased 6.7% to $9,233,000 from $8,654,000 and
Manufacturing Operations revenues increased 22.3% to $14,792,000 from
$12,092,000. The Company believes that the increase in sales was due to
improved industry conditions in both segments. In addition, the net proceeds
from the 1994 Offering allowed the Company to establish increased credit lines
with its vendors.
The Company's gross profit margin increased to 19.9% in fiscal 1995 as
compared to 16.3% in fiscal 1994. The Company believes that this increase was
primarily due to continued manufacturing efficiencies and targeting sales that
produce higher gross profits.
Selling, general and administrative expenses for fiscal 1995 decreased by
26
11.9% to $4,149,000 or 17.3% of sales, from $4,709,000 or 22.7% of sales in
fiscal 1994. The decrease was principally due to a reduction in bad debt
expenses of $177,000, a reduction in consulting fees and salaries to former
officers of $245,000, as well as advertising incentives and purchase discounts
of $97,000.
Interest expense was $584,000 for fiscal 1995 as compared to $1,392,000
in the prior year. This decrease was principally due to debt financing charges
of $812,000 on convertible debt and bridge-loan financing in fiscal 1994 which
did not reoccur in fiscal 1995.
The increase in the number of shares used to calculate per share amounts
in 1995 results from the number of shares sold in the 1994 Offering.
Outstanding options and warrants did not materially dilute earnings per share
in 1995, but could do so in the future if there is a significant increase in
the spread between their exercise price and the quoted market price of the
Company's Common Stock.
Adoption of New Accounting Standards
Under Financial Accounting Standards Statement No. 123 (FASB 123),
"Accounting for Stock-Based Compensation", companies are required to provide
new disclosures about stock options based upon their fair value at the date of
grant. This new rule becomes effective for fiscal years beginning after
December 15, 1995. FASB 123 provides for an option to disclose the pro-forma
effects of stock compensation on net income and earnings per share or charge
stock compensation to earnings. The Company intends to adopt the pro-forma
disclosure method in its June 30, 1997 consolidated financial statements.
Liquidity and Capital Resources
The Company had working capital as of March 31, 1996 of approximately
$1,216,000 as compared to working capital of $1,065,000 as of June 30, 1995. A
substantial portion of the Company's working capital consists of inventory,
which was $5,391,000, $4,364,000, and $3,166,000 as of March 31, 1996, June
30, 1995 and 1994, respectively. The Company is required to maintain
substantial inventories of its numerous products to meet the immediate
requirements of its customers who need products on short notice and who do not
maintain an inventory of such products.
The Company is dependent upon its revolving line of credit with Congress,
which as revised during July, 1996, expires October 1, 1999, except that
Congress at its sole option may extend the termination date to October 1,
2000. The line of credit is in an amount which was increased from $6,000,000
to $9,000,000 in July, 1996. Interest is payable monthly at 1.25% (previously
2.25%) over the prime rate, with provision to further reduce such rate to 1%
over the prime rate upon consummation of this Offering no later than December
31, 1996. Borrowings are currently limited to 55% of the Company's eligible
inventory and 85% of the Company's eligible accounts receivable. The amounts
outstanding under the line of credit at June 30, 1995 and June 30, 1994, were
$4,829,000 and $3,184,000, respectively. As of June 30, 1996, the amount
outstanding on the line of credit was $5,558,000, with an availability of
borrowing $51,000 based upon accounts receivable and inventory at that date.
The loan is subject to certain working capital and net worth covenants and is
collateralized by all of the Company's assets not previously pledged under
other loan agreements. Although the Company may use substantially all of the
net proceeds of this offering to reduce outstanding indebtedness under its
credit facility (See "Use of Proceeds"), the Company will, in all likelihood,
draw down funds under such facility in the future in order to continue to
finance its
27
operations. In the event that the Company is unable to obtain financing from
its principal lender or alternative sources of financing, or if able to do so
but not on favorable terms, the Company's ability to operate profitably could
be materially adversely affected.
The Company's loan covenants with Congress were amended in July, 1996 to
provide that the Company will maintain Consolidated Tangible Net Worth (as
defined in the revised agreement) of not less than $2,100,000 from July 31,
1996 to the day immediately prior to the consummation of this Offering, and
thereafter shall not be less than $2,100,000 plus the net proceeds from this
Offering. The Company will maintain a Consolidated Working Capital (as defined
in the revised agreement) of not less than $6,100,000 from July 31, 1996 to
the day immediately prior to the consummation of this Offering, and thereafter
shall not be less than $6,100,000 plus 40% of the net proceeds from this
Offering. Congress agreed from time to time to make New Equipment Term Loans
to the Company not to exceed $1,000,000 in the aggregate, of up to: (i) 70% of
the Cost of Eligible New Equipment; or (ii) 80% of the orderly liquidation
value of such Eligible New Equipment.
In the event that the Company fails to comply with its obligations, the
Company's indebtedness could be declared immediately due and payable and, in
certain cases, the Company's assets could be foreclosed upon. Moreover, to the
extent that all of the Company's assets continue to be pledged to secure
outstanding indebtedness, such assets are unavailable to secure additional
debt financing, which may adversely affect the Company's ability to borrow in
the future.
The Company believes that its current working capital position, line of
credit and operations will be sufficient to satisfy its cash needs during the
next 12 months.
The Company has no material commitments for capital expenditures.
At the present time, the Company, 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 the
Company. The Company may become a party to additional asbestos-related actions
in the future. The Company is also party to a non-asbestos product liability
action. While as indicated, legal and settlement costs to the Company have not
been material to date, the Company cannot, at this time, determine the outcome
of these uncertainties which may have an adverse effect upon the liquidity of
the Company in the future.
From time to time, information provided by the Company or statements made
by its employees, or information provided in its filings with the Securities
and Exchange Commission (including this Prospectus) may contain forward
looking information. The Company'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 each of those risks
set forth in the Risk Factors contained in this Prospectus. See "Risk
Factors". The market price of the Company's Common Stock may be volatile at
times in response to fluctuations in the Company's quarterly operating
results, changes in analyst earnings estimates, market conditions, as well as
general conditions and other factors general to the Company.
28
BUSINESS
General
Eastco Industrial Safety Corp. is a corporation organized and existing
under the laws of the State of New York, having been incorporated on May 15,
1958. The Company, through its wholly-owned subsidiaries, Disposable, Safety
Wear, Puerto Rico Safety Equipment, and Puerto Rico Safety, manufactures
industrial protective clothing products and distributes a wide range of
industrial safety products. The Company's Manufacturing Operations sells its
products to distributors. The Company's Distribution Operations sells products
to "end users," including manufacturing companies and service businesses,
public utilities, fisheries, pharmaceutical plants, the transportation
industry and companies engaged in hazardous materials abatement.
Manufacturing Operations
Manufactured products are sold under the "Charkate / Worksafe",
"Charkate", "Worksafe" and "COVER-UP" trade names. The Company, through
Disposable, Safety Wear and Puerto Rico Safety Equipment, manufactures
disposable and reusable industrial protective apparel. Disposable protective
products items include coveralls, shirts, pants, hats, hoods, aprons, smocks,
lab coats, hazardous material handler suits, examination gowns, sleeves, shoe
covers and related items. Disposable clothing is designed to protect the user
from, among other things, splash, dirt, contamination and against a wide range
of hazardous substances. Disposable clothing is made primarily of a spun
bonded polyolefin produced solely by Dupont under the trade name Tyvek(R).
Reusable industrial protective clothing consists of 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. Specific products manufactured 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.
The Company also manufactures welding blankets, curtains and screens.
The Company's Manufacturing Operations and warehousing are located in
Puerto Rico, Alabama, Texas and California and are primarily directed from New
York. The Company's products are sold primarily in the United States and
Puerto Rico. The Company sells its manufactured products through sales
representatives. In addition, manufactured products are sold through the
Company's Distribution Operations in the Northeastern region of the United
States and Puerto Rico to "end users."
Distribution Operations
The Company, primarily through Eastco, distributes to "end users"
industrial safety products made by the Charkate / Worksafe division as well as
by non-affiliated companies. These products include hard hats, protective
glasses, ear muffs, ear plugs, respirators, goggles, face shields, rainwear,
protective footwear, first-aid kits, monitoring devices, signs and related
products. These products are sold to manufacturing companies and service
businesses, including public utilities, fisheries, hospitals, pharmaceutical
plants, the transportation industry and companies engaged in hazardous
materials abatement.
The Company's Distribution Operations are primarily directed from the
Company's offices in New York. The Company also has facilities for warehousing
and distribution of its non-manufactured products in Puerto Rico, Connecticut
and Florida. The Company sells a variety of safety products from independent
manufacturers, including, but not limited to, 3M, Racal Health and Safety,
Inc.
29
and Willson Safety Products, a division of WGM Safety Corporation. Items
distributed are sold primarily in the Northeastern region of the United
States.
Sales and Marketing
The Company utilizes catalogs and telemarketing to aid in its sales
efforts; however, the Company does not engage in any mail-order business nor
sell on a retail basis. Sales are also promoted through trade shows, mailings
and advertising in directories and trade magazines. Sales are primarily to
"end users" comprised of industrial, commercial and governmental accounts. The
Company considers industrial accounts to be those businesses which are
primarily based upon manufacturing and production, while commercial accounts
are considered by the Company to be service businesses. The Company also
believes that standards established by OSHA have resulted in a need by others
to purchase the Company's products. The Company employs 10 full-time salesmen
in its Distribution Operations who sell products distributed by the Company,
and on a more limited basis, products manufactured by the Company.
Customers
For the nine months ended March 31, 1996 and the previous two fiscal
years, no one customer accounted for more than 10% of the Company's sales.
Accordingly, the Company believes it is not dependent upon any single
customer, the loss of any one of which would not have an adverse effect on the
business of the Company.
Competition
The market for industrial protective clothing and industrial safety
products is extremely competitive. The Company faces competition in all of its
product markets from large, established companies that have greater financial,
managerial, sales and technical resources than the Company, and some of the
Company's product markets are dominated by such larger companies. Larger
competitors also may be able to benefit from economies of scale and introduce
new products that compete with the Company's products.
The Company's primary competitors in its Manufacturing Operations are
Kappler Inc. and Lakeland Industries, Inc., in disposable clothing sales, and
P.G.I., Incorporated; Red Kap, a subsidiary of VF Industries Inc.; Topps Mfg.
Co. and Workrite Uniform Co. in the sale of reusable clothing. Primary
competitors in the manufacture of reusable gloves are Chicago Protective
Apparel, Inc. and Steel Grip, Inc. The Company's major competitors in its
Distribution Operations are Balco Industries, Inc. and Freemont Safety Corp.
in industrial sales, and Insulation Distributions Company, Industrial
Productions Company and Aramsco Company in abatement sales.
Suppliers
The Company is not dependent upon any one Company for a source of supply
of raw materials for its manufacturing operations other than DuPont which
supplies the Company with Tyvek(R), a raw material which is used in various
lines of its disposable products. Products utilizing Tyvek(R) accounted for
approximately 42% for the nine months ended March 31, 1996, and 35% and 29% of
consolidated sales for the fiscal years ended June 30, 1995 and June 30, 1994,
respectively. Management believes that its current relationship with DuPont is
satisfactory.
30
Government Regulation
The Company's manufacturing facilities are subject to regulation and
inspection standards established by OSHA. Such facilities have not yet been
inspected for compliance with OSHA. Although the Company believes it is in
material compliance with required standards, there can be no assurance that
any inspection will not reveal that the Company has failed to comply with OSHA
and that, as a result, the Company may be required to expend sums, which can
be costly, to assure compliance with OSHA regulations.
Special Tax Considerations
Puerto Rico Safety Equipment is engaged in manufacturing in Puerto Rico
and was granted an exemption for seventeen (17) years under the Puerto Rico
Industrial Tax Exemption Act of 1963 (the "Industrial Tax Act") with respect
to Puerto Rico income taxes on the production of such items as safety
clothing, protective sleeves, coats, pants, hoods and jackets for the period
commencing January 1, 1970. On July 1, 1989 Puerto Rico Safety Equipment was
granted an extension of its exemption and has a 90% exemption from Puerto Rico
income taxes for the ten-year period ending on June 30, 1999. During this
period, Puerto Rico Safety Equipment has a 75% exemption from Puerto Rico
municipal taxes on its real and personal property utilized in its operations.
Disposable has been granted a fifteen-year exemption under the Industrial
Tax Act with respect to Puerto Rico income taxes on its operations covering
the production of disposable clothing and with respect to the property used in
its operations for the period commencing June 4, 1977, subject to the terms of
the grant. The Company was advised on September 14, 1995, that this exemption
has been extended until 2006 on the basis of a 90% exemption on Puerto Rico
income taxes and personal property taxes and a 60% exemption on municipal
license taxes.
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 Company. If the conditions of
Section 936(a)(2) are satisfied, the Section 936 credit equals the portion of
the United States income tax that is 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 payable by each subsidiary to the Company from operations 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") imposes new limitations on computing the Possession Tax
Credit under Section 936 for tax years beginning after 1993. There are two
methods for determining the credit under the new law. Under the first method,
the amount of the credit may be determined by using the so-called economic
activity limit. This attempts to limit the credit by applying various
percentages to possession-based compensation, depreciation and taxes paid or
accrued. Alternatively, the Company may make an irrevocable election when it
files its June 30, 1996 federal income tax return to have present rules apply,
but to phase out the credit to 60% of the 1994 level, and further phase down
by 5% per year to 40% in 1998 and years thereafter. Since the credit is a
function of future earnings, if any, the effect of such limitations cannot be
determined at the present time. In addition, the Omnibus Act makes the 100%
dividends received deduction subject to the Alternative Minimum Tax
Calculation. No dividends have been declared on the aggregate undistributed
earnings of Puerto Rico Safety Equipment and Disposable (which through June
30, 1995, aggregates approximately $2,458,000) and none are intended to be
declared because it is management's intention to
31
reinvest the earnings from such subsidiaries indefinitely. The Company
believes that based upon current operations, the Omnibus Act will not have a
material effect on the Company for the foreseeable future.
As Puerto Rico tax exemptions are reduced or expire, the Company may be
required to pay taxes on income earned in Puerto Rico. The Company is unable
to predict the amount of such impact if such exemptions are reduced or
expire.
Employees
As of June 30, 1996, the Company has 179 employees in its Manufacturing
Operations and 14 in its Distribution Operations. In addition, there are 4
executive management employees, and 17 clerical and administrative personnel.
None of the Company's employees are covered by a collective bargaining
agreement and the Company considers its relations with its employees to be
satisfactory.
Properties
The executive offices of the Company are located at 130 West 10th Street,
Huntington Station, New York (the "Huntington Property"), which building is
owned by the Company. The Huntington Property is also used for warehousing and
distributing and contains approximately 25,000 square feet of warehouse space
and 5,000 square feet of office space. As of June 30, 1996, the Huntington
Property was subject to a first mortgage due to Associates in the amount of
$489,782. The wives of Messrs. Alan Densen and Anthony P. Towell, executive
officers and directors of the Company, and Herbert Schneiderman, a director,
are members of Associates.
The Company's wholly owned subsidiary, Disposable, leases a building in
Aguadilla, Puerto Rico, consisting of approximately 45,000 square feet, from
the Puerto Rico Industrial Development Company which is used for manufacturing
and warehousing. A lease was entered into for these premises on February 21,
1995, effective for the ten year period commencing September 1, 1993. Monthly
rent for the two-year period ending August 31, 1996 is at the rate of $7,079,
and escalates to $13,041 monthly in the final year of the lease.
The Company's wholly owned subsidiary, Safety Wear, occupies
approximately 30,000 square feet in Decatur, Alabama. The premises are
utilized for the cutting and warehousing of coveralls and the manufacturing of
disposable products. The Company pays $6,450 rent per month. The premises are
leased on a month-to-month basis. Should these facilities not be available to
the Company, the Company believes that alternative sites are available at a
comparative cost.
Legal Proceedings
The Company, in the past, manufactured certain products made of asbestos.
Such use was terminated by the Company in the mid-1980's. It has been alleged
that asbestos is a cause of cancer, such as asbestosis, mesothelioma, and
other related diseases, the symptoms of which may not appear for twenty or
more years. Since the early 1980's, numerous lawsuits have been instituted
against the Company by persons who have been exposed to asbestos and asbestos
products. Such legal proceedings, for the most part, are covered by the
Company's insurance policies.
As of June 30, 1996, the Company estimates that it is a party to
approximately 280 cases with respect to exposure to asbestos involving
32
approximately 1300 plaintiffs, of which no cases pertain to Puerto Rico Safety
Equipment. During the twelve months ended June 30, 1996, approximately 30 new
actions involving approximately 630 plaintiffs were commenced against the
Company. During the same period, approximately 30 actions involving
approximately 1300 plaintiffs were settled, for which the Company's
obligations on these settlements were approximately $5,500. All of the actions
against the Company to date have been brought by non-employees of the Company
and are based upon personal injury claims. The pending actions are in the
Supreme Court of the State of New York, County of New York; Superior Court of
New Jersey, Middlesex County, Law Division; and Court of Common Pleas of
Luzerne County, Trial Division of Pennsylvania. The number of first-party
plaintiffs include, in various instances, spouses of said plaintiffs. 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. Each seeks varying amounts of damages, usually
unlimited, or for each plaintiff as high as $10,000,000 for compensatory
damages and $20,000,000 for punitive damages. The Company may become a party
to additional asbestos actions in the future.
From 1981 through June 30, 1996, the Company estimates that approximately
900 actions on behalf of approximately 7500 first-party plaintiffs have been
instituted against it concerning asbestos-related claims and that
approximately 600 actions and the claims of approximately 6200 plaintiffs have
been terminated against the Company. The Company estimates that as of June 30,
1996, with the exception of defense costs, a total of approximately $1,500,000
has been paid, or agreed to be paid, in settlements to date with regard to the
terminated actions (inclusive of actions against Puerto Rico Safety Equipment)
of which all but approximately $45,000 has been paid by the Company's
insurance carriers. The foregoing is based upon information available to the
Company to date and assumes certain settlements in the process of being made
and payments to be made thereunder by insurance companies awaiting
documentation from plaintiffs. Through June 30, 1996, the Company has paid
less than $35,000 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 Company is unable to predict.
For the period commencing April 1, 1968 to April 1, 1969 and March 11,
1971 to November 27, 1985, the Company believes that it has various policies
of primary insurance in different amounts which would protect it against
liability for asbestos-made, product-related personal injuries. The policies
range in amounts from $50,000 to $1,000,000 on an annual basis. The Company
also believes that since August 10, 1972 to on or about August 11, 1986 it has
had various policies for excess coverage applicable to asbestos claims on an
annual basis. 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 and approximately
thirty-six months in the excess coverage between August 10, 1972 and August
11, 1986. The policies of insurance are not applicable to all of the
subsidiaries of the Company, which have varying coverage, and such
subsidiaries may also be without coverage for various times of their doing
business. Not all of these policies are in the possession of the Company.
Reference is made to "Risk Factors" regarding the liquidation of certain of
the Company's insurance carriers with respect to excess product liability
coverage.
During fiscal 1994, the Company reached a settlement (the "1994
Settlement") pertaining to all pending and future cases against it in the
State of New York brought by one firm of plaintiffs' attorneys, which firm has
been primarily responsible for bringing asbestos actions against the Company
in the State of
33
New York. The settlement does not apply to Puerto Rico Safety Equipment and is
only applicable to cases brought by the same law firm against the Company in
the State of New York. The Company 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 nonmalignant 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.
Effective June 26, 1990, an agreement between Eastco and its primary
insurance carriers dated March 26, 1990 became effective. Eastco entered into
this agreement in an effort to resolve uncertainties as to its insurance
coverage which will cover asbestos claims against the parent Company where any
exposure to asbestos is alleged during the period 1971 to 1985, inclusive.
Pursuant to this agreement, the Company is obligated to share in the payment
of asbestos-related claims against Eastco. Pursuant to the agreement, the
Company 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
parties to the agreement. The agreement is subject to policy limitations of
each insurance policy. The agreement may be terminated at any time upon ninety
(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 twelve (12) months
from the date the notice of termination is given. The Company has been advised
that no pending cases are on the trial calendar.
Effective during May, 1991, the Company entered into a Settlement
Agreement and Release with Mount Vernon Fire Insurance Company. Pursuant to
this Agreement, the Company discontinued its action against Mount Vernon,
which agreed that, subject to the terms of the Agreement, Mount Vernon would
reimburse the Company (where applicable) for 6.25% of attorneys' fees (52.08%
of the Company's 12% share referred to in the agreement in the previous
paragraph) and 6.25% of indemnification costs (36.76% of the Company's 17%
share referred to in the agreement in the previous paragraph). The Agreement
is not applicable to any asbestos actions against the Company where no
exposure is alleged to products manufactured or distributed by Eastco between
April 1, 1968 and April 1, 1969. The Agreement may be terminated at any time
upon 90 days' notice, but such notice is not applicable to asbestos actions
placed on a trial calendar, unless such has a trial date more than twelve
months from the date the notice of termination is given. The agreement
provides that the limit available under the policy is $100,000 plus attorneys'
fees while the agreement is in effect and is applicable only to Eastco.
Approximately $25,000 has been reimbursed by Mount Vernon Fire Insurance
Company as of June 30, 1996 for indemnification.
The Company is unable to ascertain the total extent of insurance
applicable to asbestos claims against it or the extent to which its insurance
carriers will provide coverage. The two agreements referred to above between
the Company and the insurance carriers may not be applicable to Puerto Rico
Safety Equipment, which is covered by other insurance. To date, the claims
settled by Puerto Rico Safety Equipment have been paid in full by insurance.
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 March 11, 1971 to July 23, 1986 with various
gaps.
An action entitled Michael F. Cilone and Marie Cilone v. Willson Safety
Products, Inc., Standard Coating Corporation, National Paint Co., Inc., E.I.
34
Dupont De Nemours & Co Inc., Orb Industries, Inc., PPG Industries Inc., Olde
England Paint & Varnish Corp., Oatey Co., d/b/a Bond Tight Products, Eastco
Industrial Safety Corp. was instituted on September 19, 1988 in the Supreme
Court of the State of New York, County of Kings. The Company has referred this
matter to its insurance carriers applicable to the period 1984 to 1986 and who
have provided primary insurance on an annual basis of $1,000,000 per year in
addition to applicable excess carriers. The complaint alleges four causes of
action, including one for punitive damages on behalf of Michael F. Cilone,
against the Company in the amount of $5,000,000 each and one cause of action
for $500,000 on behalf of Marie Cilone. The complaint alleges that the Company
sold respirators made by Willson Safety Products and other safety equipment to
Michael F. Cilone's employer, the New York City Transit Authority, between
1984 and 1986 and that he sustained injuries as a result of chemicals and
various materials made by the other defendants. The Company has been advised
by counsel, designated by its insurance carriers to defend it, that any
settlement and/or verdict potential should be within the policy limits of the
Company's insurance. This is based upon the present status of the case and the
fact that depositions have not yet all been completed.
The Company'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 the defendant for wrongs 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 thereto, is required for a
court to award punitive damages. The Company is unable to specify whether its
actions would give rise to punitive damages. It believes that its actions
should not give rise to punitive damages. There, however, can be no assurance
that this will be the case.
35
MANAGEMENT
Directors and Officers
The Board of Directors is separated into two classes. All directors hold
office until the second annual meeting of shareholders of the Company
following their election or until their successors are duly elected and
qualified officers are appointed by the Board of Directors and serve at its
discretion. The directors and executive officers of the Company are as
follows:
Name Age Position
- ---------------- --- -------------------------
Alan E. Densen 61 President, Chief Executive
Officer, and Director
Lawrence Densen 38 Senior Vice President and
Director
Anthony P. Towell 64 Vice President of Finance,
Secretary, Treasurer, Chief
Financial Officer and
Director
Dr. Martin Fleisher 59 Director
James Favia 61 Director
Herbert Schneiderman 64 Director
The term of office of Alan E. Densen, Lawrence Densen, and Anthony P.
Towell does not expire until the Company's next annual meeting and when their
successors are chosen. The remaining directors' term does not expire until the
following year's annual meeting and when their successors are chosen.
Alan E. Densen has been President, Chief Executive Officer and a director
of the Company since 1958 (except for the period September 1993 to January
1994, when he served as its Senior Vice President). He was also Treasurer and
Chief Financial Officer of the Company through 1992.
Lawrence Densen, Senior Vice President and director of the Company, has
been a Vice President and a director of the Company since 1986.
Anthony P. Towell has been the Company's Vice President of Finance,
Treasurer, and Chief Financial Officer since 1992, its Secretary since 1993,
and from 1989 to 1992 its Vice President. He has been a director of the
Company since 1989. He was a director of New York Testing Laboratories, Inc.
("NYT"), a laboratory testing Company and manufacturer of automotive
accessories, from 1988 to 1995. In addition, he has been a director since 1988
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 through 1996. The common
stock of Nytest is registered, and the common stock of Ameridata was
registered, under Section 12(g) and (b), respectively, of the Securities
Exchange Act of 1934.
Dr. Martin Fleisher, who holds a Ph.D. in biochemistry from New York
University, has been attending clinical chemist at Memorial Sloan-Kettering
Cancer Center since 1967. He has been a director of the Company since 1989.
He devotes only a limited portion of his time to the business of the Company.
36
James Favia has been a consultant during the past five years to Donald &
Co., which acts as the Company's investment advisor. He is a chartered
financial analyst and has an MBA in finance which he obtained from New York
University in 1959. He became a director of the Company on July 26, 1995. He
was a director of T.J. Systems until November, 1994. The common stock of T.J.
Systems is registered under Section 12(g) of the Securities Exchange Act of
1934. He devotes only a limited portion of his time to the business of the
Company.
Herbert Schneiderman has been President of the Casablanca Group, L.P.
during the past five years, a manufacturer of diversified women's sportswear.
He became a director of the Company on July 26, 1995. He devotes only a
limited portion of his time to the business of the Company.
Committees of the Board of Directors
The Board of Directors has established a Compensation Committee, a Stock
Option Committee and an Audit Committee. The Compensation Committee consists
of Messrs. Fleisher, Favia and Schneiderman. The purpose of the Compensation
Committee is to review the Company's compensation of its executives, to make
determinations relative thereto and to submit recommendations to the Board of
Directors with respect thereto.
The Stock Option Committee consists of Messrs. Fleisher, Favia and
Schneiderman. The purpose of the Stock Option Committee is to select the
persons to whom options to purchase shares of the Company's Common Stock under
the 1994 Incentive Stock Option Plan and to make various other determinations
with respect to such plans.
The Company has an Audit Committee consisting of Messrs. Towell, Favia and
Schneiderman. The purpose of the Audit Committee is to provide general oversight
of audit, legal compliance and potential conflict of interest matters.
Each of the foregoing committees met once during the fiscal year ended
June 30, 1996.
37
EXECUTIVE COMPENSATION
Summary
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 $100,000.
Summary Compensation Table
Annual Compensation Long term compensation
------------------------ -----------------------------------------------
Awards Payouts
------------------------- -----------------
Other Securities All
Name and annual Restricted underlying LTIP other
principal Salary Bonus compen- stock options / payouts compen-
position Year ($) ($) sation($) award(s)($) SARs(#)(5) ($) sation($)
- -------- ---- ------ ----- ---------- --------- ---------- ------ --------
Alan E. 1996 121,000 -0- 35,672(3) -0- 8,875(4) -0- -0-
Densen, 1995 107,930 -0- 32,875(3) -0- 84,236(2) -0- -0-
CEO 1994(1) 117,154 -0- 30,078(3) -0- -0- -0- -0-
Lawrence 1996 105,000 -0- 4,200 -0- 8,875(4) -0- -0-
Densen, 1995 89,130 -0- 4,200 -0- 84,236(2) -0- -0-
Senior VP 1994 86,936 -0- 4,200 -0- -0- -0- -0-
(1) From September, 1993 to January, 1994, Mr. Densen was not CEO; he
served as Senior Vice President.
(2) Includes incentive stock options granted January 20, 1995 to acquire
2,000 shares at $10.625 as well as non-qualified stock options to
acquire 41,118 shares exercisable at $5.168 per share, each
exercisable until January 19, 2005. The non-qualified options can not
be exercised during the first five years unless (a) the audited
pre-tax profit for fiscal 1995 is greater than $50,000, then options
to acquire 41,118 shares of Common Stock may be exercised and (b) the
audited pre-tax profit for fiscal 1996 is greater than $250,000, then
options to purchase the remaining 41,118 shares of Common Stock may
be exercised. It was determined in September 1995 that the
non-qualified options can now be exercised for 41,118 shares of
Common Stock, which options provide for adjustment in the event of
anti-dilution as a result of sales of securities at less than the
exercise price and have been adjusted to and inclusive of this
Offering.
(3) Primarily life insurance premiums on the life of Alan E. Densen owned
by Mr. Densen's wife and paid for by the Company.
(4) Non-qualified options to acquire 8,875 shares of Common Stock at
$5.428 granted February 23, 1996 until February 22, 2001, in
consideration of the guaranty of overadvances by Congress to the
Company. These options provide for adjustment in the event of
anti-dilution and have been adjusted to and inclusive of this
Offering.
(5) Each person's options including only options directly held by such
person.
38
Stock Options
OPTION/SAR GRANTS IN LAST FISCAL YEAR
[Individual Grants]
Number of Percent of
securities total options /
underlying SARs granted Exercise
Options/SARs in fiscal or base Expiration
Name granted (#)(1) year (1) price ($/Sh) Date
- ----- -------------- -------------- ------------- -----------
Alan E. 8,875 33.3% $5.428 2/22/2001
Densen,
CEO
Lawrence 8,875 33.3% $5.428 2/22/2001
Densen,
Senior V.P.
(1) See note (4) above in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number
of securities Value
underlying unexercised in-
unexercised the-money options
Shares SARs at FY-end (#) SARs at FY-end($)
acquired on Value exercisable / exercisable /
Name exercise (#) realized ($) unexercisable(2) unexercisable
- ----- -------------- ----------- ------------- ----------------
Alan E. 0 0 51,993/41,118 129,888/108,737
Densen,
CEO (1)
Lawrence 0 0 52,674/41,118 129,888/108,737
Densen,
Senior V.P.
(1) See footnotes (2) and (4) above in the Summary Compensation Table.
Does not include warrants to acquire 1,667 shares described in Note
(1) under Principal Shareholders or options held by Lawrence Densen.
(2) Each person's options include only options directly held by such
person.
Employment Agreements and Change in Control Features
As of July 1, 1995, Alan E. Densen entered into a new employment agreement
which provides for him to serve as the Company's President for a term of five
years and Lawrence Densen also entered into a new employment agreement to
serve as Senior Vice-President for a term of five years. At the end of each
fiscal year during the term of the agreement, the agreements are 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 agreements. The base annual salaries for each Alan E. Densen and Lawrence
Densen were $121,000
39
and $105,000, respectively, for fiscal 1996 which is to be increased at the
beginning of each fiscal year commencing July 1, 1996, at the discretion of
the Board of Directors but not less than 10% of the minimum compensation paid
to the employees in the prior fiscal year. For fiscal 1997, their base fiscal
salaries are $133,100 and $115,500, respectively. Each is entitled to receive
an annual bonus equal to 3 1/3% of the Company's earnings before interest and
taxes for the fiscal year ended June 30, 1996 and each fiscal year thereafter
during the term of the agreement, and Lawrence Densen is entitled to .75% of
the Company's revenues in excess of $20.5 million. Bonuses are to be paid
within 30 days after the completion of the Company's audited financial
statements for each fiscal year and is to be paid in cash or registered shares
of common stock of the Company. In addition, each, in accordance with Company
policy, is entitled to receive reimbursement of ordinary and necessary
business expenses, a monthly automobile allowance of $700 and disability,
medical and hospitalization insurance.
The employment agreements entered into by Messrs. Alan E. Densen and Lawrence
Densen include provisions that provide for their right to terminate the
agreements and thereby receive additional compensation, as provided below, in
the event that they are not elected or retained as President and Senior
Vice-President, respectively, or as a director of the Company; the Company
acts to materially reduce their duties and responsibilities under the
agreement; the Company changes the geographic location of their duties to a
location from the New York metropolitan area; their base compensation is
reduced by 10% or more; any successor to the Company fails to assume the
agreements; any other material breach of the agreements which is not cured by
the Company within 30 days; and a "Change of Control" 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 agreements, or a "group" as defined in Section 13(d)(3)
of the Securities 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.
In the event that Messrs. Alan E. Densen or Lawrence Densen terminate their
positions because of any of the aforesaid reasons other than a "Change of
Control", or if the Company terminates their employment in any way that is a
breach of the agreement by the employer, Messrs. Alan E. Densen and Lawrence
Densen shall be entitled to receive, in addition to their salary continuation,
as a bonus, a cash payment equal to their 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 to them shall become immediately
exercisable at an exercise price of $0.10 per share. In the event that either
owns or is entitled to receive any unregistered securities of the Company,
than the Company shall register such securities within 120 days of the their
termination.
In the event that there is a "Change of Control", Messrs. Alan E. Densen and
Lawrence Densen shall be paid within 30 days thereof a one-time bonus equal to
their total minimum base salary for the next three years and they shall be
immediately reimbursed for all amounts not yet received for their
participation in the $250,000 junior participation in the loans made to the
Company from Congress Financial Corporation ("Congress") during September
1993, without regard to whether such amount is currently due pursuant to the
terms thereof. Similar provisions are contained in the employment agreement
with Anthony Towell.
Messrs. A. Densen, L. Densen, and A. Towell, in modification agreements
40
to their employment agreements, have waived: (i) their right to bonuses based
upon the Company's earnings or sales for the fiscal years ended June 30, 1996
and June 30, 1997; (ii) their exercise rights on options and warrants and
repayment of their junior participation interests with Congress and
compensation payable in the event of a Change in Control with respect to the
Private Placement and this Rights Offering; and (iii) their right to terminate
their relationship with the Company, as per the terms of their respective
employment agreements. The modification agreements provide that their right to
terminate their employment agreements shall not be waived in the event that
there is a material breach of such agreements by the Company. Further
modifications to the above-referenced employment agreements may result from
negotiations between the Company and the Underwriter.
During February 1996, Messrs. A. Densen, L. Densen, and A. Towell
guaranteed to Congress overadvances to the Company of up to $500,000 in
excess of the Company's eligible borrowings. The Company issued warrants
for a term of five years in consideration for their guaranty to each
Messrs. A. Densen, L. Densen, and A. Towell to purchase 8,875 shares of
Common Stock at an exercise price of $5.428 per share commencing February
23, 1996. The overadvances have since been repaid and their guarantees
are no longer in effect.
Compensation to Directors
No compensation is paid to officers who also serve as directors for their
serving solely as a director. Outside directors are compensated at the rate of
$500 for each board of directors meeting which they attend in person.
Indemnification of Directors and Executive Officers
The Company's Certificate of Incorporation provides that the Company
shall, to the fullest extent permitted by Section 722 of the Business
Corporation Law of the State of New York, as the same may be amended and
supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and
the indemnification provided for herein shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any By-Law,
agreement, vote of stockholders or disinterested Directors or otherwise.
Section 722 of the Business Corporation Law of the State of New York contains
provisions entitling directors and officers of the Company to indemnification
from judgments, fines, amounts paid in settlement and reasonable expenses,
including attorney's fees, as the result of an action or proceeding in which
they may be involved by reason of being or having been a director or officer
of the Company provided said officers or directors acted in good faith, the
acts were not the result of deliberate dishonesty, and that the indemnitee
does not personally gain or profit where not legally entitled to do so.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefor
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or
41
controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer of controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and is therefore unenforceable and will be
governed by the final adjudication of such issue.
1996 Incentive Stock Option Plans
At a special meeting of shareholders held on August 12, 1996, the
shareholders approved: (i) an incentive stock option plan (the "1996 Incentive
Plan"); and (ii) a non-qualified stock option plan (the "1996 Non-Qualified
Plan").
1996 Incentive Stock Option Plan
The 1996 Incentive Plan authorizes the grant of 300,000 shares of Common
Stock, subject to adjustment as provided in the plan. Eligibility to
participate in the 1996 Incentive Plan is limited to key employees of the
Company and its subsidiaries. The 1996 Incentive Plan terminates May 12, 2006.
The term of each option may not exceed ten years. Options will not be
transferable except upon death and, in such event, transferability will be
effected by will or by the laws of descent and distribution. An option granted
under the 1996 Incentive Plan may not be exercised unless, at the time of
exercise, the optionee is then in the Company's employ and has completed at
least twelve (12) months of continuous employment with the Company from the
date of grant of the option. Incentive Stock Options may not be granted at
less than 100% of fair market value at the time of the grant. Options granted
to employees who own more than 10% of the Company's outstanding Common Stock
will be granted at not less than 110% of fair market value for a term of five
years. The aggregate market value of stock for which Incentive Stock Options
are exercisable during any calendar year by an individual is limited to
$100,000, but the value may exceed $100,000 for which options may be granted
to an individual. Payment of the exercise price for options under the 1996
Incentive Plan are to be made in cash or by the exchange of Common Stock
having equivalent value.
No options have been granted under this Plan.
1996 Non-Qualified Stock Option Plan
The 1996 Non-Qualified Plan authorizes stock options to key employees,
consultants and others to acquire shares of the Company's Common Stock. The
1996 Non-Qualified Plan terminates ten (10) years after stockholder approval.
Options granted shall specify the exercise price, the duration of the option,
the number of shares to which the option applies and such other terms and
conditions not inconsistent with the 1996 Non-Qualified Plan as the committee,
or other legally permissible entity, administering the 1996 Non-Qualified Plan
shall determine provided that the option price shall not be less than 100% of
the fair market value at the time the option is granted and no option may be
exercisable for more than ten (10) years after the date on which it is
granted. Payment of the exercise price for options under the 1996
Non-Qualified Plan is to be made in cash, by the exchange of Common Stock
having equivalent value or through a "Cashless Exchange". If a Participant
elects to utilize a
42
"Cashless Exercise" (as defined in the Plan), he shall be entitled to a credit
equal to the amount of that equity by which the current Fair Market Value
exceeds the option price on that number of options surrendered and to utilize
that credit to exercise additional options held by him that such equity could
purchase. There shall be canceled that number of options utilized for the
credit and for the options exercised with such credit.
No options have been granted under this Plan.
43
PRINCIPAL SHAREHOLDERS
The following are known by the Company, as of the date hereof, to be the
beneficial owners of more than five percent of Common Stock:
Percent Percent
of Class of Class
Name and Address Amount and Nature Before After
Title of Class of Beneficial Owner of Beneficial Owner Offering Offering
- -------------- ------------------- ------------------- -------- -------
Common Stock Alan E. Densen 59,396(1)(4)(5) 6.4% 3.7%
$.12 par value 130 West 10th Street shares direct and
Huntington Station, NY beneficial
Common Stock Lawrence Densen 53,608(2)(4)(5) 5.8% 3.4%
$.12 par value 130 West 10th Street shares direct and
Huntington Station, NY beneficial
Common Stock Anthony P. Towell 138,739(3)(4)(5) 13.7% 8.6%
$.12 par value 130 West 10th Street shares direct and
Huntington Station, NY beneficial
Common Stock George Schiavoni 76,000 8.6% 0%(6)
$.12 par value 46 Bayview Avenue shares direct and
Sag Harbor, NY beneficial
- ------------------
(1) Includes warrants, held by Mr. Densen's wife, to acquire 1,667 shares
of Common Stock, exercisable at $13.00 per share which expire April
11, 1999. Also includes incentive stock options granted under the
1994 Plan to acquire 2,000 shares of Common Stock, exercisable at
$10.625 which expire January 19, 2005. Amount indicated does not
include shares beneficially owned by Lawrence Densen, son of Alan E.
Densen.
(2) Does not include shares beneficially owned by Alan E. Densen, father
of Lawrence Densen. Includes 700 Class A Warrants; incentive stock
options granted under the 1983 Incentive Stock Option Plan (the
"1983 Plan") to acquire 625 shares which expire December 17, 1996
and are exercisable at $26.664 per share; incentive stock options
granted under the 1983 Plan to acquire 56 shares of Common Stock
which expire May 31, 1998 and are exercisable at $30.00 per share;
and incentive stock options granted under the 1994 Plan to acquire
2,000 shares of Common Stock , which expire January 19, 2005 and are
exercisable at $10.625.
(3) Includes 1,500 Class A Warrants; warrants, held by Mr. Towell's wife,
to acquire 1,667 shares of Common Stock, exercisable at $13.00 per
share which expire April 11, 1999; and incentive stock options
granted under the 1994 Plan to acquire 2,000 shares of Common Stock,
exercisable at $10.625 which expire January 19, 2005. Also includes
warrants to acquire 90,941 shares of Common Stock exercisable at
$5.718 per share which expire April 11, 1999, which warrants provide
for an anti-dilution adjustment as a result of sales of securities at
less than the exercise price and have been adjusted for this
Offering. Prior to this Offering, the number of shares under the
Towell Warrant was 88,645 at an exercise price of $6.292.
(4) Includes non-qualified options to acquire 41,118 shares to each
Messrs. A. Densen, A. Towell and L. Densen exercisable until January
19, 2005 at an exercise price of $5.168. Does not include options
to acquire an additional 41,118 shares to each Messrs. A. Densen, A.
Towell and L. Densen which cannot be exercised until January 20,
2000 unless the pre-tax profit for fiscal 1996 is greater than
44
$250,000. These options provide for an anti-dilution adjustment as a
result of sales of securities at less than the exercise price and
have been adjusted for this Offering. Prior to this Offering, the
number of shares under these options was 80,158 at an exercise price
of $5.302. See "Certain Relationships and Related Transactions".
(5) Includes warrants to acquire 8,875 shares of Common Stock exercisable
at $5.428 per share, which expire February 22, 2001. These warrants
provide for an adjustment anti-dilution adjustment as a result of
sales of securities at less than the exercise price and have been
adjusted for this Offering. Prior to this Offering, the number of
shares under these warrants was 8,348 at an exercise price of $5.771.
See "Certain Relationships and Related Transactions".
(6) Mr. Schiavoni is a selling shareholder and this Prospectus assumes
the sale of his shares of Common Stock.
The following table sets forth as of August 12, 1996, 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:
Percent Percent
of Class of Class
Amount and Nature Before After
Name and Address of Beneficial Owner Offering Offering
- ---------------- ------------------- -------- --------
Alan E. Densen 59,396(1) 6.4% 3.7%
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Anthony P. Towell 138,739(2) 13.7% 8.6%
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Lawrence Densen 53,608(3) 5.8% 3.4%
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Dr. Martin Fleisher 1,000(4) * *
130 West 10th Street shares direct
Huntington Station, NY and beneficial
James Favia 2,000(5) * *
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Herbert Schneiderman 3,833(6) * *
130 West 10th Street shares direct
Huntington Station, NY and beneficial
All executive officers
and directors
as a group
(6 persons) 258,576 23.0% 14.8%
- -------------------
* Less than 1%
(1) See footnotes (1), (4), and (5) in the preceding chart.
(2) See footnotes (3), (4), and (5) in the preceding chart.
(3) See footnotes (2), (4), and (5) in the preceding chart.
(4) Includes stock options to acquire 1,000 shares of Common Stock.
(5) Includes stock options to acquire 1,000 shares of Common Stock.
(6) Includes warrants and stock options to acquire 1,833 shares of
Common Stock.
The foregoing reflects the outstanding options and warrants held by each of
such persons, and reflects all adjustments for anti-dilution rights through
this Offering.
45
DESCRIPTION OF SECURITIES
Rights
The Rights offered hereby to the Company's existing stockholders consist
of the right to acquire one Unit of the Company's Common Stock at a price of
$5.00 per Unit on the basis of 4 Rights for each 5 shares of Common Stock
currently owned by such holder. No fractional Rights will be issued. Rights
will be rounded to the nearest lower whole number. The Rights are
nontransferable and expire upon the Expiration Date of the Offering unless
exercised by the holder thereof.
Units
The Units offered in the Offering each consist of one share of Common Stock
and one Class B Warrant.
The Class B Warrants are immediately detachable, transferable and
separately tradeable from the Common Stock with which they are issued. The
Units will be evidenced by separate certificates for the Common Stock and the
Class B Warrants which comprise the Units.
Common Stock
The authorized capital stock of the Company is 20,000,000 shares of
Common Stock, $0.12 par value per share. The holders of Common Stock (i) have
equal ratable rights to dividends from funds legally available, therefore,
when, as and if declared by the Board of Directors of the Company; (ii) are
entitled to share ratably in all of the assets of the Company available for
distribution to holders of Common Stock upon liquidation, dissolution or
winding up of the affairs of the Company; (iii) do not have preemptive,
subscription or conversion rights and there are no redemption or sinking fund
provisions applicable thereto; and (iv) are entitled to one vote per share on
all matters on which shareholders may vote at all meetings of shareholders.
The holders of shares of Common Stock of the Company do not have
cumulative voting rights, which means that the holders of more than 51% of
such outstanding shares voting for the election of Directors can elect all of
the Directors to be elected, if they so choose, and, in such event, the
holders of the remaining shares will not be able to elect any of the Company's
Directors.
Class B Warrants
The Class B Warrants will be issued pursuant to the Warrant Agreement
between the Company and American Stock Transfer and Trust Co., as warrant
agent (the "Warrant Agent"). None of the Class B Warrants have been issued
prior to the Offering. The following discussion of certain terms and
provisions of the Class B Warrants is qualified in its entirety by reference
to the detailed provisions of the Class B Warrant Agreement and the Class B
Warrant certificates, the forms of which have been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
46
Each Class B Warrant entitles its holder to purchase one share of Common
Stock at an exercise price of $6.25 per share. The Class B Warrants expire on
_______________________ (three years after the Effective Date). The Class B
Warrants may be redeemed by the Company at any time, commencing eighteen
months after the Effective Date, or sooner with the sole consent of the
Underwriter (but no sooner than nine months from the date of this Prospectus)
at a redemption price of $.01 per Warrant upon 10 days prior written notice,
provided the closing high bid price of the Common Stock for the 15 consecutive
trading days ending on the third day prior to the date of notice of redemption
is in excess of $9.375 (or 150% of the exercise price of the Class B Warrants
to be proportionately adjusted for any stock dividends and stock splits
occurring after the Effective Date and which may be adjusted to 150% of the
current exercise price of the Class B Warrants, if such exercise price is
changed) per share. Warrantholders shall exercise rights until the close of
business on the day preceding the date fixed for redemption.
In order for a holder to exercise a Class B Warrant, and as required in
the Warrant Agreement, there must be a current registration statement on file
with the Commission pertaining to the shares of Common Stock underlying the
Class B Warrants, and such shares must be registered or qualified for sale
under securities laws of the state in which such warrantholder resides or such
exercise must be exempt from registration in such state. The Company will be
required to file post-effective amendments to the Registration Statement of
which this Prospectus forms a part during the nine month period from the date
hereof, when events require such amendments. In addition, the Company has
agreed with the Underwriter to use its best efforts to keep the Registration
Statement covering the shares underlying the Class B Warrants current and
effective. There can be no assurance however, that such Registration Statement
(or any other Registration Statement filed by the Company to cover shares of
Common Stock underlying the Class B Warrants) can be kept current. If a
Registration Statement covering the shares of Common Stock is not kept current
for any reason, or if the shares underlying the Class B Warrants are not
registered in the state in which a holder resides, the Class B Warrants will
not be exercisable and will be deprived of any value.
Holders of the Class B Warrants will be protected against dilution upon
the occurrence of certain events, including, but not limited to stock
dividends, stock splits, reclassifications, mergers, and sales of Common Stock
below the Exercise Price or then-current market value. However, holders of
Class B Warrants will have no voting rights and are not entitled to dividends.
In the event of liquidation, dissolution or winding up of the Company, holders
of Class B Warrants will not be entitled to participate in any distribution of
the Company's assets.
The purchase price payable upon exercise of the Class B Warrants is to be
paid in lawful money of the United States. The Company is not required to
issue certificates representing fractions of shares of Common Stock upon the
exercise of Class B Warrants, but with respect to any fraction of a share, it
will make payment in cash based upon the market price of the Common Stock as
determined by the Warrant Agent.
47
Transfer Agent, Warrant Agent and Registrar
The Transfer Agent and Warrant Agent for the Common Stock and the Class
B Warrants is American Stock Transfer and Trust Co., 40 Wall Street, New
York, New York 10005.
Other Publicly Held Securities and Preferred Stock
Class A Warrants
The Company has issued and outstanding 2,262,500 Class A Warrants,
exercisable for 226,250 shares of Common Stock, which are publicly tradeable
and are exercisable at a price of $13.00 per share until April 11, 1999. Such
holders are protected against dilution upon the occurrence of certain events
including but not limited to stock dividends, stock splits, reclassifications,
and mergers, but have no voting rights and are not entitled to dividends. In
the event of liquidation, dissolution, or winding up of the Company, holders
of Class A Warrants are not entitled to participate in the distribution of any
of the Company's assets.
Preferred Stock
Pursuant to shareholder approval at the August 12, 1996 Special
Shareholders' Meeting, the Company is authorized to issue 1,000,000 shares of
preferred stock par value $.01. The Board of Directors has the express
authority, without further action of the stockholders, to issue shares of
Preferred Stock from time to time in one or more series and to fix before
issuance with respect to each series: (a) the designation and the number of
shares to constitute each series, (b) the liquidation rights, if any, (c) the
dividend rights and rates, if any, (d) the rights and terms of redemption, if
any, (e) whether the shares will be subject to the operation of a sinking or
retirement fund, if any, (f) whether the shares are to be convertible or
exchangeable into other securities of the Company, and the rates thereof, if
any, (g) any limitation on the payment of dividends on the Common Stock while
any such series is outstanding, if any, (h) the voting power, if any, in
addition to the voting rights provided by law, of the shares, which voting
powers may be general or special, and (i) such other provisions as shall not
be inconsistent with the certificate of incorporation. All the shares of any
one series of the Preferred Stock shall be identical in all respects. No
preferred shares are currently outstanding.
48
SHARES ELIGIBLE FOR FUTURE SALE
Of the 879,488 shares of Common Stock of the Company outstanding as of the
Effective Date, _____ shares are restricted securities, as that term is
defined in Rule 144 promulgated under the Securities Act of 1933 (the
"Securities Act"). 399,000 shares have been registered for sale concurrently
herewith subject to an agreement with the Underwriter not to sell such shares
for a period of three months without the prior written consent of the
Underwriter, and 114,000 shares have been registered for sale concurrently
herewith subject to an agreement with the Underwriter not to sell such shares
for a period of nine months without the prior written consent of the
Underwriter. Of the 879,488 shares, _____ shares are owned by affiliates of
the Company, as that term is defined under the Securities Act, Absent
registration under the Securities Act, the sale of such shares is subject to
Rule 144, as promulgated under the Securities Act. In general, under Rule 144,
subject to satisfaction of certain other conditions, a person, including an
affiliate of the Company, who has beneficially owned restricted shares of
Common Stock for at least two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the total number of outstanding shares of the same class, or if the Common
Stock is quoted on NASDAQ, the average weekly trading volume during the four
calendar weeks preceding the sale. A person who has not been an affiliate of
the Company for at least three months immediately preceding the sale and who
has beneficially owned the shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to any of the
volume limitations described above. The Company's executive officers and
directors have agreed not to sell their shares for a period of eighteen months
from the Effective Date without the prior consent of the Underwriter. The
Underwriter may consent to the sale of such shares at any time, in its sole
discretion, upon the request of the holder. The Underwriter's decision to
consent will be based upon the current market conditions, liquidity of the
Common Stock, as well as such other factors the Underwriter deems appropriate.
No public announcement will be made with respect to the foregoing.
49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During September 1993, the Company's lender, Congress, agreed to provide
an overadvance to the Company of $500,000. In connection therewith,
Messrs. A. Densen, L. Densen and A. Towell obtained a junior
participation interest from Congress by advancing $250,000 of their funds
to Congress. $250,000 of this overadvance was repaid to Congress during
fiscal 1994. Mr. L. Densen was repaid $35,000 of the previous balance in
full by Congress during May, 1996. The remaining balance of $215,000
will be repaid by Congress, at its option, to Messrs. A. Densen and A.
Towell, subject to the availability of funds.
A group of investors (the "Associates") holds a first mortgage on the
Company's executive offices and warehouse facility in the principal amount of
$489,782 as of June 30, 1996. The wives of Alan E. Densen and Anthony P.
Towell, executive officers and directors of the Company, and Herbert
Schneiderman, a director of the Company, are members of Associates.
On January 20, 1995, the Company granted non-qualified options to acquire
41,118 shares of Common Stock to each Messrs. A. Densen, A. Towell, and L.
Densen. These options are exercisable until January 19, 2005 at an exercise
price of $5.168, are subject to anti-dilution provisions, and cannot be
exercised during the first five years unless pre-tax profit for fiscal year
1995 is greater than $50,000. It was determined in September 1995 that these
options can now be exercised for 41,118 shares of Common Stock. An additional
41,118 options were granted on January 20, 1995, which are exercisable until
January 19, 2005, at an exercise price of $5.168 but which cannot be exercised
during the first five years unless pre-tax profit for fiscal year 1996 is
greater than $250,000. All of the options granted on January 20, 1995 were
granted in consideration of previous sacrifices including reduction in
salaries, cancellation of options, and other surrendered benefits by executive
officers as well as the turnaround performance achieved by the Company. The
turnaround achieved by the Company in its performance can be directly related
to the efforts of Messrs. A. Densen, A. Towell, and L. Densen.
On January 31, 1995, the Company's board of directors reduced the exercise
price of the 2.3 million outstanding Class A Warrants issued in connection
with the 1994 Public Offering to $13.00 per share. At the same time, the board
of directors also reduced the exercise price to $13.00 per share with regard
to the 10,833 warrants ("Associate Warrants") issued to a group of investors,
including the spouses of Alan Densen (1,667 Associate Warrants owned by her)
and Anthony P. Towell (1,667 Associate Warrants owned by her), and Herbert
Schneiderman (833 Associate Warrants owned by him), in connection with a
reduction of indebtedness regarding the Company's premises; 90,941 warrants
purchased by Anthony P. Towell, the Company's Chief Financial Officer, from
Scorpio Partners, L.P.; 4,078 Royce warrants issued in connection with a 1991
public offering to the same Underwriter herein; and 833 warrants in
connection with a 1991 bridge loan. All these warrants have also been extended
to April 11, 1999. These warrants
50
were all adjusted as indicated so as to treat them on an equal basis and to
provide incentives for them to be exercised.
The Company had employment agreements with Messrs. A. Densen, A. Towell and L.
Densen, which commenced as of the effective date of the Company's 1994 public
offering in April, 1994. As of July 1, 1995, these executive officers entered
into new agreements. See "Executive Compensation Employment Agreements and
Change in Control Features" with regards to provisions contained in the
employment agreement of Alan E. Densen, the Company's President and CEO, and
Lawrence Densen, the Company's Senior Vice-President. Similar provisions are
contained in the employment agreement with Anthony P. Towell. Messrs. A.
Densen, L. Densen, and A. Towell, in modification agreements to their
employment agreements, have waived: (i) their right to bonuses based upon the
Company's earnings or sales for the fiscal years ended June 30, 1996 and June
30, 1997; (ii) their exercise rights on options and warrants and repayment for
their junior participation interests with Congress and compensation payable in
the event of a Change in Control with respect to the Private Placement and
this Rights Offering; and (iii) their right to terminate their relationship
with the Company, as per the terms of their respective employment agreements.
The modification agreements provide that their right to terminate their
employment agreements shall not be waived in the event that there is a
material breach of such agreements by the Company.
On April 18, 1995, the Company entered into an agreement with Donald to act as
its investment adviser for a term of three years at a retainer of $3,000 per
month. The agreement may be terminated for cause at any time and after
eighteen (18) months by either party upon forty-five days notice. Donald was
also granted a five year warrant to purchase 12,500 shares exercisable at
$12.50 per share, the closing market price on the date of grant. James Favia,
a director of the Company, serves as a consultant to Donald.
On July 10, 1995 the Company terminated its relationship with Lew Lieberbaum &
Co., Inc. ("Lew Lieberbaum"), the Company's underwriter in its 1994 public
offering. Pursuant to an agreement dated July 10, 1995, the Company canceled
all of Lew Lieberbaum's rights under the Underwriting Agreement (the
"Underwriting Agreement"), including, but not limited to, the right of first
refusal to act on behalf of the Company in future transactions, the
cancellation of all Underwriter's Warrants held by Lew Lieberbaum or its
affiliates, their right to representation on the Company's board of directors
and the termination of any obligation by holders of securities subject to a
"lock-up" to obtain the permission of Lew Lieberbaum prior to sale or other
disposition of said securities. At the same time, Leonard A. Neuhaus and
Sheldon Lieberbaum, who are affiliated with Lew Lieberbaum, resigned as
directors of the Company. In exchange, the Company issued 10,000 shares of
common stock to Lew Lieberbaum.
During February 1996, Messrs. A. Densen, A. Towell and L. Densen,
executive officers and directors of the Company, guaranteed to Congress
overadvances to the Company of up to $500,000 in excess of the Company's
eligible borrowings. The Company issued warrants for a term of five
years in consideration for their guaranty to each Messrs. A. Densen, A.
51
Towell, and L. Densen to purchase 8,875 shares of Common Stock at $5.428 per
share which expire on February 22, 2001, and are subject to anti-dilution
provisions. The overadvance has since been repaid and their guarantees have
been returned to them.
On June 28, 1996, the Company completed the Private Placement Offering,
pursuant to which it issued 399,000 shares at $1.50 per share to 20 investors,
pursuant to provisions for exemption from registration under the Securities
Act of 1933 as amended. The terms of the Private Placement Offering were
established by negotiation between the Company and Royce Investment Group,
Inc., a registered broker/dealer (the "Private Placement Agent"). Under the
terms of the Private Placement Offering, 10 1/2 units (the "Units") were
offered, and sold, in multiples of $57,000 per Unit. Each full Unit consists
of 38,000 shares of the Company's Common Stock, par value $0.12 per share. The
Company used net proceeds from the Private Placement Offering to pay off a
short-term loan in the amount of $500,000 from Elono Portfolio S.A., which had
been used to reduce the amount due to Congress. Gross proceeds from the
Private Placement Offering were $598,500. The Underwriter acted as Placement
Agent and received a commission of 10% and a 3% non-accountable expense
allowance. On July 9, 1996, the Company completed an additional private
placement offering for 114,000 shares at $1.50 per share to 5 investors,
pursuant to provisions for exemption from registration under the Securities
Act of 1933 as amended. The shares sold in the foregoing private placements
are being registered concurrently herewith.
THE OFFERING
The Rights
The Company is granting to holders of all its outstanding Common Stock of
record on ____________ ("Record Date"), in those states where qualified, or
exempt from qualification, (see page ____ for list of such states), the
nontransferable Rights to subscribe for Units, each of which consists of one
share of common stock $0.12 par value (the "Common Stock") of the Company and
one Class B Redeemable Common Stock Purchase Warrant (the "Class B Warrants")
of the Company on the basis of 4 Rights for each 5 shares of Common Stock
owned on the Record Date. Inasmuch as the Rights are not transferable, there
will be no market for the Rights, nor will Royce Investment Group, Inc. (the
"Underwriter") be purchasing any Rights.
52
Expiration Date
The Rights Offering will terminate, and the Rights will expire, at 5:00
p.m. New York Time, on __________________, 1996 (the "Expiration Date").
Method of Exercising Rights
Rights may be exercised by completing and signing a rights certificate.
The completed and signed subscription form, accompanied by payment in full of
the Subscription Price for all Units purchased, must be received by the
Subscription Agent before the Expiration Date.
The executed rights certificate and payment should be mailed or delivered
to the Subscription Agent at the following address:
American Stock Transfer & Trust Co.
40 Wall Street
New York, New York 10005
Payment of the Subscription Price must be made by certified check, bank
check or money order payable to American Stock Transfer & Trust Co.
A subscription also will be in acceptable form if a properly completed
and signed subscription form has been deposited with a bank, trust company, or
member firm of the New York or American Stock Exchange, or the National
Association of Securities Dealers, provided that, before the Expiration Date,
the Subscription Agent has received a letter or telegraphic notice from the
bank, trust company, or member firm setting forth the subscriber's name and
the number of shares subscribed for, guaranteeing payment of the full
Subscription Price (which must be received by the Subscription Agent within
five calendar days after the Expiration Date), and stating that the
rights certificate has been properly completed and signed and has been or
will be forwarded to the Subscription Agent by the bank, trust company, or
member firm. Acceptance of subscriptions in the foregoing manner will be
subject to withholding delivery of the shares subscribed for until receipt of
the duly executed rights certificate and payment of the aggregate Subscription
Price. No formal arrangements for the deposit of rights certificate have been
made with any bank, trust company, or member firm.
Certificates representing the Units purchased by exercising Rights will
be issued as soon as practicable after acceptance, provided that the
Subscription Agent has received a properly completed subscription agreement
accompanied by proper payment in full of the Subscription Price. The sale of
the unsubscribed Units to the Underwriter is expected to occur on the seventh
calendar day after the Expiration Date. All funds received by the Subscription
Agent will, upon its acceptance of subscriptions and its authorization of the
issuance of certificates representing the Common Stock, be placed in the
Subscription Agent's escrow account.
All questions as to the validity, form, eligibility (including times of
receipt and beneficial ownership) and the acceptance of rights certificates and
the Subscription Price will be jointly determined by the
53
Company and the Underwriter, whose determinations will be final and binding.
Once made, subscriptions are irrevocable, and no alternative, conditional or
contingent subscriptions will be accepted. The Company reserves the absolute
right to reject any or all subscriptions not properly submitted or the
acceptance of which would, in the opinion of the Company's counsel, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions, and the Company's and the Underwriter's joint interpretations of
the terms and conditions of the Offering shall be final and binding. Any
irregularities in connection with subscriptions must be cured within such time
as the Company shall determine unless waived. The Company and the Underwriter
are not under any duty to give notification of defects in such subscriptions
and will not have any liability for failure to give such notifications.
Subscriptions will not be deemed to have been made until such irregularities
have been cured or waived and, if rejected, will be returned to the holder of
the Rights as soon as practicable.
Standby Commitment
In accordance with a standby underwriting agreement (the "Standby
Agreement") entered into on the date of this Prospectus and pursuant thereto
the Underwriter shall be obligated to purchase all of the Units subject to the
Rights Offering which are not subscribed for in said offering on the second
business day following the Expiration Date of such offering and commence the
distribution of such securities on or after said time. The Underwriter will
pay for the securities on the seventh calendar day after the Expiration Date,
at the subscription price set forth on the cover page of the Prospectus. If
all of the Rights are exercised, the Underwriter will not, subject to the
following, purchase any of the Units pursuant to the Standby Agreement.
In the event that the unsubscribed Units to be purchased by the
Underwriter is less than 300,000 Units, the Underwriter will have the right
but not the obligation to purchase a minimum of 300,000 of these Optional
Units at the Subscription Price less a 10% discount and 3% nonaccountable
expense allowance.
The Underwriter will offer to sell to the public all of the components of
the Units it acquires from the Company pursuant to the Standby Agreement (the
"Standby Offering") at prices which may exceed the highest asked price as
reported on NASDAQ. If any of the Company's affiliated stockholders acquire
Units or components thereof directly from the Underwriter in the Standby
Offering, such purchases, if any, will not exceed 10% of the shares being
offered hereby. Any securities acquired by affiliates in the Offering or the
Standby Offering will be acquired for investment purposes only and made
subject to a "lock-up" agreement for eighteen (18) months from the date of
this Prospectus with the Underwriter. See "Description of Securities-Potential
Future Sales of Common Stock pursuant to Rule 144."
The Underwriter may terminate its obligations under the Standby Agreement
if there is a material adverse change in the condition of the Company, or if
certain other events occur. In such event investors will not have the right to
cancel their subscriptions. The Company has the
54
right to retain the monies from Rights subscribed for. The Rights Offering is
distinct and separate from the Standby Offering under which the Underwriter
has a market out right of cancellation as described herein.
Tax Consequences of the Offering
Investors and stockholders are urged to consult with their independent
tax advisors for the tax consequences of this Offering for the following
reasons.
Individual shareholders may be subject to federal and/or state
inheritance or estate taxes. A shareholder's evaluation of the federal and/or
state income tax consequences of this Offering may depend on his federal
and/or state tax situation. The Company is unable to determine the federal
and/or state income tax consequences to investors and stockholders of the
Company with regard to their subscribing, or failing to subscribe, for the
Rights.
55
UNDERWRITING
Pursuant to a Standby Underwriting Agreement between the Underwriter and
the Company dated as of the date of this Prospectus (the "Standby Agreement"),
the Underwriter has participated in establishing the terms and structure of
the Offering. Pursuant to the Standby Agreement, the Company will pay to the
Underwriter a 10% standby fee of $351,795.50 ($.50 per share)in consideration
of its agreement to enter into the standby commitment and also will pay the
expenses of the Underwriter, on a 3% nonaccountable basis, in the amount of
$105,538.65 ($.15 per share). In the event that the number of unsubscribed
Units to be purchased by the Underwriter is less than 300,000 Units, the
Underwriter will have the right but not the obligation to purchase a minimum
of 300,000 Units at the Subscription Price less a 10% discount and 3%
nonaccountable expense allowance to be purchased within 30 days of the date of
the Closing. These amounts will be paid by the Company to the Underwriter
whether or not all of the Rights are exercised and the Underwriter actually
purchases any Units under the Standby Agreement, unless the Standby Offering
is terminated pursuant to the terms of the Standby Agreement. In addition, the
Company has agreed to pay to the Underwriter for its agreement to act as a
financial consultant for a term of one year from the Effective Date, a fee
totaling 2% of the proceeds of the Offering (including the Optional Units)
payable on the Closing and the sale of the Optional Units.
The Offering is not being underwritten. However, as described above under
"The Offering-Standby Commitment," subject to the terms and conditions of the
Standby Agreement, the Underwriter has committed to purchase, at the
Subscription Price, all of the Units not subscribed for in the Offering. The
Underwriter's commitment to the Company in this regard is made on a "firm
commitment" basis except if, in the reasonable judgment of the Underwriter, it
is impracticable to consummate the Standby Offering under normal "market out"
conditions, such as (i) any material adverse change in the business, property
or financial condition of the Company; (ii) trading in securities on the New
York Stock Exchange, the American Stock Exchange or NASDAQ System having been
suspended or limited or minimum prices having been established on either such
Exchange or System; (iii) a banking moratorium having been declared by either
federal or state authorities; (iv) an outbreak of major hostilities or other
national or international calamity having occurred; (v) any action having been
taken by any government in respect of its monetary affairs which, in the
reasonable opinion of the Underwriter, has a material adverse effect on the
United States securities markets; (vi) any action, suit or proceeding at law
or in equity against the Company, or by any Federal, State of other
Commission, board or agency wherein any unfavorable decision would materially
adversely effect the business, property, financial condition or income of the
Company; or (vii) due to conditions arising subsequent to the execution
hereof, the Underwriter reasonably believes that, as a result of material and
adverse events affecting the market for the Company's Common Stock or the
securities markets in general, it is impracticable or inadvisable to proceed
with the Standby Offering. Accordingly, should the Underwriter not purchase
the unsold Units in accordance with the market out conditions, shareholders
who have exercised the Rights will not have a right to
56
cancel their subscription. In addition, in the event that all of the Units
offered hereby are not sold pursuant to the exercise of Rights, and the
Underwriter fails to purchase the unsold Units pursuant to its Standby
Agreement, the Company will elect not to return payment received on the Rights
subscribed for, and investors may be vulnerable to illiquidity and/or a loss
of their entire investment. The Subscription Price has been arbitrarily
determined through negotiation between the Company and the Underwriter, was
set at approximately 60-70% of the average closing bid price as reported by
NASDAQ for the ten business days preceding the Effective Date, and may bear no
relationship to current market price, earnings, assets or other recognized
criteria of value applicable to the Company. Factors considered in determining
such prices, in addition to prevailing market conditions, included the history
of and the prospects for the industry in which the Company competes, an
assessment of the Company's management, the prospects of the Company, its
capital structure and such other factors as were determined relevant.
Reference is made to the Standby Agreement, which is annexed as an exhibit to
the Registration Statement, of which this Prospectus forms a part, for its
complete terms and provisions.
On or after the second business day following the Expiration Date of the
Offering, the Underwriter proposes initially to offer from time to time, the
components of the Units, acquired by it pursuant to its standby commitment
directly to the public at prices which may exceed the highest available asked
price then existing on NASDAQ. The Underwriter presently does not make a
market in the Company's securities and in connection with any sales, does not
intend to stabilize prices. In addition, the Underwriter will not purchase or
make a market in any securities of the Company until it has completed its
distribution of the components of the Units acquired in the Standby Offering.
As a portion of the consideration for its standby commitment and the
investment banking services rendered by the Underwriter, the Company has
agreed to sell to the Underwriter for its own account, at a price of $.0001
per Unit covered thereby, warrants ("Underwriter's Warrants") to purchase 10%
of the Units offered pursuant to its standby commitment. The Underwriter's
Warrants may not be exercised for a period of twelve (12) months from the date
of this Prospectus. The Underwriter's Warrants will be exercisable in whole or
in part for a period of four (4) years thereafter at a price of $6 per Unit
which is equal to 120% of the Subscription Price. The exercise price and the
number of shares of Common Stock issuable under the Underwriter's Warrants and
underlying warrants are subject to adjustment to protect the holder against
dilution in certain events. The Underwriter's Warrants are not transferable by
the Underwriter during the initial twelve (12) months except to one or more of
its officers. The holders of the Underwriter's Warrants have no voting,
dividend or other rights of shareholder of the Company with respect to the
shares underlying such Underwriter's Warrants unless such Warrants have been
exercised.
Moreover, in the event that the Underwriter elects to register securities
underlying the Underwriter's Warrants and commence a distribution of such
securities, it will comply with SEC Rule 10b-6 in that, among other things, it
will not make a market or continue to make
57
a market if it should be a market maker in any of the Company's securities
until such time as the distribution of such securities is completed. Any sale
of Units and/or the components thereof at a price in excess of the
Underwriter's purchase price pursuant to the standby commitment will result in
realization by the Underwriter of additional underwriting compensation. It
should be noted that the Underwriter is acting as a principal in the Standby
Offering, and not as agent for the Company.
The Company has agreed, for a period of six(6) years commencing one (1)
year following the date of this Prospectus, that on any occasion that it files
a new registration statement or Regulation A offering within such period
(except on Form S-8 or any other appropriate form) it will include in each
such filing the Underwriter's Warrants and/or underlying securities to the
extent permitted by the then applicable rules and regulations of the
Commission, at the request of any holder or holders of such Underwriter's
Warrants and/or underlying securities at no expense to them.
Further, the Company has agreed to qualify or register the Underwriter's
Warrants and/or the underlying securities once at its own expense during the
four (4) year period commencing one (1) year after the date of this
Prospectus, upon request of the Underwriter or its specific duly authorized
designee or the holders of a least 40% of the Underwriter's Warrants and/or
underlying Securities together with the consent of the Underwriter or its
specific duly authorized designee. Any profit received by the Underwriter
either from the sale of the Underwriter's Warrants or from the sale of the
shares of Common Stock purchasable upon exercise of the Underwriter's Warrants
may be deemed additional underwriting compensation. The Company has agreed to
pay the Underwriter a warrant solicitation fee of 7% of the exercise price for
each Class B Warrant exercised during the period commencing eighteen months
after the Effective Date or sooner if the Class B Warrants become exercisable,
but in no event sooner than one year after the Effective Date, and to
indemnify the Underwriter against certain liabilities, including those arising
under the Securities Act. A portion of the 7% solicitation fee the Underwriter
shall receive may be allowed by the Underwriter to the dealer who solicited
the exercise (which may also be the Underwriter) provided: (1) the market
price of the Common Stock on the date the Warrant was exercised was greater
than the Warrant exercise price on that date; (2) exercise of the Warrant was
solicited by a member of the NASD; (3) the Warrant was not held in a
discretionary account; (4) disclosure of compensation arrangements were made
both a the time of the Offering and at the time of exercise of the Warrant;
and (5) the solicitation of the exercise of the Warrant was not in violation
of Rule 10b-6 promulgated under the Securities and Exchange Act of 1934.
The Company has agreed that the Underwriter shall have a right of first
refusal with respect to the public sale of any of the Company's securities to
be made by the Company, its principal stockholders or subsidiaries during the
three (3) year period commencing with the consummation of the Standby
Agreement, subject to certain exceptions.
The Standby Agreement provides that the Underwriter shall have the
58
right to designate a director and/or non-voting advisor to the Company's board
of directors for a period of sixty (60) months after the consummation of the
Standby Agreement and that the Company shall use its best efforts to cause the
election of said member. Said designee shall receive no more or less
compensation than is paid to other non-management directors of the Company and
shall be entitled to receive reimbursement for all reasonable costs incurred
in attending such meetings, including but not limited to food, lodging and
transportation. Moreover, to the extent permitted by law, the Company will
agree to indemnify the Underwriter and its designee(s) for the actions of such
designee(s) as director and/or as advisor of the Company. In the event the
Company maintains a liability insurance policy affording coverage for the acts
of its officers and/or directors, it will agree, to the extent permitted by
under such policy, to include each of the Underwriter and its designee(s) as
an insured under such policy. The Underwriter has no present intent to
exercise this right.
The Standby Agreement provides that if the Company shall within 5 years
from the Effective Date, enter into any agreement or understanding with any
person or entity introduced by the Underwriter involving (i) the sale of all
or substantially all of the assets and properties of the Company, (ii) the
merger or consolidation of the Company (other than a merger or consolidation
effected for the purpose of changing the Company's domicile) or (iii) the
acquisition by the Company of the assets or stock of another business entity,
which agreement or understanding is thereafter consummated, whether or not
during such 5 year period, the Company, upon such consummation, shall pay to
the Underwriter an amount equal to the following percentages of the
consideration paid by the Company in connection with such transaction: 5% of
the first $1,000,000 or portion thereof, of such consideration; 4% of the
second $1,000,000 or portion thereof, of such consideration; and 3% of such
consideration in excess of the first $2,000,000 of such consideration.
The Company, for a period of one year from the Effective Date, shall not
file a Registration Statement for the benefit of officers, directors,
employees, consultants and/or affiliates of the Company without the prior
written consent of the Underwriter. For a period of one year from the
Effective Date, without the consent of the Underwriter, the Company will not
place or sell any of its securities other than in connection with mergers,
acquisitions or the exercise of currently outstanding options and warrants.
The Company will maintain a current Registration Statement for the Underwriter
to offer and sell the securities purchased by it for a period of at least nine
months from the Effective Date or such reasonable further period as the
Underwriter may request. Nevertheless, the Underwriter agrees to notify the
Company when its distribution has been completed. Neither the Company nor any
officer or director thereof shall for a period of 5 years from the Effective
Date offer to sell any securities of the Company in a Regulation S offering
without the prior written consent of the Underwriter.
59
CONCURRENT REGISTRATION OF COMMON STOCK
Concurrently with this Offering, 513,000 shares of Common Stock have been
registered under the Securities Act of 1933 for immediate resale
simultaneously with the Offering. The holders of 399,000 such shares have agreed
not to sell any shares for a period of three months from the Effective Date
without the prior written consent of the Underwriter. The holders of the
remaining 114,000 shares have agreed not to sell any shares for a period of
nine months from the Effective Date without the prior written consent of the
Underwriter.
LEGAL MATTERS
Certain legal matters with respect to the issuance of securities offered
hereby will be passed upon for the Company by Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP, 585 Stewart Avenue, Garden City, New York 11530.
Members of the firm of Hollenberg Levin Solomon Ross Belsky & Daniels, LLP own
988 shares of Common Stock. Lester Morse, P.C., 111 Great Neck Road, Great
Neck, New York 11021, is acting as counsel for the Underwriter in connection
with certain legal matters relating to the Units of Common Stock and Warrants
offered hereby.
EXPERTS
The Consolidated Financial Statements included in the Registration
Statement, of which this Prospectus forms a part, have been audited by
Cornick, Garber & Sandler, LLP, independent public accountants, to the extent
and for the periods indicated in their report with respect thereto and were
included herein in reliance upon the authority of said firm as experts in
giving said report. Reference is made to said report which contains an
explanatory paragraph regarding the Company's litigation uncertainties.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on
Form SB-2 with respect to the securities being offered hereby. This Prospectus
does not contain all the information set forth in such Registration Statement,
as permitted by the Rules and Regulations of the Commission. For further
information with respect to the Company and such securities, reference is made
to the Registration Statement and to the exhibits and schedules filed
therewith. Each statement made in this Prospectus referring to a document
field as an exhibit to the Registration Statement is qualified by reference to
the exhibit for a complete statement of its terms and conditions. The
Registration Statement, including exhibits thereto, may be inspected without
charge, by anyone at the principal office of the Commission in Washington D.C.
and copies of all or any part of thereof may be obtained from the Commission's
office in Washington D.C. upon payment of the Commission's charge for copying.
60
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
INDEPENDENT AUDITORS' REPORT.......................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets........................................ F-3
Consolidated Statements of Operations.............................. F-4
Consolidated Statements of Changes in Shareholders' Equity......... F-5
Consolidated Statements of Cash Flows.............................. F-6
Notes to Consolidated Financial Statements......................... F-8
F-1
Independent Auditors' Report
Board of Directors and Shareholders
Eastco Industrial Safety Corp.
Huntington Station, New York
We have audited the accompanying consolidated balance sheet
of EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES as at June 30, 1995 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the two years in the period ended June 30, 1995.
These financial statements 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 generally
accepted auditing standards. Those standards require that we plan and perform
the audits 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, such consolidated financial statements
present fairly, in all material respects, the consolidated financial position
of Eastco Industrial Safety Corp. and Subsidiaries as at June 30, 1995 and the
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 11 to the consolidated financial
statements, the Company is a defendant in various lawsuits, together with a
multitude of other defendants, in actions alleging exposure by plaintiffs to
asbestos and products containing asbestos sold by the Company over unspecified
periods of time. The Company is also a defendant in a non-asbestos related
product liability lawsuit. While the Company has entered into an agreement
with its primary insurance companies which limits its liability with respect
to certain asbestos litigation, the ultimate outcome or range of liability, if
any, resulting from the various lawsuits cannot presently be determined.
Accordingly, no provision for any liability that may result has been made in
the accompanying consolidated financial statements.
/s/ Cornick, Garber & Sandler, LLP
----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Uniondale, New York
September 8, 1995
F-2
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 1995 March 31, 1996
------ ------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents (Note 1) $ 521,210 $ 348,571
Accounts receivable, net of allowance for
doubtful accounts of $304,000 and $170,000
at June 30, 1995 and March 31, 1996,
respectively (Note 5) 3,898,173 4,679,597
Inventories (Notes 1, 2 and 5) 4,363,898 5,391,061
Other 481,868 310,350
----------- -----------
Total current assets 9,265,149 10,729,579
Property, plant and equipment, net
(Notes 1, 3, 5 and 6) 1,319,111 1,243,809
Other assets 131,788 193,892
----------- -----------
TOTAL $10,716,048 $12,167,280
=========== ===========
LIABILITIES
-----------
Current liabilities:
Convertible subordinated debenture payable
(Notes 6 and 12) $ 250,000
Loans payable (Note 5) $ 4,928,908 5,991,587
Current maturities of long-term debt (Note 6) 48,762 54,128
Accounts payable 2,891,043 2,973,588
Accrued expenses 331,907 244,314
----------- -----------
Total current liabilities 8,200,620 9,513,617
Long-term debt, less current maturities (Note 6) 489,782 448,488
----------- -----------
Total liabilities 8,690,402 9,962,105
----------- -----------
Commitments and contingencies (Notes 9, 10 and 11)
SHAREHOLDERS' EQUITY
--------------------
(Notes 1, 5, 6, 7 and 12)
Common stock, $.12 par value; authorized 20,000,000
shares; outstanding 347,738 and 361,488 shares at
June 30, 1995 and March 31, 1996, respectively 41,729 43,379
Additional paid-in capital 6,224,509 6,343,634
(Deficit) (statement attached) (4,240,592) (4,181,838)
----------- -----------
2,025,646 2,205,175
----------- -----------
TOTAL $10,716,048 $12,167,280
=========== ===========
The notes to consolidated financial statements are made a part hereof.
F-3
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, Nine Months Ended March 31,
---------------------- ---------------------------
1995 1994 1996 1995
----------- ----------- ------------ -----------
(Unaudited)
Net sales $24,024,897 $20,745,809 $19,739,719 $17,365,091
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales (Note 1) 19,254,571 17,372,063 15,624,922 13,887,720
Selling, general and
administrative (Note 1) 4,148,517 4,709,037 3,431,369 3,183,097
Interest (including approximately
$812,000 of debt finance costs
and common stock issued to note
holders in 1994) (Notes 5 and 6) 583,665 1,391,777 599,496 405,081
Other income (net) (39,793) (15,690) (52,822) (96,654)
Settlement with former underwriter (Note 7) 78,000
----------- ----------- ----------- -----------
Total costs and expenses 23,946,960 23,457,187 19,680,965 17,379,244
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 77,937 $(2,711,378) $ 58,754 $ (14,153)
=========== =========== =========== ===========
Income (loss) per share (Note 1):
Primary $.20 $(20.76) $.13 $(.04)
==== ======= ==== =====
Assuming full dilution $.17 $(20.76) $.13 $(.04)
==== ======= ==== =====
Average number of shares used
in computing per share amounts:
Primary 392,529 130,585 447,343 347,738
======= ======= ======= =======
Assuming full dilution 471,698 130,585 447,343 347,738
======= ======= ======= =======
The notes to consolidated financial statements are made a part hereof.
F-4
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NOTES 1, 5, 6, 7 and 12)
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995 AND FOR THE
NINE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
Common Stock* Treasury Stock*
----------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
BALANCE - JULY 1, 1993 80,031 $ 9,604 (17) $(5,500)
Net proceeds of public offering 230,000 27,600
Shares issued to Scorpio Partners
to reacquire warrant 8,750 1,050
Shares issued in connection with
bridge loan financing 28,750 3,450
Sale of warrant to underwriter
Retirement of treasury stock (17) (2) 17 5,500
Shares issued for services 224 27
Net (loss) for the year ended
June 30, 1994
------- ------- ---- -------
BALANCE - JUNE 30, 1994 347,738 41,729 -- --
Net income for the year ended
June 30, 1995
------- -------
BALANCE - JUNE 30, 1995 347,738 41,729
Shares issued on settlement with
former underwriter 10,000 1,200
Exercise of Class A warrants 3,750 450
Net income for the nine months ended
March 31, 1996
------- ------- ---- -------
BALANCE - MARCH 31, 1996 (UNAUDITED) 361,488 $43,379 -- $ --
======= ======= ==== =======
Additional
Paid-in
Capital (Deficit) Total
---------- ----------- ----------
BALANCE - JULY 1, 1993 $2,237,124 $(1,607,151) $ 634,077
Net proceeds of public offering 3,417,920 3,445,520
Shares issued to Scorpio Partners
to reacquire warrant (1,050)
Shares issued in connection with
bridge loan financing 571,550 575,000
Sale of warrant to underwriter 10 10
Retirement of treasury stock (5,498)
Shares issued for services 4,453 4,480
Net (loss) for the year ended
June 30, 1994 (2,711,378) (2,711,378)
---------- ----------- -----------
BALANCE - JUNE 30, 1994 6,224,509 (4,318,529) 1,947,709
Net income for the year ended
June 30, 1995 77,937 77,937
---------- ----------- -----------
BALANCE - JUNE 30, 1995 6,224,509 (4,240,592) 2,025,646
Shares issued on settlement with
former underwriter 70,825 72,025
Exercise of Class A warrants 48,300 48,750
Net income for the nine months ended
March 31, 1996 58,754 58,754
---------- ----------- -----------
BALANCE - MARCH 31, 1996 (UNAUDITED) $6,343,634 $(4,181,838) $ 2,205,175
========== =========== ===========
*As restated to give retroactive effect of 1-for-10 reverse stock split
(see Notes 1 and 12).
The notes to consolidated financial statements are made a part hereof.
F-5
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, Nine Months Ended March 31,
--------------------------------- --------------------------------
1995 1994 1996 1995
----------- ----------- -------------- ---------
(Unaudited)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss) $ 77,937 $(2,711,378) $ 58,754 $ (14,153)
----------- ----------- ----------- ---------
Adjustments to reconcile results of
operations to net cash effect of
operating activities:
Depreciation and amortization 164,533 172,870 112,910 140,523
(Reduction of) provision for losses on
accounts receivable (38,655) 138,843 50,000 8,929
Shares issued in connection with
bridge loan financing 575,000
Shares issued for services and settlement
with former underwriter 4,480 72,025
Net changes in assets and liabilities:
Accounts receivable (430,003) 1,120,727 (831,424) 56,833
Inventories (1,197,860) 371,746 (1,027,163) (979,350)
Other current assets (37,608) (25,797) 171,518 171,686
Other assets 20,247 59,107 (62,104) 1,070
Accounts payable 401,146 (1,262,624) 82,545 414,156
Accrued expenses (102,136) 134,982 (87,593) (155,853)
Deferred compensation (65,000)
----------- ----------- ----------- ---------
Total adjustments (1,220,336) 1,224,334 (1,519,286) (342,006)
----------- ----------- ----------- ---------
Net cash used for operating
activities (1,142,399) (1,487,044) (1,460,532) (356,159)
----------- ----------- ----------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (191,242) (24,658) (37,608) (136,291)
----------- ----------- ----------- ---------
(Continued)
F-6
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-2-
Year Ended June 30, Nine Months Ended March 31,
--------------------------------- --------------------------------
1995 1994 1996 1995
----------- ----------- -------------- ---------
(Unaudited)
Cash flows from financing activities:
Repayments of long-term debt $ (42,426) $ (361,913) $ (35,928) $ (31,260)
Borrowings under line of credit
agreements 25,789,531 22,159,610 20,553,406 18,709,316
Repayments under line of credit
agreements (24,044,483) (23,363,860) (19,490,727) (17,810,205)
Net proceeds from public offering
of common stock and warrants 3,445,520
Proceeds from sale of warrants 10
Proceeds from convertible subordinated
debt 250,000
Proceeds from excercise of warrants 48,750
(Decrease) increase in bank
overdrafts (365,277) 149,841 (365,277)
------------ ------------ ------------ ------------
Net cash provided by
financing activities 1,337,345 2,029,208 1,325,501 502,574
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,704 517,506 (172,639) 10,124
Cash and cash equivalents - beginning 517,506 521,210 517,506
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS - end $ 521,210 $ 517,506 $ 348,571 $ 527,630
============ ============ ============ ============
Supplemental disclosure of cash paid for:
Interest $ 583,665 $ 548,702 $ 607,131 $ 428,219
============ ============ ============ ============
Taxes $ 5,179 $ 2,572
============ ============
Supplemental disclosure of noncash
financing activities:
Repurchase of warrant for issuance of stock $ 175,000
============
The notes to consolidated financial statements are made a part hereof.
F-7
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies:
Operations:
The Company operates in two industry segments. The first is the
manufacture and sale of disposable clothing, industrial protective
clothing and protective products to distributors throughout the
United States and in Puerto Rico. The second is the distribution and
sale of industrial protective clothing and protective products
directly to "end users" located primarily in the Northeast United
States.
The Company's manufacturing division uses Tyvek(R) to produce
disposable clothing which is produced solely by E.I. Dupont
Industries, Inc. Products made of Tyvek(R) accounted for
approximately 35%, 29% and 42% of consolidated sales for the years
ended June 30, 1995 and 1994 and for the nine months ended March 31,
1996, respectively.
Principles of Consolidation:
The consolidated financial statements include the accounts of Eastco
Industrial Safety Corp. and its subsidiaries, all of which are
wholly-owned. All significant intercompany balances and transactions
have been eliminated in consolidation.
Interim Financial Statements:
The consolidated financial statements as at March 31, 1996 and for
the nine months ended March 31, 1996 and 1995 are unaudited.
Management believes they contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly these
financial statements for the periods presented. Interim results are
not necessarily indicative of results or cash flows to be expected
for a full fiscal year.
(Continued)
F-8
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies (Continued):
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash:
Cash includes certificates of deposit of approximately $500,000 at
June 30, 1995 and $300,000 at March 31, 1996 which are considered
cash equivalents on the statement of cash flows. A $300,000
certificate has been pledged as collateral for a bank loan to the
extent of such loan (see Note 5).
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.
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.
Income Taxes:
In 1987, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 96. Financial Accounting Standards Statement
No. 109 (FASB 109), which superseded FASB 96, was adopted for the
fiscal year ended June 30, 1994. However, because of the similarity
of these two statements as they affect the Company, the adoption of
FASB 109 did not affect the consolidated financial statements.
(Continued)
F-9
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies (Continued):
Per Share Amounts:
Primary earnings per share amounts have been computed utilizing the
weighted average number of common and, if material, common equivalent
shares outstanding during the period. Fully diluted earnings per
share is based upon the weighted average number of common and common
equivalent shares outstanding. Computation of loss per share amounts
do not include common equivalent shares because their inclusion would
be anti-dilutive. Per share amounts give effect to the retroactive
adjustment for the 1 for 10 reverse stock split in August 1996 (see
Note 12).
All other per share amounts and information set forth in the attached
financial statements and the notes thereto have also been adusted to
give effect to the reverse stock split.
NOTE 2 - Inventories:
Inventories consist of the following:
June 30, March 31,
1995 1996
---------- ----------
Raw materials $1,688,881 $1,605,259
Work-in-process 440,164 300,107
Finished goods 2,234,853 3,485,695
---------- ----------
Total $4,363,898 $5,391,061
========== ==========
NOTE 3 - Property, Plant and Equipment:
Property, plant and equipment is comprised of the following:
Estimated
June 30, March 31, Useful Life
1995 1996 (Years)
---------- ---------- ----------
Cost:
Land $ 382,000 $ 382,000
Building and leasehold
improvements 827,451 827,451 5 - 40
Machinery and equipment 1,160,416 1,198,024 3 - 10
Furniture and fixtures 192,948 192,948 7 - 10
---------- ----------
Total 2,562,815 2,600,423
Less accumulated depreciation
and amortization 1,243,704 1,356,614
---------- ----------
Balance $1,319,111 $1,243,809
========== ==========
(Continued)
F-10
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995 AND
THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 4 - Income Taxes:
Effective July 1, 1993, Statement of Financial Accounting Standards
No. 109 (SFAS 109) became effective for the Company. The adoption of
SFAS 109 had no effect on the financial statements as at June 30,
1994 and for the year then ended. While SFAS 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 past history of losses, it
has recorded a valuation allowances equal to the net deferred tax
asset account at June 30, 1995 and March 31, 1996.
Deferred income taxes relate to the following temporary differences
and carryforwards as of:
June 30, March 31,
1995 1996
---------- -----------
Deferred tax assets:
Net operating loss carryforwards $2,056,000 $ 2,037,000
Allowance for doubtful accounts
and credits 124,000 70,000
Tax basis adjustments to inventory 60,000 74,000
---------- -----------
Total 2,240,000 2,181,000
Less deferred tax liability:
Accelerated depreciation of
property and equipment (3,000) (8,000)
---------- -----------
Balance 2,237,000 2,173,000
Less valuation allowance (2,237,000) (2,173,000)
----------- -----------
Net deferred income taxes after
valuation allowance $ -- $ --
=========== ===========
(Continued)
F-11
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 4 - Income Taxes (Continued):
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 such
subsidiaries continue to meet the terms and conditions of their
grants. One subsidiary's exemption expires June 30, 1999. The
subsidiary has received a 90% exemption from Puerto Rico income taxes
and a 75% exemption from Puerto Rico municipal and property 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 to 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 which would
otherwise be due on their income. The Omnibus Budget Reconciliation
Act of 1993 imposes new 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.
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 (of approximately $2,458,000
at June 30, 1995) because it is management's intention to reinvest
such earnings indefinitely.
A reconciliation between the expected tax expense at the statutory
federal income tax rate and the Company's actual income tax expense
is as follows:
June 30, March 31,
------------------------ -----------------------
1995 1994 1996 1995
-------- --------- -------- -------
Income tax expense (benefit)
at the statutory rate $ 26,000 $(922,000) $ 20,000 $(4,800)
Effect of net operating loss of
Puerto Rican subsidiaries for
which there is no current tax
benefit 106,000
Effect of domestic net operating
loss for which there is no
current tax benefit 816,000 4,800
Benefit of utilization of net
operating loss carryforwards (26,000) (20,000)
-------- --------- -------- -------
Actual income tax expense $ -- $ -- $ -- $ --
======== ========= ======== =======
(Continued)
F-12
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 4 - Income Taxes (Continued):
At June 30, 1995, the Company has net operating loss carryforwards of
approximately $5,410,000 for federal income tax purposes. Such
carryforwards expire in 2005 through 2009. As a result of the public
stock offering in April 1994 (Note 7), the amount of the loss
carryforwards which can be utilized to offset future taxable income
will be limited to approximately $380,000 a year, plus any loss
carryforwards incurred after April 19, 1994. 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.
Accordingly, carryforwards available to be utilized for the year
ending June 30, 1996 approximate $1,584,000.
The annual limitation of the Company's net operating loss deductions
may be further reduced as a result of the private placement and the
proposed additional public offering (see Note 12).
NOTE 5 - Loans Payable:
Loans payable are comprised of short-term bank borrowings of $100,000
at June 30, 1995 and $295,000 at March 31, 1996 and borrowings under
the Company's line of credit agreement with Congress Financial
Corporation ("Congress"). Short-term bank borrowings (which usually
have 30 day terms) are renewable at the bank's option and bear
interest at 1% above the bank's prime rate.
The Company's line of credit agreement with Congress, which was to
expire in October 1996, provided for borrowings up to $6,000,000 with
interest payable monthly at 2 1/4% above the prime rate, plus an
unused line fee of 1/4% a year. Borrowings were limited to 80% of
eligible accounts receivable and 50% of eligible inventory up to a
maximum inventory of $2,875,000. As further described in Note 12, in
July 1996 the line of credit was amended and extended. The loans are
subject to certain working capital and 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. In September 1993, Congress sold to
three individuals, who are officers and directors of the Company, a
$250,000 junior participation in the loans made to the Company. The
Company had an informal agreement with Congress, whereby Congress
agreed to provide the Company an additional $500,000 in borrowing
(Continued)
F-13
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 5 - Loans Payable (Continued):
availability which was repaid at $11,250 a week beginning November 1,
1993 until $250,000 of additional borrowings was repaid. Congress
can, at its option, repurchase the junior participation if the
Company has at least $250,000 in availability under the financing
agreement. In May 1996, participations of $35,000 were repurchased.
The participants' interest in the obligations, collateral and
collections is subordinated to Congress.
In December 1993, the Company received a non-interest bearing loan of
$400,000 from an underwriter as an advance against a $750,000 private
placement bridge loan which was completed in January 1994. Additional
bridge loans of $375,000 and $25,000 were received in March and April
1994, respectively. The loans were repaid in April 1994 on the
closing of a public offering (Note 7). The interest on these loans
was at 5% a year, plus the issuance of $575,000 of the Company's
common stock upon the closing of the public offering. The costs
incurred in connection with the issuance of the notes of
approximately $160,000, together with the $575,000 value of the
28,750 shares of the Company's common stock issued to the note
holders,was charged to operations and included with interest expense
during the year ended June 30, 1994.
NOTE 6 - Long-Term Debt:
Long-term debt consists of a mortgage payable, collateralized by
land, building, accounts receivable and personal property, with
interest at 14.0%. In June 1992, a group of investors, including a
director and the spouses of certain officers and directors of the
Company, acquired the mortgage on the Company's building with a
balance of approximately $962,000 and $500,000 of subordinated debt
from a bank for $650,000. The group entered into a modification of
indebtedness agreement which reduced the mortgage to $650,000 and
forgave the balance, which, after the write off of related deferred
financing costs, resulted in a gain of $722,000 in fiscal 1992. In
connection with this transaction, the Company also issued five-year
warrants to acquire 10,833 shares of common stock at $30.00 a share.
In January 1995, the Company reduced the exercise price to $13.00 and
extended the expiration date until April 1999. The mortgage is
payable in monthly installments of $10,092, including interest, with
the remaining balance of approximately $434,000 due in July 1997.
Interest on the mortgage was $78,682 and $84,195 for the years ended
June 30, 1995 and 1994, respectively, approximately 38% of which is
applicable to a director and the spouses of the officers and
directors of the Company.
(Continued)
F-14
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 6 - Long-Term Debt (Continued):
In June 1993, the Company borrowed $325,000 from Scorpio Partners
L.P. ("Scorpio") in the form of a convertible subordinated note
payable in June 1997. In connection with the note, the Company also
sold to Scorpio for $25,000 and $15,000, respectively, warrants to
purchase 82,645 shares of the Company's common stock at $6.29 a share
and 25,000 shares of common stock at $30.00 a share.
In January 1994, the Scorpio loan was renegotiated (whereby the first
warrant was purchased by a corporate officer/director and extended to
March 31, 1997 and the second warrant was purchased by the Company
and canceled) in consideration for the issuance of common stock
having a total value of $175,000 on the effective date of a public
offering. In April 1994, the Scorpio loan was repaid upon the closing
of the public offering. The $1,050 par value of the shares issued to
repurchase the warrants was charged against additional paid-in
capital in the year ended June 30, 1994. The finance costs of
approximately $77,000 incurred in connection with these loans were
charged to operations during the year ended June 30, 1994 and are
included with interest expense on the statement of operations. Two
partners of Scorpio were officer/directors of the Company from June
29, 1993 until January 1994 and June 1994. Interest paid on the note
during the year ended June 30, 1994 was $20,346.
NOTE 7 - Shareholders' Equity:
Common Stock:
In April 1991, the Company sold, pursuant to a rights offering,
48,007 shares of common stock. In this connection, the underwriter
was sold a warrant to purchase 4,078 shares of common stock at $53.30
per share, which was exercisable until February 28, 1996. The Company
also had borrowed $200,000 with interest at 17% per annum during
February 1991 from five unrelated parties. These loans were repaid
out of the proceeds of the rights offering, including interest. In
connection with these loans, the Company issued warrants to purchase
833 shares of common stock, exercisable at $30.00 per share until May
13, 1996. In January 1995, the Company reduced the exercise price of
the above warrants to $13.00 and extended their expiration dates
until April 1999.
(Continued)
F-15
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 7 - Shareholders' Equity (Continued):
Common Stock (Continued):
On April 19, 1994, the Company sold in a public offering 200,000
units at $20.00 per unit. Each unit consists of one share of the
Company's common stock and one Class A warrant. Each warrant entitled
the holder to purchase one tenth of one share of common stock at an
exercise price of $24.00 a share from April 12, 1995 through April
12, 1999. In January 1995, the Company reduced the exercise price to
$13.00 a share. These warrants are redeemable by the Company
commencing April 12, 1995 at $1.00 a warrant, provided that the high
bid price of its stock is at least $19.50 for the required number of
days prior to the Notice of Redemption. The Company also granted to
the underwriter an option to purchase, at the same price, 30,000
units to cover over-allotments. This option was exercised in May
1994. The net proceeds to the Company of these sales were $3,445,520.
Out of these proceeds, the bridge loans (Note 5) of $1,150,000 plus
interest and the Scorpio loan (Note 6) of $325,000 plus interest were
repaid. In addition, the Company sold to the underwriter for $10 an
option, exercisable from April 12, 1995 to April 12, 1999, to
purchase 23,000 additional units at $29.00 a unit and entered into a
two year consulting agreement with the underwriter at a total cost of
$72,000. Subsequent to the public offering, two officers of the
underwriter became directors of the Company until their resignations
on July 10, 1995.
On July 10, 1995, the Company issued 10,000 shares of common stock to
the underwriter of its 1994 public stock offering in exchange for the
cancellation of all of its rights under the Underwriting Agreement.
The $78,000 cost thereof, based on the market value of the shares
issued and legal expenses incurred, is separately reflected on the
consolidated statement of operations for the nine months ended March
31, 1996.
Warrants:
On July 26, 1995, the Company issued to a consulting firm, which is
the employer of a new director of the Company, a five year warrant to
purchase 12,500 shares of the Company for $12.50 a share.
(Continued)
F-16
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 7 - Shareholders' Equity (Continued):
Incentive Stock Option Plans:
Under the Company's 1983 Incentive Stock Option Plan, options could
be granted to June 23, 1993 for a maximum of 5,625 shares of the
Company's common stock. At June 30, 1995, options to purchase 865
shares at $26.70 to $30.00 a share are outstanding; no further
options may be granted under this plan.
The Company's 1992 Incentive Stock Option Plan provides for the
granting of options for 20,000 shares of the Company's common stock
to December 20, 2002.
The Company's 1994 Incentive Stock Option Plan provides for the
granting of options for 10,000 shares of the Company's common stock
to January 2004.
Options granted under the incentive stock option plans must be
exercised within such period as stated in the plans and, in any
event, must be exercised no later than ten 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 plans are summarized as follows:
Shares Option Price Per Share
------- ----------------------
Outstanding - July 1, 1993 26, 503 $26.40 to $396.00
Expired (825)
Canceled (24,500)* $27.50 to $ 51.30
-------
Outstanding - June 30, 1994 1,178 $26.40 to $27.50
Granted 8,500 $10.63
Expired (13)
-------
Outstanding - June 30, 1995
and March 31, 1996 9,665 $10.63 to $27.50
=======
*In connection with the public offering in 1994, holders of incentive
and nonqualified stock options for 25,421 shares at prices of $27.50
to $440.40 a share agreed to the cancellation of their options.
(Continued)
F-17
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 7 - Shareholders' Equity (Continued):
On November 28, 1990, the Board of Directors granted to the Company's
president and vice president options to purchase 7,917 shares
exercisable at $30.00 per share from June 1992 through December 1996,
contingent upon the earnings per share of the Company during this
period. No options became exercisable through June 30, 1995.
Compensation expense will be recognized with respect to these options
to the extent that the fair market value of the stock exceeds the
option price when they become exercisable. All other outstanding
options are noncompensatory.
1995 Stock Options:
On January 20, 1995, the Board of Directors granted to the Company's
president and two vice-presidents ten-year nonqualified options to
purchase 80,158 shares each at $5.30 per share. The options are
exercisable after five years but may become exercisable sooner upon
the Company achieving pretax earnings targets. Based on the earnings
for the year ended June 30, 1995, options for 120,237 shares are now
exercisable; options for the remaining shares will become exercisable
if the Company's pretax earnings for the year ending June 30, 1996
exceeds the $250,000 target.
Other nonqualified options outstanding at March 31, 1996, under prior
years' grants, aggregate 108 shares at $30.00 a share.
The following summarizes shares reserved at March 31, 1996 under
options and warrants outstanding:
Price Per
Number Share or Unit
-------- ---------------
Stock options:
Incentive stock option plans 9,665 $10.63 - $30.00
Nonqualified options 123,000 $ 5.30 - $16.87
Warrants:
Class A 226,250 $13.00
Other 68,244 $12.50 - $13.00
(Continued)
F-18
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 8 - Commitments and Contingencies:
Rent:
The Company is obligated through August 2003 under several
noncancellable long-term operating leases covering office, factory
and warehouse facilities. Minimum annual rentals under these leases
are:
Year ending June 30:
1996 $ 109,000
1997 116,000
1998 127,000
1999 137,000
2000 157,000
Thereafter 474,000
----------
Total $1,120,000
==========
Rent expense, including month-to-month rentals, was $219,000,
$221,000, and $167,000 in the fiscal years ended June 30, 1995 and
1994 and the nine months ended March 31, 1996, respectively.
Employment Agreements:
The Company had employment agreements, which commenced as of the
effective date of the April 1994 public offering, with three of its
officers. These agreements provided for combined annual salaries of
$247,000. On July 1, 1995, these officers entered into new agreements
which provide for the following:
Officer Period Annual Salary
---------------- ------- -------------
President (a) 5 years $121,000
Senior Vice-President (b) 5 years $105,000
Vice-President of Finance
and Treasurer (c) 5 years $ 55,000
(Continued)
F-19
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 8 - Commitments and Contingencies (Continued):
Employment Agreements (Continued):
(a) This officer is entitled to a bonus of 3 1/3% of the Company's
income before taxes and interest.
(b) 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 1% of net
sales in excess of $20,500,000.
(c) This officer is entitled to a bonus of 3 1/3% of the Company's
income before taxes and interest.
The above officers are also entitled to annual increases of not less
than 10% of the prior year's compensation. 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:
(a) Each will be paid a bonus equal to their minimum base salary for
the next three years.
(b) Each will be repaid their junior participation in loans made to
the Company (see Note 5).
(c) All rights (options, warrants, etc.) will become immediately
vested and exercisable.
These officers have waived their right to bonuses for the years ended
June 30, 1996 and 1997 and to compensation payable in the event of a
change in control due to the private placement and the proposed
public offering (see Note 12).
NOTE 9 - Profit Sharing Plan:
The Company's qualified profit sharing plan covering all eligible
full-time employees provides for discretionary (i.e., no minimum
contributions are required) contributions as approved by the
Company's Board of Directors. The profit sharing plan includes a
401(k) plan. There were no contributions made for the fiscal years
ended June 30, 1995 and 1994 or for the nine months ended March 31,
1996.
(Continued)
F-20
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 10 - Industry Segment Information:
Information for the Company's distribution and manufacturing segments
for the years ended June 30, 1995 and 1994 is summarized as follows:
1995 Distribution Manufacturing Total
---- ------------ ------------- -----------
Net sales $ 9,233,456 $14,791,441 $24,024,897
=========== =========== ===========
Operating profit $ 156,199 $ 1,666,331 $ 1,822,530
=========== ===========
General corporate expenses (1,160,928)
Interest expense (583,665)
-----------
Income before provision for
income taxes $ 77,937
===========
Identifiable assets $ 4,291,806 $ 6,424,242 $10,716,048
=========== =========== ===========
Capital expenditures $ 27,882 $ 163,360 $ 191,242
=========== =========== ===========
Depreciation and
amortization expense $ 37,462 $ 127,071 $ 164,533
=========== =========== ===========
1994
----
Net sales $ 8,653,738 $12,092,071 $20,745,809
=========== =========== ===========
Operating profit $ 80,839 $ 235,564 $ 316,403
=========== ===========
General corporate expenses (1,636,004)
Interest expense (1,391,777)
-----------
Loss before provision for
income taxes $(2,711,378)
===========
Identifiable assets $ 4,035,140 $ 4,966,616 $ 9,001,756
=========== =========== ===========
Capital expenditures $ 13,850 $ 10,808 $ 24,658
=========== =========== ===========
Depreciation and
amortization expense $ 35,620 $ 137,250 $ 172,870
=========== =========== ===========
(Continued)
F-21
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 11 - Litigation:
At June 30, 1996, the Company is a defendant in approximately 280
lawsuits, together with a multitude of other defendants, in actions
alleging exposure by approximately 1,300 first party plaintiffs to
asbestos and products containing asbestos sold by the Company over
unspecified periods of time.
To June 30, 1996 and since 1981, the Company estimates approximately
900 actions on behalf of approximately 7,500 first party plaintiffs
have been instituted against it concerning asbestos related claims
and that claims of approximately 6,200 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 $1,500,000 has been agreed to in
settlements to date with regard to the terminated actions of which
all but $45,000 has been paid by the Company's insurance carriers. To
June 30, 1996, the Company has paid less than $35,000 for legal and
defense costs to counsel appointed by the insurance companies to
defend it. The Company entered into an agreement with its primary
insurance companies, wherein 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 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, 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 applied only
during the period Mount Vernon provided insurance coverage, which is
between April 1, 1968 to 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
(Continued)
F-22
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 11 - Litigation (Continued):
insurance coverage applicable to asbestos claims against the Company
or the extent to which insurance carriers will provide 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 action instituted
against the Company.
The Company is party to other product liability litigation arising in
the ordinary course of business. After consultation with counsel, the
Company considers that its ultimate liability, if any, after
available insurance coverage, in the majority of these matters, would
not have a material adverse effect upon the Company's financial
position. However, there can be no assurances that the Company's
insurance coverage will adequately cover these cases or whether the
Company's insurance will provide coverage for punitive damages should
they be awarded.
NOTE 12 - Subsequent Events:
Convertible Subordinated Debenture:
During April 1996, the holder of a $250,000 convertible subordinated
debenture, issued in February 1996, converted $150,000 of the
debenture into 26,374 shares of the Company's common stock. The
Company repurchased 21,374 of these shares for $180,000 and retired
the stock. The remaining $100,000 balance of the debenture was
repurchased for $120,000.
Bridge Loan:
On May 17, 1996, the Company received a $500,000 bridge loan, through
the underwriter, as an advance against a private placement. Interest
was payable at 10% per annum. The bridge loan was repaid on June 28,
1996 with the proceeds of the private placement. In connection with
the foregoing, the Company issued warrants, which expire
June 30, 1999, to purchase 2,500 shares of common at $1.00 per share.
F-23
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 12 - Subsequent Events (Continued):
Reverse Stock Split, Preferred Stock, Stock Option Plans and Stock
Options:
On May 13, 1996, the Board of Directors approved the following
proposals [which are all subject to shareholder approval at a special
meeting of shareholders to be held on August 12, 1996] which were
approved by the shareholders at a special meeting on August 12, 1996.
1. A 1-for-10 reverse stock split of all outstanding shares of the
Company. The acompanying financial statements and notes thereto give
retroactive effect to this split.
2. Amendment of the certificate of incorporation to authorize a class
of preferred stock consisting of 1,000,000 shares.
3. Adoption of the 1996 incentive stock option plan for the issuance
of 300,000 shares to key employees.
4. Adoption of the 1996 nonqualified stock option plan for the
issuance of 300,000 shares to key employees.
In addition, the Board of Directors authorized the issuance of
warrants to purchase 8,348 shares each to the Company's president and
two of the vice presidents for their guarantees of advances by
Congress. The warrants are exercisable for five years commencing
February 23, 1996 at $5.77 per share.
(Continued)
F-24
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 12 - Subsequent Events (Continued):
Private Placements:
On June 28, 1996, the Company issued, in a private placement, 10 1/2
units at $57,000 a unit. Each unit consists of 38,000 shares of the
Company's common stock. The net proceeds to the Company were
approximately $501,000 after fees to the placement agent and other
expenses. The proceeds were used to repay the bridge loan. On July 9,
1996, an additional 3 units were sold for net proceeds of
approximately $165,000. No fees were paid to the placement agent for
these units. The 513,000 shares issued will be registered in the
proposed public offering. However, the 10 1/2 units and the 3 units
cannot be sold until three months and nine months, respectively,
after the effective date of the proposed public offering without the
consent of the underwriter.
Proposed Public Offering:
The Company has signed a letter of intent with an underwriter for a
rights offering and for the sale of units. Each holder of 5 shares of
the Company's common stock will be allowed to purchase 4 units at $ .
per unit. Each unit is comprised of one share of common stock and a
Class B warrant to purchase one share of common stock at $ . . The
warrants expire three years from the effective date of the offering.
These warrants are redeemable by the Company eighteen months after
the effective date (no earlier than nine months with the
underwriter's consent) at $.01 a warrant provided the high bid price
of its stock is at least 150% in excess of the exercise price of the
warrants for the required number of days prior to the redemption
notice. The Company entered into a standby agreement with the
underwriter whereby any units not sold pursuant to the exercise of
rights will be sold to the underwriter at the same price. In the
event the unsubscribed units to be purchased by the underwriter is
less than 300,000 units, the underwriter will have the right, but not
the obligation, to purchase a minimum of 300,000 units. The Company
also granted to the underwriter, for $7, an option to purchase one
unit for each 10 units sold in the offering at $ per unit. The
Company will also enter into a one year financial consulting
agreement at a cost of 2% of the gross proceeds of the offering. The
Company also agreed to pay the underwriter a warrant solicitation fee
of 7% of the exercise price of each Class B warrant.
(Continued)
F-25
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1995 AND 1994
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED MARCH 31, 1995
AND THE PERIOD SUBSEQUENT TO JUNE 30, 1995 IS UNAUDITED)
NOTE 12 - Subsequent Events (Continued):
Amendment to the Company's Line of Credit Agreement:
On July 23, 1996, the Company and Congress amended their loan
agreement effective August 1, 1996. The line was increased to
$9,000,000 with interest at 1.25% above the prime rate and was
extended to October 1, 1999 with an option of Congress to extend the
loan for one year. If the proposed public offering is consummated no
later than December 31, 1996 and the net proceeds are at least
$2,500,000, the interest will be reduced to prime plus 1%. The limit
on borrowings was increased to 85% of eligible accounts receivable
and 55% of eligible inventory.
The loan is subject to certain revised working capital and net worth
requirements and contains certain prepayment penalties. Congress also
agreed to make new equipment term loans to the Company from time to
time not to exceed $1,000,000. The Company paid a $20,000 loan
extension fee to Congress.
F-26
Until ____, 1996 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as soliciting dealer.
TABLE OF CONTENTS Page
---
Restrictions in Certain States
Statement of Available Information
Prospectus Summary
Summary Financial
Information
Risk Factors 703,591 Units
Use of Proceeds
Dilution EASTCO INDUSTRIAL
Capitalization SAFETY CORP.
Market Information
Dividend Policy -----------
Management's Discussion
and Analysis of Results PROSPECTUS
of Operations and
Financial Condition
Business
Management
Principal Shareholders
Description of Securities
Shares Eligible for
Future Sale
Plan of Distribution
Certain Relationships and Related
Transactions
The Offering
Underwriting
Concurrent Registration of Common
Stock
Legal Matters
Experts
Additional Information
Consolidated Financial
Statements
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied on as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy, by
any person in any jurisdiction in which it is unlawful for such person to make
such offer or solicitation.
(Alternate Page for Common Prospectus)
SUBJECT TO COMPLETION, DATED ________, 1996
EASTCO INDUSTRIAL SAFETY CORP.
513,000 Shares of Common Stock
This Prospectus relates to the sale by certain selling stockholders (the
"Selling Stockholders") of 513,000 shares of common stock, $0.12 par value per
share (the "Common Stock") offered hereby (the "Offering"), of Eastco
Industrial Safety Corp., a New York corporation (the "Company" and sometimes
"Eastco" when referring to the parent company only). None of the proceeds from
the sale of the Common Stock by the Selling Stockholders will be received by
the Company. By agreement, 399,000 shares are restricted from being sold until
3 months from the date hereof. By agreement, 114,000 shares are restricted from
being sold until 9 months from the date hereof. The Company will bear all
expenses (other than selling commissions and fees and expenses of counsel or
other advisors to the Selling Stockholders) in connection with the registration
and sale of the Common Stock being offered by the Selling Stockholders.
See "Selling Stockholders".
The Common Stock will be offered by the Selling Stockholders in
transactions in the over-the counter market, in negotiated transactions or a
combination of such methods of sale, at prices related to such prevailing
market prices, or at negotiated prices. The Selling Stockholders may effect
such transactions by selling the Common Stock to or through broker/dealers,
and such broker/dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of the Common Stock for whom such broker/dealers may act as agent or to whom
they sell as principal, or both. The Selling Stockholders may be deemed to be
"underwriters" as defined in the Securities Act of 1933, as amended (the
"Securities Act"). If any broker/dealers are used by the Selling Stockholders,
any commissions paid to broker/dealers and, if broker/dealers purchase any
shares of Common Stock as principals, any profits received by such
broker/dealers on the resales of the shares of Common Stock may be deemed to
be underwriting discounts or commissions under the Securities Act. In
addition, any profits realized by the Selling Stockholders may be deemed
underwriting commissions. All costs, expenses and fees in connection with the
registration of the shares offered by the Selling Stockholders will be borne
by the Company. Brokerage commissions, if any, attributable to the sale of
Common Stock will be borne by the Selling Stockholders. See "Selling
Stockholders" and "Plan of Distribution".
The Company's Common Stock is traded on the NASDAQ Stock Market
("NASDAQ") under the symbol "ESTO".
Concurrently with the commencement of this offering, the Company offered
by separate Prospectus, 703,591 units (the "Units") each Unit consisting of
one share of Common Stock and one Common Stock purchase warrant (the
"Warrants"). The Company's offering (the "Unit Offering") is being offered
through Royce Investment Group, Inc. (the "Underwriter").
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AS
DESCRIBED HEREIN. FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES. SEE "RISK
FACTORS" BEGINNING ON PAGE ____ AND "DILUTION" BEGINNING ON PAGE ____.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is____________, 1996.
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safety products to "end-users" made by the Charkate / Worksafe division as
well as by non-affiliated companies. These products include hard hats,
protective glasses, ear muffs, ear plugs, respirators, goggles, face shields,
rainwear, protective footwear, first-aid kits, monitoring devices, signs and
related products. These products are sold to manufacturing companies and
service businesses, including public utilities, fisheries, hospitals,
pharmaceutical plants, the transportation industry and companies engaged in
hazardous materials abatement.
The Company supplies a variety of items which may be used during the
removal and/or encapsulation of hazardous materials in office buildings,
chemical plants, refineries, electric generating plants and schools. Abatement
products sold by the Company include in the largest part, items made by other
companies, such as negative air machines, respirators, air filtration
equipment, vacuums, polybags and sheetings, decontamination showers, signs,
tools, pumps, sprayers and related equipment. The Company does not engage in
the removal or encapsulation of hazardous materials.
The Company's Distribution Operations are primarily directed from the
Company's offices in New York. The Company also has facilities for warehousing
and distribution of its non- manufactured products in Puerto Rico, Connecticut
and Florida. Items distributed are sold primarily in the Northeastern region
of the United States.
The Offering
Securities Offered 513,000 shares of Common Stock
Common Stock outstanding prior to
the Offering(1)(2) 1,583,079 shares of Common Stock
Common Stock to be outstanding
after the Offering(1)(2)(3) 1,583,079 shares of Common Stock
Risk Factors The securities offered hereby involve
a high degree of risk and immediate
substantial dilution. See "Risk
Factors" and "Dilution."
NASDAQ Symbol Common Stock -- ESTO
- ---------------------
(1) All shares and shares issuable under outstanding warrants and options
in this Prospectus have been adjusted for a one-for-ten reverse stock
split approved by the shareholders of the Company on August 12, 1996.
(2) Does not include Common Stock which may be issued upon the exercise
of any options or warrants currently outstanding. The Company
currently has outstanding options and warrants to purchase 633,935
shares of Common Stock exercisable at prices between $5.168 and $30.00
per share. The foregoing may be subject to adjustment with respect to
anti-dilution rights as a result of Units issued in this Offering.
(3) Does not include Common Stock which may be issued upon exercise of
Underwriter's Purchase Option and Optional Units.
6
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completion of this Offering and the Company's ability to utilize its net
operating loss carryforwards could be further limited.
Reliance on Current Management. The Company's current operations and
future success is greatly dependent upon the services of Mr. Alan Densen, its
President, Lawrence Densen, its Senior Vice President and Anthony P. Towell,
its Vice President of Finance. The loss of services of any of the foregoing,
who are each employed under written agreements for five year terms, could have
a material adverse effect on the Company.
Control By Management. As of the date of this Prospectus, the Company's
executive officers and directors own of record and beneficially, an aggregate
of approximately 23% of the Company's outstanding Common Stock and may be in a
position to have significant influence over the outcome of all matters
submitted to stockholders for approval, including the election of directors of
the Company, as a result of their control of such shares which will vote on
all matters. The Company's Board of Directors is divided into two classes,
each of which generally serves for a term of two years, with only one class of
directors being elected in each year. A classified board under certain
circumstances could discourage, prevent or delay a change in control of the
Company, which could have the effect of discouraging bids for the Company and
thereby prevent shareholders from receiving the maximum value for their
shares. In addition, there are provisions in the employment agreements with
Messrs. A. Densen, A. Towell and L. Densen, that provide for them to receive
immediately a lump sum payment of three years' compensation as well as
severance pay should a "Change in Control" occur, which also could have a
similar effect of deterring bids for the Company. Messrs. A. Densen, L.
Densen, and A. Towell, in modification agreements to their employment
agreements, have waived: (i) their right to bonuses based upon the Company's
earnings or sales for the fiscal years ended June 30, 1996 and June 30, 1997;
(ii) exercise rights on options and warrants and repayment for their junior
participation interests with Congress and compensation payable in the event of
a Change in Control with respect to the Offerings; and (iii) their right to
terminate their relationship with the Company, as per the terms of their
respective employment agreements. See "Management".
Outstanding Options and Warrants. As of the date hereof, there are
633,935 shares of Common Stock subject to issuance upon currently outstanding
options and warrants at exercise prices between $5.168 and $30.00 per share. To
the extent that outstanding options and warrants are exercised, additional
equity investment funds will be paid into the Company at the expense of
dilution to the interests of the Company's shareholders. Moreover, the terms
upon which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of outstanding options and warrants can
be expected to exercise or convert them at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable
to the Company than those provided in such securities.
Penny Stock Regulation. The Commission has adopted rules that regulate
broker-dealer practices in connection with transactions in "penny stocks."
Penny stocks generally are equity securities with a price of less than $5.00
(other than securities registered on certain national securities exchanges or
quoted on the NASDAQ system, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules to deliver a
standardized risk disclosure document prepared by the Commission that provides
information
16
(Alternate Page for Common Prospectus)
about penny stocks and the nature and level risks in the penny stock market.
The broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and broker-dealer and salesperson compensation information
must be given to the customer orally or in writing prior to effecting the
transaction and must be given in writing before or with the customer's
confirmation. In addition, the penny stock rules require that prior to a
transaction of a penny stock not otherwise exempt from such rules, the
broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for a
stock that becomes subject to the penny stock rules. If the Company's securities
become subject to the penny stock rules, investors in this offering may find
it more difficult to sell such securities.
Although the Company believes that its securities will, as of the date of
this Prospectus, be outside the definitional scope of a penny stock, as it
will be listed on NASDAQ, in the event the Common Stock were subsequently to
become characterized as a penny stock the market liquidity for the Company's
securities could be severely affected. In such event, the regulations on penny
stocks could limit the ability of broker-dealers to sell the Company's
securities, and thus, the ability of purchasers in this offering to sell their
securities in the secondary market.
Tax Incentives. 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 Company. If the
conditions of Section 936(a)(2) are satisfied, the Section 936 credit equals
the portion of the United States income tax that is 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 payable by each subsidiary to the Company from operations
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") imposes new limitations on computing the Possession Tax
Credit under Section 936 for tax years beginning after 1993. There are two
methods for determining the credit under the new law. Under the first method,
the amount of the credit may be determined by using the so-called economic
activity limit. This attempts to limit the credit by applying various
percentages to possession-based compensation, depreciation and taxes paid or
accrued. Alternatively, the Company may make an irrevocable election when it
files its June 30, 1996 federal income tax return to have present rules apply,
but to phase out the credit to 60% of the 1994 level, and further phase down
by 5% per year to 40% in 1998 and years thereafter. Since the credit is a
function of future earnings, if any, the effect of such limitations cannot be
determined at the present time. In addition, the Omnibus Act makes the 100%
dividends received deduction subject to the Alternative Minimum Tax
Calculation. No dividends have been declared on the aggregate undistributed
earnings of Puerto Rico Safety Equipment and Disposable (which through June
30, 1995, aggregates approximately $2,458,000) and none are intended to be
declared because it is management's intention to reinvest the earnings from
such subsidiaries indefinitely. The Company believes that based upon current
operations, the
17
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Omnibus Act will not have a material effect on the Company for the forseeable
future.
As Puerto Rico tax exemptions are reduced or expire, the Company may be
required to pay taxes on income earned in Puerto Rico. the Company is unable
to predict the amount of such impact after such exemptions are reduced or
expire. See "Management's Discussion of Analysis of Financial Condition and
Results of Operations."
Shares Eligible for Future Sale. Of the 879,488 shares of Common Stock of
the Company outstanding as of the Effective Date, ____ shares are restricted
securities, as that term is defined in Rule 144 promulgated under the
Securities Act of 1933 (the "Securities Act"), 399,000 shares are being
registered for sale herewith subject to an agreement with the Underwriter not
to sell such shares for a period of three months without the prior written
consent of the Underwriter, and 114,000 shares are being registered for sale
herewith subject to an agreement with the Underwriter not to sell such shares
for a period of nine months without the prior written consent of the
Underwriter. Of the _____ shares, _____ shares are owned by an affiliate of
the Company, as that term is defined under the Securities Act. Absent
registration under the Securities Act, the sale of such shares is subject to
Rule 144, as promulgated under the Securities Act. In general, under Rule 144,
subject to satisfaction of certain other conditions, a person, including an
affiliate of the Company, who has beneficially owned restricted shares of Common
Stock for at least two years is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of 1% of the total number of
outstanding shares of the same class, or if the Common Stock is quoted on
NASDAQ, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has beneficially
owned the shares of Common Stock for at least three years is entitled to sell
such shares under Rule 144 without regard to any of the volume limitations
described above. The Company's executive officers and directors have agreed
not to sell their shares for a period of eighteen months from the Effective
Date without the prior consent of the Underwriter. The Underwriter may consent
to the sale of such shares at any time, in its sole discretion, upon the
request of the holder. The Underwriter's decision to consent will be based
upon the current market conditions, liquidity of the Common Stock, as well as
such other factors the Underwriter deems appropriate. No public announcement
will be made with respect to the foregoing.
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USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock
in the Selling Stockholder Offering.
DILUTION
As of March 31, 1996, the Company had a pro forma net tangible book value
of $2,741,942 or $3.12 per share. The pro-forma net tangible book value per
share as of March 31, 1996 represents the Company's tangible pro-forma assets
less the total pro-forma liabilities. The pro-forma net tangible book value
gives effect to the 513,000 shares issued in the private placement and the
5,000 shares issued, as well as the additional charges to earnings related to
the settlement of the subordinated convertible debentures payable. See
"Certain Relationships and Related Transactions" and Note 12 in the
"Consolidated Financial Statements." After giving effect to the 703,591 shares
issued in the Rights Offering and sale of Units offered hereby, the pro-forma
net tangible book value, as adjusted, as of March 31, 1996 would have been
approximately $5,452,563 or $3.44 per share after the receipt of the net
proceeds. This represents an immediate increase in the pro-forma net tangible
book value of $.32 per share to existing stockholders and an immediate
dilution of $1.56 per share to new stockholders purchasing shares of common
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(Alternate Page for Common Prospectus)
DESCRIPTION OF SECURITIES
Common Stock
The authorized capital stock of the Company is 20,000,000 shares of
Common Stock, $0.12 par value per share. The holders of Common Stock (i) have
equal ratable rights to dividends from funds legally available, therefore,
when, as and if declared by the Board of Directors of the Company; (ii) are
entitled to share ratably in all of the assets of the Company available for
distribution to holders of Common Stock upon liquidation, dissolution or
winding up of the affairs of the Company; (iii) do not have preemptive,
subscription or conversion rights and there are no redemption or sinking fund
provisions applicable thereto; and (iv) are entitled to one vote per share on
all matters on which shareholders may vote at all meetings of shareholders.
The holders of shares of Common Stock of the Company do not have
cumulative voting rights, which means that the holders of more than 51% of
such outstanding shares voting for the election of Directors can elect all of
the Directors to be elected, if they so choose, and, in such event, the
holders of the remaining shares will not be able to elect any of the Company's
Directors.
Transfer Agent
The Transfer Agent for the Common Stock is American Stock Transfer and Trust
Co., 40 Wall Street, New York, New York 10005.
Other Publicly Held Securities and Preferred Stock
Class A Warrants
The Company has issued and outstanding 2,262,500 Class A Warrants,
exercisable for 226,250 shares of Common Stock, which are publicly tradeable
and are exercisable at a price of $13.00 per share until April 11, 1999. Such
holders are protected against dilution upon the occurrence of certain events
including but not limited to stock dividends, stock splits, reclassifications,
and mergers, but have no voting rights and are not entitled to dividends. In
the event of liquidation, dissolution, or winding up of the Company, holders
of Class A Warrants are not entitled to participate in the distribution of any
of the Company's assets.
Class B Warrants
The Company will issue 703,591 Class B Warrants as part of its Rights
Offering for Units which also includes 703,591 shares of Common Stock.
Each Class B Warrant entitles its holder to purchase one share of Common
Stock at an exercise price of $6.25 per share. The Class B Warrants expire on
_______________________ (three years after the Effective Date). The Class B
Warrants may be redeemed by the Company at any time, commencing eighteen
months after the Effective Date, or sooner with the sole consent of the
Underwriter (but no sooner than nine months from the date of this Prospectus)
at a redemption price of $.01 per Warrant upon 10 days prior written notice,
provided the closing high bid price of the Common Stock for the 15 consecutive
trading days ending on the third day prior to the date of notice of redemption
is in excess of $9.375 (or 150% of the exercise price of the Class B Warrants
to be proportionately adjusted for any stock dividends and stock splits
occurring after the Effective Date and which may be adjusted to 150% of the
current exercise price of the Class B Warrants, if such exercise price is
changed) per share. Warrantholders shall exercise rights until the close of
business on the day preceding the date fixed for redemption.
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Holders of the Class B Warrants will be protected against dilution upon
the occurrence of certain events, including, but not limited to stock
dividends, stock splits, reclassifications, mergers, and sales of Common Stock
below the Exercise Price or then-current market value. However, holders of
Class B Warrants will have no voting rights and are not entitled to dividends.
In the event of liquidation, dissolution or winding up of the Company, holders
of Class B Warrants will not be entitled to participate in any distribution of
the Company's assets.
Preferred Stock
Pursuant to shareholder approval at the August 12, 1996 Special
Shareholders' Meeting, the Company is authorized to issue 1,000,000 shares of
preferred stock par value $.01. The Board of Directors has the express
authority, without further action of the stockholders, to issue shares of
Preferred Stock from time to time in one or more series and to fix before
issuance with respect to each series: (a) the designation and the number of
shares to constitute each series, (b) the liquidation rights, if any, (c) the
dividend rights and rates, if any, (d) the rights and terms of redemption, if
any, (e) whether the shares will be subject to the operation of a sinking or
retirement fund, if any, (f) whether the shares are to be convertible or
exchangeable into other securities of the Company, and the rates thereof, if
any, (g) any limitation on the payment of dividends on the Common Stock while
any such series is outstanding, if any, (h) the voting power, if any, in
addition to the voting rights provided by law, of the shares, which voting
powers may be general or special, and (i) such other provisions as shall not
be inconsistent with the certificate of incorporation. All the shares of any
one series of the Preferred Stock shall be identical in all respects. No
preferred shares are currently outstanding.
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SHARES ELIGIBLE FOR FUTURE SALE
Of the 879,488 shares of Common Stock of the Company outstanding as of the
Effective Date, _____ shares are restricted securities, as that term is
defined in Rule 144 promulgated under the Securities Act of 1933 (the
"Securities Act"). 399,000 shares are being registered for sale
herewith subject to an agreement with the Underwriter not to sell such shares
for a period of three months without the prior written consent of the
Underwriter, and 114,000 shares are being registered for sale
herewith subject to an agreement with the Underwriter not to sell such shares
for a period of nine months without the prior written consent of the
Underwriter. Of the _____ shares, _____ shares are owned by affiliates of
the Company, as that term is defined under the Securities Act. Absent
registration under the Securities Act, the sale of such shares is subject to
Rule 144, as promulgated under the Securities Act. In general, under Rule 144,
subject to satisfaction of certain other conditions, a person, including an
affiliate of the Company, who has beneficially owned restricted shares of
Common Stock for at least two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the total number of outstanding shares of the same class, or if the Common
Stock is quoted on NASDAQ, the average weekly trading volume during the four
calendar weeks preceding the sale. A person who has not been an affiliate of
the Company for at least three months immediately preceding the sale and who
has beneficially owned the shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to any of the
volume limitations described above. The Company's executive officers and
directors have agreed not to sell their shares for a period of eighteen months
from the Effective Date without the prior consent of the Underwriter. The
Underwriter may consent to the sale of such shares at any time, in its sole
discretion, upon the request of the holder. The Underwriter's decision to
consent will be based upon the current market conditions, liquidity of the
Common Stock, as well as such other factors the Underwriter deems appropriate.
No public announcement will be made with respect to the foregoing. In addition
to the foregoing, 703,591 Units, each Unit consisting of one share of Common
Stock and one Class B Warrant, are being registered simultaneously herewith.
See "Concurrent Registration of Common Stock."
49
(Alternate Page for Common Prospectus)
Towell, and L. Densen to purchase 8,875 shares of Common Stock at $5.428 per
share which expire on February 22, 2001, and are subject to anti-dilution
provisions. The overadvance has since been repaid and their guarantees have
been returned to them.
On June 28, 1996, the Company completed the Private Placement Offering,
pursuant to which it issued 399,000 shares at $1.50 per share to 20 investors,
pursuant to provisions for exemption from registration under the Securities
Act of 1933 as amended. The terms of the Private Placement Offering were
established by negotiation between the Company and Royce Investment Group,
Inc., a registered broker/dealer (the "Private Placement Agent"). Under the
terms of the Private Placement Offering, 10 1/2 units (the "Units") were
offered, and sold, in multiples of $57,000 per Unit. Each full Unit consists
of 38,000 shares of the Company's Common Stock, par value $0.12 per share. The
Company used net proceeds from the Private Placement Offering to pay off a
short-term loan in the amount of $500,000 from Elono Portfolio S.A., which had
been used to reduce the amount due to Congress. The Private Placement Offering
is part of a letter of intent, dated May 14, 1996, pursuant to which the
Company is filing this registration statement. On July 9, 1996, the Company
completed an additional private placement offering for 114,000 shares at $1.50
per share to 5 investors, pursuant to provisions for exemption from
registration under the Securities Act of 1933 as amended.
52
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53
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54
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55
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57
(Alternate Page for Common Prospectus)
CONCURRENT REGISTRATION OF COMMON STOCK
Concurrently with the commencement of this Offering, the Company has
offered by separate prospectus 703,591 Units at $5.00 per Unit. Each Unit
consists of one share of Common Stock and one Class B Warrant. The Unit
Offering is being offered through the Underwriter.
SELLING STOCKHOLDERS
The following table sets forth the number of shares of Common Stock of
the Company owned by each Selling Stockholder and the number of shares of
Common Stock included for sale in this Prospectus.
Beneficial Ownership Beneficial Ownership
of shares of Common of shares of Common
Selling Stockholders Stock prior to Sale(1) Stock after Sale
- -------------------- ---------------------- --------------------
RONALD SPINELLI &
RICHARD SPINELLI (A) 9,500 0
RAMESH PATEL (A) 9,500 0
BRENDA FURINO (A) 19,000 0
CINDY DOLGIN (A) 9,500 0
JOHN CZINGER (A) 9,500 0
LEONARD MOSKOWITZ &
VICKIE MOSKOWITZ (A) 9,500 0
ALOYSIUS G. FREEMAN
& MARY FREEMAN (A) 9,500 0
RAYMOND KAYAL (A) 9,500 0
DAVID COHEN (A) 9,500 0
JOANN WEAN &
CHARLES WEAN III (A) 9,500 0
ASHDOWN HOLDINGS LIMITED (A) 38,000 0
BLAISE FINANCIAL CORP. (A) 38,000 0
ELLIOT S. SCHLISSEL (A)
& LOIS C. SCHLISSEL (A) 19,000 0
GLOBALSIDE LIMITED (A) 38,000 0
CORNELIA COMPANY LIMITED (A) 38,000 0
WAAL INVESTMENTS LTD (A) 38,000 0
HARRIET REUTER (A) 19,000 0
EDMOND O'DONNELL (A) 19,000 0
DOMINICK LELIA &
ALICE LELIA (A) 9,500 0
MELINDA N. TYRWHITT (A) 38,000 0
GEORGE SHIAVONI (B) 76,000 0
ANTHONY C. SALVO (B) 5,000 0
ANDREW J. FINKLESTEIN (B) 6,667 0
HEATHER REISER (B) 21,667 0
ROBERT W. BURKE (B) 4,666 0
- ------------------
(A) Has agreed not to sell their shares for 3 months from the date hereof.
(B) Has agreed not to sell their shares for 9 months from the date hereof.
58
(Alternate Page for Common Prospectus)
PLAN OF DISTRIBUTION
Each Selling Stockholder is free to offer and sell his or her shares of
Common Stock at such times, in such manner and at such prices as he or she
shall determine. Such shares may be offered by the Selling Stockholders in one
or more types of transactions, which may or may not involve brokers, dealers
or cash transactions. The Selling Stockholders may also use Rule 144 under the
Securities Act, to sell such securities, if they meet the criteria and conform
to the requirements of such Rule. There is no underwriter or coordinating
broker acting in connection with the proposed sale of Common Stock to the
Selling Stockholders.
The Selling Stockholders have advised the Company that sales of Common
Stock may be effected from time to time in transactions (which may include
block transactions) in the over-the-counter market, in negotiated
transactions, through the writing of options on the Common Stock, or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, or at negotiated prices. The
Selling Stockholders have advised the Company that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker/dealers regarding the sale of their securities. The Selling
Stockholders may effect such transactions by selling Common Stock directly to
purchasers or to or through broker/dealers which may act as agents or
principals. Such broker/dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Stockholders and/or
purchasers of Common Stock for whom such broker/dealers may act as agents or
to whom they sell as principal, or both (which compensation as to a particular
broker/dealer might be in excess of customary commissions). The Selling
Stockholders and any broker/dealers that act in connection with the sale of
the Common Stock might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by them and
any profit on the resale of the shares of Common Stock as principal might be
deemed to be underwriting discounts and commissions under the Securities Act.
The Selling Stockholders may agree to indemnify any agent, dealer or
broker/dealer that participates in transactions involving sales of the shares
against certain liabilities, including liabilities arising under the
Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the Selling Stockholders
will be subject to prospectus delivery requirements under the Securities Act.
Furthermore, in the event of a "distribution" of his or her shares, any
Selling Stockholder, any selling broker or dealer and any "affiliated
purchasers" may be subject to Rule 10b-7 under the Exchange Act which
prohibits any "stabilizing bid" or "stabilizing purchase" for the purpose of
pegging, fixing or stabilizing the price of Common Stock in connection with
this Offering.
59
(Alternate Page for Common Prospectus)
LEGAL MATTERS
Certain legal matters with respect to the issuance of securities offered
hereby will be passed upon for the Company by Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP, 585 Stewart Avenue, Garden City, New York 11530.
Members of the firm of Hollenberg Levin Solomon Ross Belsky & Daniels, LLP own
988 shares of Common Stock. Lester Morse, P.C., 111 Great Neck Road,
Great Neck, New York 11021, is acting as counsel for the Underwriter in
connection with certain legal matters relating to the Units of Common Stock
and Warrants offered hereby.
EXPERTS
The Consolidated Financial Statements included in the Registration
Statement, of which this Prospectus forms a part, have been audited by
Cornick, Garber & Sandler, LLP, independent public accountants, to the extent
and for the periods indicated in their report with respect thereto and were
included herein in reliance upon the authority of said firm as experts in
giving said report. Reference is made to said report which contains an
explanatory paragraph regarding the Company's litigation uncertainties.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on
Form SB-2 with respect to the securities being offered hereby. This Prospectus
does not contain all the information set forth in such Registration Statement,
as permitted by the Rules and Regulations of the Commission. For further
information with respect to the Company and such securities, reference is made
to the Registration Statement and to the exhibits and schedules filed
therewith. Each statement made in this Prospectus referring to a document
field as an exhibit to the Registration Statement is qualified by reference to
the exhibit for a complete statement of its terms and conditions. The
Registration Statement, including exhibits thereto, may be inspected without
charge, by anyone at the principal office of the Commission in Washington D.C.
and copies of all or any part of thereof may be obtained from the Commission's
office in Washington D.C. upon payment of the Commission's charge for copying.
60
(Alternate Page for Common Prospectus)
Until ____, 1996 all dealers
effecting transactions in the
registered securities, whether or not
participating in this distribution,
may be required to deliver a
Prospectus. This is in addition to
the obligation of dealers to deliver
a Prospectus when acting as
soliciting dealer.
TABLE OF CONTENTS Page
---
Restrictions in Certain States
Statement of Available Information
Prospectus Summary
Summary Financial
Information
Risk Factors
Use of Proceeds
Dilution
Capitalization
Market Information
Dividend Policy EASTCO INDUSTRIAL
Management's Discussion SAFETY CORP.
and Analysis of Results
of Operations and
Financial Condition
Business -----------
Management
Principal Shareholders PROSPECTUS
Description of Securities
Shares Eligible for
Future Sale
Selling Stockholders
Plan of Distribution
Certain Relationships and Related
Transactions
The Offering
Underwriting
Concurrent Registration of Common
Stock
Legal Matters
Experts
Additional Information
Consolidated Financial
Statements
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied on as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy, by
any person in any jurisdiction in which it is unlawful for such person to make
such offer or solicitation.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Indemnification Undertaking In Accordance with Item 512(i) of Regulation S-K
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been informed that in the opinion of the Commission such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer of controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and is therefore
unenforceable and will be governed by the final adjudication of such issue.
Item 25. Other Expenses of Issuance and Distribution
SEC Registration Fee 5,690.10
NASD Filing Fee 2,125.63
Transfer Agent Fee* 5,000.00
Printing Costs* 75,000.00
Legal Fees and Expenses* 120,000.00
Accounting Fees and Expenses* 75,000.00
Blue Sky Fees and Expenses* 60,000.00
Miscellaneous Expenses* 7,184.27
----------
TOTAL 350,000.00
- ------
*Indicates expenses that have been estimated for the purpose of filing.
Item 26. Recent Sales of Unregistered Securities
Except as set forth below, there were no sales of unregistered securities
by the Company during the past three years:
A. In January through April 1994, the Company issued 2,875 shares in
connection with bridge loans in the aggregate principal amount of $1,150,000.
Such offering was made to the following purchasers in compliance with Rule 506
of Regulation D of the Act in that the offering was made to no more than 35
persons who were not "accredited" (as defined in Rule 501 of Regulation D),
any of such non-accredited persons possessing sufficient knowledge and
experience of similar investments, the information to be required to be
delivered pursuant to Rule 502 of Regulation D was delivered; the offering was
made without general solicitation or advertising; and limitations were imposed
upon the resale of securities purchased. Such shares were then registered as
part of the Company's public offering on April 12, 1994. The following were
participants of such offering:
WILLIAM C. ALBERT TRUST VERNARD MARRIN
CHRISTOPHER ALF DAN PERONE
MICHAEL BUTLER SIMEON SCHREIBER
RONALD COHEN ADAM SEGAN
HERBERT CYRLIN FRANK TEDESCO
MARSHALL N.CYRLIN TIMOTHY TEUFEL
II-1
GEOFFROY De BELLOY WILLIAM WELLING
ISAAC DWECK PERRY WEITZ
JONATHAN S. ELIAS IRA-SEP. KENNETH WINTER
KARL EVERTZ RUTH ZALAZNICK
JEROME GIANGRASSO JOEL KANTOR
DR. HARVEY GLIKER VINCENT BARONE
EDWARD HOGAN MICHAEL KERSCH
GREGORY A. JONES & TAWORN JONES JAMES LUSTIG
K & K REALTY CO. THOMAS PEACOCK
DR. DAVID J. KATZ JONATHAN ELIAS
DONALD KOLLMAR RONALD OLSEN
ALBERT KULA ARTHUR LUXENBERG
MOSHE LEVY & DAN LEVY JTWROS MICHAEL LUXENBERG
The sales set forth above are claimed to be exempt from registration with
the Securities and Exchange Commission pursuant to Sections 4(2) of the Act,
as transactions by an issuer not involving any public offeriing.
B. In June 1996, the Company issued and sold 399,000 shares in connection
with a private placement in the aggregate principal amount of $598,500. Such
offering was made to the following purchasers in reliance upon exemptions
under Sections 4(2) and 3(b) of the Act, Section 4(6) of the Act or the
provisions of Regulation D promulgated thereunder. The Units were sold only to
accredited investors as such term is defined in the Act and Regulation D
thereunder. Such shares are being registered in the concurrent registration.
The following were participants of such offering:
RONALD SPINELLI & RICHARD SPINELLI ASHDOWN HOLDINGS LIMITED
RAMESH PATEL BLAISE FINANCIAL CORP.
BRENDA FURINO ELLIOT S. & LOIS C. SCHLISSEL
CINDY DOLGIN GLOBALSIDE LIMITED
JOHN CZINGER CORNELIA COMPANY LIMITED
LEONARD MOSKOWITZ & VICKIE MOSKOWITZ WAAL INVESTMENTS LTD
ALOYSIUS G. FREEMAN & MARY FREEMAN HARRIET REUTER
RAYMOND KAYAL EDMOND O'DONNELL
DAVID COHEN DOMINICK LELIA & ALICE LELIA
JOANN WEAN & CHARLES WEAN III MELINDA N. TYRWHITT
C. In July 1996, the Company issued 114,000 shares in connection with a
private placement in the aggregate principal amount of $171,000. Such offering
was made to the following purchasers in reliance upon exemptions under
Sections 4(2) and 3(b) of the Act, Section 4(6) of the Act or the provisions
of Regulation D promulgated thereunder. It is the intention to offer the Units
only to accredited investors as such term is defined in the Act and Regulation
D thereunder. Such shares are being registered in the concurrent registration.
The following were participants of such offering:
GEORGE SCHIAVONI HEATHER REISER
ANTHONY C. SALVO ROBERT W. BURKE
ANDREW J. FINKLESTEIN
Item 27. List of Exhibits
Exhibit Description of Exhibit
- ------- ----------------------
1.01 Form of Standby Agreement
1.02 Warrant Exercise Fee Agreement
1.03 Financial Advisory Services Agreement
3.01 Certificate of Incorporation, as amended***
3.02 By-Laws
4.01 Form of Common Stock Certificate**(A)
II-2
4.02 Form of Rights Certificate*
4.03 Form of Subscription Agreement for
Rights between the Registrant and
American Stock Transfer & Trust Co.*
4.04 Form of Class B Warrant Certificate*
4.05 Form of Warrant Agency Agreement for Class
B Warrants between the Registrant and
American Stock Transfer & Trust Co.*
4.06 Form of Underwriter's Warrant
5.01 Opinion of Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP *
10.01 Employment Agreement with Alan 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 Towell,
dated as of July 1, 1995
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**(B)
10.05 Amendment to Financing Agreements with
Congress dated July, 1996*
10.06 Exemption of Puerto Rico Safety Corporation
with respect to Puerto Rico taxes as
amended to date**(C)
10.07 Exemption of Disposable with respect to
Puerto Rico taxes as amended to date*
10.08 Form of Modification Agreement to
Employment Agreements with Alan Densen,
Lawrence Densen and Anthony Towell*
11.01 Statement re: Computation of per share
earnings
21.01 Subsidiaries of the Registrant*
23.01 Consent of Cornick Garber & Sandler, LLP
23.02 Consent of Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP
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 April 30, 1999)
99.04 Form of Option Agreements Granted as of
January 20, 1995 with Alan Densen, Anthony
Towell and Lawrence Densen
99.05 Asbestos Litigation as of June 30, 1996
99.06 Product liability primary insurance
coverage for asbestos
99.07 Product liability excess insurance
coverage for asbestos
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 for plaintiffs'
attorneys, dated February 3, 1994 and March 14, 1994,
II-3
respectively, with respect to settlement of New York cases
- ------------------------------------------------------------
* To be filed by amendment
** Previously filed
***Certificate of amendment for reverse split to be filed on amendment
(A) Filed as part of Registration Statement on Form S-1 (No. 33-34988)
as amended, effective April 12, 1994 and incorporated by reference.
(B) Incorporated by reference to Form 10K for June 30, 1991.
(C) Incorporated by reference to Form 10K for June 30, 1993.
Schedules to be filed:
Item 28. Undertakings.
A. Certificates
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to: (i)
include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) reflect in the Prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or together, represent a fundamental
change in the information in the registration statement; and (iii) include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) For the purpose of determining liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) To file a post-effective amendment to the registration statement
to include any financial statements required by Rule 3-19 of Regulation S-X at
the start of any delay offering or throughout a continuous offering.
(5) To supplement the Prospectus after the end of the Subscription
Period to include the results of the Subscription Offer, the transactions by
the Underwriter during the Subscription Period, the amount of securities that
the Underwriter will purchase and the terms of any later reoffering. If the
Underwriter makes any public offering of the securities on terms different
from those on the Cover Page of the Prospectus, the registrant will file a
post-effective amendement to state the terms of such offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, or otherwise, the Company has
been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
II-4
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer of controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and is therefore unenforceable and
will be governed by the final adjudication of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in
Huntington Station, New York on July 31, 1996.
EASTCO INDUSTRIAL SAFETY CORP.
By: /S/ Alan E. Densen
-------------------
ALAN E. DENSEN, President
/s/ Alan E. Densen Date: July 31, 1996
- ----------------------------
ALAN E. DENSEN, President,
and Director
/s/ Anthony P. Towell Date: July 31, 1996
- -----------------------------
ANTHONY P. TOWELL
Vice President of Finance, Secretary,
Treasurer, and Chief Financial Officer
/s/ Lawrence Densen Date: July 31, 1996
- -----------------------------
LAWRENCE DENSEN
Executive Vice-President and
Director
/s/ Herbert Schneiderman Date: July 31, 1996
- ------------------------------
HERBERT SCHNEIDERMAN
Director
/s/ Martin Fleisher Date: July 31, 1996
- ------------------------------
MARTIN FLEISHER
Director
/s/ James A. Favia Date: July 31, 1996
- ------------------------------
JAMES A. FAVIA
Director
II-6
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
1.01 Form of Standby Agreement
1.02 Warrant Exercise Fee Agreement
1.03 Financial Advisory Services Agreement
3.01 Certificate of Incorporation, as amended***
3.02 By-Laws
4.01 Form of Common Stock Certificate**(A)
4.02 Form of Rights Certificate*
4.03 Form of Subscription Agreement for
Rights between the Registrant and
American Stock Transfer & Trust Co.*
4.04 Form of Class B Warrant Certificate*
4.05 Form of Warrant Agency Agreement for Class
B Warrants between the Registrant and
American Stock Transfer & Trust Co.*
4.06 Form of Underwriter's Warrant
5.01 Opinion of Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP *
10.01 Employment Agreement with Alan 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 Towell,
dated as of July 1, 1995
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**(B)
10.05 Amendment to Financing Agreements with
Congress dated July, 1996*
10.06 Exemption of Puerto Rico Safety Corporation
with respect to Puerto Rico taxes as
amended to date**(C)
10.07 Exemption of Disposable with respect to
Puerto Rico taxes as amended to date*
10.08 Form of Modification Agreement to
Employment Agreements with Alan Densen,
Lawrence Densen and Anthony Towell*
11.01 Statement re: Computation of per share
earnings
21.01 Subsidiaries of the Registrant*
23.01 Consent of Cornick Garber & Sandler, LLP
23.02 Consent of Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP
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 April 30, 1999)
99.04 Form of Option Agreements Granted as of
January 20, 1995 with Alan Densen, Anthony
Towell and Lawrence Densen
99.05 Asbestos Litigation as of June 30, 1996
99.06 Product liability primary insurance
coverage for asbestos
99.07 Product liability excess insurance
coverage for asbestos
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 for plaintiffs'
attorneys, dated February 3, 1994 and March 14, 1994,
respectively, with respect to settlement of New York cases
- ------------------------------------------------------------
* To be filed by amendment
** Previously filed
***Certificate of amendment for reverse split to be filed on amendment
(A) Filed as part of Registration Statement on Form S-1 (No. 33-34988)
as amended, effective April 12, 1994 and incorporated by reference.
(B) Incorporated by reference to Form 10K for June 30, 1991.
(C) Incorporated by reference to Form 10K for June 30, 1993.