As filed with the Securities and Exchange Commission on September 26, 1996
Registration No. 333-09517
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
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 issuable
upon exercise of
Underwriter's Warrants(3) 70,359 $6.00 $ 422,154.00 $ 147.15
Class B Warrants
issuable upon exercise
of Underwriter's Warrants 70,359 ---- ---- ----
Common Stock 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 Directors
for Securities Act Liabilities and Executive Officers; Underwriting
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; Recent Private
Related Transactions Placements
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 a Subscription Price of $5.00
and an Exercise Price of $6.25 per Class B Warrant.]
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 September 26, 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").
Eastco Industrial Safety Corp. (the "Company") is granting to all
holders of its outstanding common stock of record on the close of business
September 24, 1996 ("Record Date"), in those states where qualified, or exempt
from qualification, (see page 3 for list of such states), the nontransferable
right ("Rights") to subscribe for Units, at the subscription price set forth
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
(continued on following page)
THESE ARE SPECULATIVE SECURITIES. 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 11 AND "DILUTION" BEGINNING
ON PAGE 24.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES 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 Unit ..... $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
pursuant to the exercise of Rights will be sold to the Underwriter ("Standby
Offering") at the 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 not to exceed
the lowest asked prices then existing at the time of sale 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 twelve months (or sooner with the consent of the
Underwriter) after the date of this Prospectus (the date of the 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 on 30 days notice commencing 18 months from the date
of this Prospectus under certain conditions but no sooner than 12 months from
the date the Warrants become exercisable.
- ----------------------------
(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
$365,000 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 date(s) 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 such number of Units that
will bring the number of Units to be purchased by the Underwriter up to
a total of 300,000 Units at the Subscription Price less a 10% discount
and 3% nonaccountable expense allowance within 30 days of the Closing.
See note (2) regarding a financial consulting fee applicable to the
Optional Units. Such additional Units are herein referred to as the
"Optional Units".
2
The Company's Common Stock is traded on the over-the-counter market on
NASDAQ Small-Cap Market under the symbol ESTO and upon the closing of the
Offering will be listed on the Boston Stock Exchange under the symbol "______".
Upon closing of this Offering, the Class B Warrants will be listed on NASDAQ
Small-Cap Market under the symbol ESTOZ and the Boston Stock Exchange under the
symbol "_____". The Company will not apply for listing of the Units on NASDAQ.
However, it is possible that some broker-dealers may seek to have the Units
listed on the NASD Electronic Bulletin Board, or in the National Quotation
Bureau's pink sheets at some time in the future. On September 17, 1996,
the reported closing sale price for the Common Stock as reported by NASDAQ
was $7 1/4 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".
-------------------------------------------
It is expected that certificates for such Units will be ready for
delivery on or about the third business day after the Underwriter receives
notice from the Subscription Agent as to the number of unsubscribed Units for
which it is committed to purchase. 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 UNITS TO BE ISSUED UPON THE EXERCISE OF THE
RIGHTS IS EXPECTED TO BE QUALIFIED OR IS BELIEVED TO BE EXEMPT FROM
QUALIFICATION IN THE FOLLOWING JURISDICTIONS: ALABAMA, ALASKA, ARIZONA,
ARKANSAS, CALIFORNIA, COLORADO, CONNECTICUT, DELAWARE, DISTRICT OF COLUMBIA,
FLORIDA, GEORGIA, HAWAII, ILLINOIS, IDAHO, INDIANA, IOWA, KANSAS, LOUISIANA,
MARYLAND, MASSACHUSETTS, MICHIGAN, MISSISSIPPI, MISSOURI, NEVADA, NEW HAMPSHIRE,
NEW JERSEY, NEW YORK, NORTH CAROLINA, OKLAHOMA, OREGON, PENNSYLVANIA, PUERTO
RICO, RHODE ISLAND, SOUTH CAROLINA, SOUTH DAKOTA, UTAH, VERMONT, VIRGINIA,
WASHINGTON, WEST VIRGINIA, WISCONSIN, AND WYOMING. 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.
FOR OKLAHOMA INVESTORS
- -------------------------
THE OFFERING COVERED BY THE PROSPECTUS CONTAINS OFFERING EXPENSES IN EXCESS
OF 15% PERMITTED BY TITLE 660, CH.10 (660;10-9-35) UNDER THE OKLAHOMA SECURITIES
ACT. FOR FURTHER INFORMATION REGARDING THE EXPENSES OF THE OFFERING, PLEASE SEE
PAGE 2 OF THIS PROSPECTUS. MOREOVER, THIS REGISTRATION STATEMENT PERTAINS ONLY
TO THE SECURITIES OFFERED TO EXISTING COMMON STOCK HOLDERS IN THE STATE OF
OKLAHOMA AND MAY NOT BE USED FOR ANY OTHER SALES UNLESS OTHERWISE REGISTERED OR
EXEMPT FROM REGISTRATION UNDER THE OKLAHOMA SECURITIES ACT.
FOR ALABAMA RESIDENTS
- ------------------------
THE OFFERING COVERED BY THIS PROSPECTUS CONTAINS OFFERING AND MARKETING
3
EXPENSES IN EXCESS OF THE AMOUNTS PERMITTED BY RULE 830-X-4.09 UNDER THE ALABAMA
SECURITIES ACT. FOR FURTHER INFORMATION REGARDING THE EXPENSES OF THIS OFFERING,
PLEASE SEE PAGE 2 OF THIS PROSPECTUS. MOREOVER, THIS REGISTRATION STATEMENT
PERTAINS ONLY TO THE SECURITIES OFFERED TO EXISTING COMMON STOCK HOLDERS IN THE
STATE OF ALABAMA AND MAY NOT BE USED FOR ANY OTHER SALES UNLESS OTHERWISE
REGISTERED OR EXEMPT FROM REGISTRATION UNDER THE ALABAMA SECURITIES ACT.
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.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. SUCH
STATEMENTS REFLECT SIGNIFICANT ASSUMPTIONS AND SUBJECTIVE JUDGMENTS BY THE
COMPANY'S MANAGEMENT CONCERNING ANTICIPATED RESULTS. THESE ASSUMPTIONS AND
JUDGMENTS MAY OR MAY NOT PROVE TO BE CORRECT. MOREOVER, SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS.
FOR A DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS". INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE UNDERWRITER HAS NOT ATTEMPTED TO VERIFY THE BASIS FOR
ANY SUCH STATEMENTS INDEPENDENTLY AND NEITHER THE UNDERWRITER NOR THE COMPANY
UNDERTAKES ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OCCURRING OR CIRCUMSTANCES ARISING
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
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
primarily in Puerto Rico and Alabama, 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
5
industrial 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 879,488 shares of Common Stock (as
Prior to the Offering(1) adjusted for prior stock splits and
estimated rounding for fractional shares)
Common Stock Outstanding
After the Offering(1) 1,583,079 shares of Common Stock.
Terms of Rights Offering(3) Holders of record on September 24, 1996 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 not to
exceed the lowest asked prices then
existing at the time of sale as reflected on
NASDAQ. No Units and/or components thereof
will be offered by the
6
Underwriter to the public until at least
two business days after the Expiration
Date of the 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 twelve months (or sooner with
the Underwriter's consent) 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 but no sooner than 12 months
after the Warrants become exercisable;
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 $2,695,000 for the
financial consulting fee of $70,359 to
the Underwriter and the balance to
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
7
Boston Stock Exchange Symbols Common Stock:
Class B Warrants:
- ------------
(1) 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 617,930
shares of Common Stock exercisable at prices between $5.302
and $30.00 per share which will be adjusted to acquire 630,887
shares at prices between $5.169 and $30.00 as a result of
anti-dilution rights due to this Offering.
(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 registered 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."
Statement of Operations Data:
Year Ended June 30,
-------------------
1996 1995
---- ----
Net sales $26,982,699 $24,024,897
Cost of sales 21,495,693 19,254,571
----------- -----------
Gross profit 5,487,006 4,770,326
----------- -----------
Selling, general
and administrative
expenses 4,546,222 4,148,517
Interest 836,359 583,665
Other expense (income)(NET) 16,388 (39,793)
Settlement with
former underwriter 78,000 -
----------- -----------
Total expenses 5,476,969 4,692,389
----------- -----------
Net income $ 10,037 $ 77,937
=========== ===========
Net income per
share(1):
Primary $ .02 $ .20
=========== ===========
Assuming full dilution $ .02 $ .17
=========== ===========
Average number of shares
used in computing per share
amounts:
Primary 595,758 392,529
========= ==========
Assuming full dilution 595,758 471,698
========= ==========
9
SELECTED CONSOLIDATED FINANCIAL DATA (Cont'd)
Consolidated Balance Sheet Data:
As at June 30, 1996
----------------------------------------
As at PRO-FORMA
June 30, PRO- AS
1995 Historical FORMA(1) ADJUSTED(2)
-------- ---------- ----------- -----------
Current
Assets $ 9,265,149 $10,987,100 $11,158,100 $11,228,459
Current
Liabilities 8,200,620 9,434,587 9,434,587 6,809,325
Working Capital 1,064,529 1,552,513 1,723,513 4,419,134
Total
Assets 10,716,048 12,472,105 12,643,105 12,713,464
Long-
Term Debt 489,782 433,738 433,738 433,738
Total
Liabilities 8,690,402 9,868,325 9,868,325 7,243,063
Shareholders'
Equity 2,025,646 2,603,780 2,774,780 5,470,401
- -------------------
(1) Adjusted to give effect to shares issued in a private placement with
net proceeds to the Company of $171,000.
(2) Adjusted to give effect to shares issued in the Rights Offering and the
sale of units offered and the receipt of $2,695,621 in net proceeds and
their initial application which is to prepay the Underwriter $70,359
for a one year consulting agreement with the balance going to pay down
the amount outstanding on the Company's line of credit.
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 years ended
June 30, 1996 and 1995, the Company had net income of $10,037 and 77,937,
respectively, 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. Other than for the fiscal years ended June 30, 1996 and 1995, the
Company has not had a profitable fiscal year since its fiscal year ended June
30, 1989. As of June 30, 1996, the Company had an accumulated deficit of
$4,230,555 compared to an accumulated deficit of $4,240,592 as of June 30, 1995.
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; USE OF ALL OF NET
PROCEEDS TOWARD PAYMENT OF DEBT. 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 for net proceeds of at least $2,500,000 which must occur 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. As of
June 30, 1996, the amount outstanding on the line of credit was approximately
$5,558,000, with an availability of borrowing $76,000 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 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
11
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 $1,400,000 has been paid, or agreed to be paid, in settlements to
date with regard to the terminated actions, of which all but approximately
$30,000 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
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.
12
INSURANCE COVERAGE APPLICABLE TO ASBESTOS LITIGATION - PERIODS OF
NON-COVERAGE. 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, and an
additional period of approximately thirteen months for excess coverage insurance
companies in liquidation, where there is likely to be no coverage. 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 provided 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.
13
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 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.
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 of fourteen months on primary
coverage and forty-two months on excess coverage.
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 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.
Various of the Company's products are also subject to other governmental
standards. 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
$5,230,000 and $4,364,000,as of June 30, 1996 and June 30, 1995, respectively.
Although the Company believes it currently maintains sufficient inventories,
prior to a 1994 public offering (the "1994 Offering"), the Company experienced
14
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 41% and 35% of
consolidated sales for the fiscal years ended June 30, 1996 and June 30, 1995,
respectively. 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.
BROAD DISCRETION ON USE OF PROCEEDS. The net proceeds from the sale of the
Units will be approximately $2,695,000. The Company intends to use the net
proceeds of this Offering to prepay to the Underwriter $70,359 for a one year
consulting agreement with the balance going to 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. As a result of the foregoing, the Company will have broad
discretion in allocating a substantial portion of the net proceeds of this
Offering. See "Use of Proceeds".
15
UNSPECIFIED ACQUISITIONS. The Company has broad flexibility in utilizing
the net proceeds of this Offering. It may utilize a substantial portion of the
proceeds to make unspecified acquisitions. The Company has been having ongoing
discussions with several companies regarding possible acquisitions but has not
entered into any definitive agreement or understanding with respect to any such
acquisition. No assurances can be given that any such acquisition will be
consummated, or if consummated, that such acquisition will be successful. The
Company's shareholders and investors in this Offering are likely not to be able
to vote on, or review the financial statements of any such acquisitions. See
"Use of Proceeds".
BENEFIT OF USE OF PROCEEDS FOR MANAGEMENT. 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. See "Use of Proceeds."
LIMITATION ON NET OPERATING LOSS CARRYFORWARDS. As of June 30, 1996, the
Company had Federal net operating loss carryforwards for income tax purposes of
approximately $4,738,000 which expire through the year 2011. 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 two 1996 private placements
("Recent Private Placements"). See "Recent Private Placements". Based upon the
number of shares offered in the Recent Private Placements and the applicable
long-term tax exempt rate, the Company's ability to utilize its net operating
carryforward losses in future years is limited to approximately $345,000 per
year. A change in ownership may also occur upon the 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. There is no key man insurance on the
life of the executive officers of the Company.
CONTROL BY MANAGEMENT. As of the date of this Prospectus, the Company's
executive officers and directors own of record and beneficially (assuming
exercise of all their options and warrants), 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
16
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 before interest and taxes for
the fiscal years ended June 30, 1996 through June 30, 2000; (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 and waivers provide that their right to
terminate their employment agreements and waiver of their bonuses 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 617,930
shares of Common Stock subject to issuance upon currently outstanding options
and warrants at exercise prices between $5.302 and $30.00 per share, which will
be adjusted to acquire 630,887 shares at prices between $5.169 and $30.00 as a
result of anti-dilution rights as a result of this Offering. Approximately
350,000 of these options and warrants have anti-dilution rights with respect to
the subsequent issuance of shares at less than market value or their exercise
price. 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. Outstanding options and warrants
did not materially dilute earnings per share in 1996, 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.
IMMEDIATE AND SUBSTANTIAL DILUTION. As of June 30, 1996, the pro-forma net
tangible book value, giving effect to the private placement closed in July 1996,
of the Company was $2,724,059 or approximately $3.10 per share of Common Stock,
based upon 879,488 shares outstanding. Investors participating in the Offering
will incur immediate dilution in the pro-forma net tangible book value of $1.58
per share, which is approximately 32%, based upon a (subscription) price of
$5.00 allocated in full to the Common Stock. See "Dilution".
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
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
17
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
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. Subsequent to the Underwriter
18
completing its distribution of any securities it acquires pursuant to the
Standby Offering, the Underwriter intends to be a market maker for the Common
Stock and Class B Warrants underlying the Units. 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 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 may have
to receive a fee for soliciting the exercise of the Class B Warrants. As a
result, the Underwriter 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 are
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 some broker-dealers may seek to have the Units listed on the
NASD Electronic Bulletin Board or, 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.
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 after 30
days from the commencement of trading on NASDAQ on at least 15 business days
notice to NASDAQ to request the Company to de-list from NASDAQ the Class B
Warrants, which could 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 Units 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. 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
19
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 states listed on page
3 of this Prospectus.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."
FAILURE TO CONSUMMATE STANDBY OFFERING; RETENTION OF RIGHTS SUBSCRIPTIONS.
In the event that all of the Units 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 Units, 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) the Company having sustained a
material loss of any 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 (not
covered by insurance), (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 and the Company may also be at a
greater risk of default and accelerated repayment of the Congress loan. See "The
Offering" and "Underwriting".
20
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, 1996, aggregates approximately
$2,321,000) 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 Omnibus Act will not
have a material effect on the Company for the foreseeable future. The Small
Business Job Protection Act of 1996 further limits the Possession tax credit for
years beginning after 2001 with the credit being eliminated for tax years
beginning after 2005.
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.
SHARES ELIGIBLE FOR FUTURE SALE. There are 879,488 shares of Common Stock
of the Company outstnding as of the Effective Date. Of these shares 528,607
shares are restricted securities, as that term is defined in Rule 144
promulgated under the Securities Act of 1933 (the "Securities Act"). Of the
restricted securities, 513,000 shares are being registered for sale, of which
114,000 shares are being registered for sale after nine months, by certain
shareholders. See "Recent Private Placements" and "Concurrent Registration of
Common Stock". 14,602 of the shares are restricted securities owned by officers
and directors of the Company. Absent registration under the Securities Act, the
sale of such shares is subject to Rule 144. 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
21
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 twelve months from the Effective
Date and an additional six months without the prior consent of the Underwriter.
The Underwriter may consent to the sale of such shares at any time after 12
months from the date of this Prospectus, 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".
RECENT ISSUANCE OF SUBSTANTIAL SHARES AT REDUCED PRICE. During June and
July of 1996, the Company issued 513,000 shares at $1.50 per share at a time
when the market price range was approximately $8 to $12 per share and the
Company was contemplating a prospective rights offering at approximately $5.00
per share. This offering was authorized to provide proceeds to pay loans and
provide working capital. The shares issued are being registered for sale
concurrently herewith. Holders of 114,000 of these shares have agreed not to
sell their shares for nine months from the date hereof. See "Concurrent
Registration of Common Stock" and "Recent Private Placements".
AUTHORITY TO ISSUE BLANK CHECK PREFERRED STOCK. The Company is authorized
to issue 1,000,000 shares of $.01 preferred stock without further action of the
stockholders 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. The Company's board of directors has broad discretion with regard
to the issuance of such shares. No preferred shares are currently outstanding.
See "Description of Securities - Preferred Stock".
22
USE OF PROCEEDS
The net proceeds from the sale of the Units will be approximately
$2,695,621. The Company intends to use the net proceeds of this Offering to (a)
prepay the Underwriter for a one year financial consulting agreement, a fee
equal to 2% of the gross proceeds, or $70,359; and (b) with the balance going to
paydown 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.The Company has been having ongoing discussions with
several companies regarding possible acquisitions but has not entered into any
definitive agreement or understanding with respect to any such acquisition. No
assurances can be given that any such acquisition will be consummated, or if
consummated, that such acquisition will be successful. 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.
23
DILUTION
The purchasers of the Units offered hereby can expect an immediate and
substantial dilution of the net tangible book value of their investment. As of
June 30, 1996, the Common Stock of the Company had a pro forma net tangible book
value of $2,724,059 or approximately $3.10 per share, which gives effect to the
private placement closed in July 1996. The Company's pro forma net tangible book
value after the Offering will be $5,419,680 or $3.42 per share, representing an
immediate increase in pro forma net tangible book value of $.32 per share to the
existing shareholders and an immediate dilution of $1.58 per share or 32% to the
persons purchasing the Common Stock contained in the Units offered hereby. The
following table illustrates the per share dilution:
Subscription Price................................. $5.00
Pro-forma net tangible book value before offering.. $3.10
Increase in net tangible book value attributable
to the Common Stock offered by the Company (1).. .32
----
Pro-forma net tangible book value after offering(1). 3.42
-----
Dilution to new investors........................... $1.58
=====
- -----------------
(1) After deduction of standby fees, the Underwriter's non-accountable expense
allowance and estimated offering expenses paid by the Company. None of the
price is allocated to the Class B Warrants.
(2) Gives no effect to outstanding options or warrants, or options or warrants
to be issued in connection with this Offering.
24
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996: (i) on an historical basis; (ii) on a pro-forma basis giving effect to
the sale of 114,000 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 June 30, 1996
---------------------------------------
Pro-
Pro- Forma As
Actual Forma (1) Adjusted (2)
------ --------- ------------
Current Liabilities:
Loans Payable $5,853,075 $5,853,075 $3,227,813
========== ========== ==========
Long-Term Debt(including the $ 489,782 $ 489,782 $ 489,782
current portion) ---------- ---------- ----------
Stockholders' Equity:
Common Stock, $.12 par value;
authorized 20,000,000 shares;
issued and outstanding;
765,488 actual outstanding,
879,488 pro-forma outstanding,
1,583,079 pro-forma as
adjusted outstanding 91,859 105,539 189,970
Additional paid-in capital 6,742,476 6,899,796 9,510,986
Accumulated Deficit (4,230,555) (4,230,555) (4,230,555)
---------- ---------- ----------
Total Stockholders' Equity 2,603,780 2,774,780 5,470,401
---------- ---------- ----------
Total Capitalization $3,093,562 $3,264,562 $5,960,183
========== ========== ==========
- ----------------------
(1) Adjusted to give effect to the issuance of 114,000 shares in a
private placement with net proceeds of approximately $171,000 during
July, 1996. See Note 7 in the "Consolidated Financial Statements" and
"Recent Private Placements".
(2) Adjusted to give the effect to shares issued in the rights offering and
the sale of units offered hereby and the receipt of $2,695,621 in net
proceeds and their initial application which is to prepay the
Underwriter $70,359 for a one year consulting agreement with the
balance going to paydown the amount outstanding on the Company's line
of credit.
25
MARKET INFORMATION
The principal market on which the Common Stock of the Company is traded is
the NASDAQ 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 10.63
Third Quarter 14.38 7.50
Fourth Quarter 14.38 6.25
1997
----
First Quarter (July 1, $ 10.00 $ 6.00
1996 through September 17,
1996)
The approximate number of holders of record of the Common Stock, as of
September 17, 1996 was 325. The Company believes there are in excess of 1200
beneficial holders of the Common Stock. On September 17, 1996, the closing price
of the Common Stock was $7.25.
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.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year 1996 Compared to Fiscal Year 1995
The Company's net income for fiscal 1996 was $10,000, which included
non-recurring expenses of approximately $113,000, comprised primarily of the
settlement costs with the Company's former underwriter and costs incurred in
connection with the issuance and repurchase of debentures, compared to net
income of approximately $78,000 for fiscal 1995.
Consolidated net sales during fiscal 1996 increased by 12.3% to $26,983,000
from $24,025,000 during fiscal 1995. In fiscal 1996, Manufacturing Operations
revenues increased 20.9% to $17,889,000 from $14,791,000, while Distribution
Operations revenues decreased 1.5% to $9,094,000 from $9,234,000. The Company
believes that the overall increase in sales was due to improved industry
conditions in the manufacturing segment.
The Company's gross profit margin continues to increase resulting in a
20.3% gross profit margin in fiscal 1996 as compared to 19.9% in fiscal 1995.
The Company believes that this increase was due primarily to continued
manufacturing efficiencies, targeting sales that produce higher gross profits
and improved inventory position.
Selling, general, and administrative expenses for fiscal 1996 were
$4,546,000 or 16.8% of sales compared to $4,149,000 or 17.3% for the prior
fiscal year. The decrease as a sales percentage was due to the increase in sales
volume for the year as well as the effect of the Company's continuing cost
reductions and increased purchase discounts and advertising incentives earned.
Interest expense was $836,000 for fiscal 1996 as compared to $584,000 in
the prior year. This increase was due principally due to increased borrowings
during the year for working capital, including establishing of sales-point
warehouses in the southwest and western areas of the United States.
Outstanding options and warrants did not materially dilute earnings per
share in 1996, 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.
Recent hurricanes have adversely affected production and shipments in
Puerto Rico which may adversely affect fiscal first quarter 1997 results. None
of the Company's production facilities have been damaged and the Company
believes that any potential adverse affect would be temporary.
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 June 30, 1996 of $1,553,000 as
compared to working capital of $1,065,000 as of June 30, 1995. The increase
27
resulted primarily from the sale of stock in a private placement in June 1996. A
substantial portion of the Company's working capital consists of inventory,
which was $5,230,000 and $4,364,000, as of June 30, 1996 and 1995, 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 had a line of credit agreement with Congress whereby the
Company could borrow up to $6,000,000, with interest payable at 2.25% above the
prime rate, plus an unused line fee of .25% per year. Borrowings under this
agreement were limited to 50% of the eligible inventory up to a maximum of
$2,875,000 and 80% of eligible accounts receivable. In July, 1996, the line of
credit was amended and extended until October 1, 1999 with an option by Congress
to extend the loan for an additional year. The line was increased to $9,000,000
with an interest rate at 1.25% above the prime rate which will be reduced to
prime plus 1% subject to the consummation of the Company's proposed public
offering by December 31, 1996 and the net proceeds of this offering being at
least $2,500,000. The limits on borrowings were increased to 85% of eligible
accounts receivable and 55% of eligible inventory. The amounts outstanding at
June 30, 1996 and June 30, 1995 were $5,558,000 and $4,829,000, respectively.
The Company had $76,000 available for borrowing at June 30, 1996. The loan is
subject to certain working capital and net worth requirements and is
collateralized by all of the assets of the Company not previously pledged under
other loan agreements. The loan agreement prohibits the payment of cash
dividends by the Company.
In September 1993, the Company received an overadvance of $500,000 from
Congress. In connection therewith, Messrs. A. Densen, L.Densen, and A. Towell
obtained the Junior Participation from Congress by advancing $250,000 of their
funds to Congress. $250,000 of this overadvance has been repaid to Congress.
The balance of $215,000, after repayment of $35,000 to L. Densen, will be repaid
by Congress, at its option, to Messrs. A.Densen, L.Densen, and A. Towell subject
to the availability of funds.
The Company believes that its current working capital position, line of
credit and operations will be sufficient to satisfy its cash needs through June
30, 1997. In addition, the net proceeds of $171,000 from the second private
placement in July, 1996 and the net proceeds of this Offering will provide the
Company with additional funds to be utilized as indicated in "Use of Proceeds."
Net cash used for operating activities was principally a result of an
increase in accounts receivable and inventories which was only partially offset
by an increase in accounts payable. Cash flows used in investing activities was
for the purchase of property, plant, and equipment. Cash flows provided by
financing activities was principally from increased borrowings under the
Company's line of credit and from the proceeds of a private placement of the
Company's Common Stock.
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 in "Business-Legal Proceedings" 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.
28
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.
29
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.
Sales of manufactured disposable clothing and related disposable products
accounted for approximately 43% and 39% of the Company's consolidated revenues
for the fiscal years ended June 30, 1996 and 1995, respectively.
The Company's Manufacturing Operations and warehousing are located
primarily in Puerto Rico and Alabama. The Company's manufacturing operations are
directed primarily from New York. The Company is presently testing the use of
contracted production facilities in Mexico. 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.
30
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. Sales of these products accounted for
approximately 20% and 22% of the Company's consolidated revenues for the fiscal
years ended June 30, 1996 and June 30, 1995, respectively. The foregoing
percentages do not include products used in the abatement field which are
manufactured by the Company.
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.
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 salespeople 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 year ended June 30, 1996 and the previous fiscal year, 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.
31
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 41%
and 35% of consolidated sales for the fiscal years ended June 30, 1996 and June
30, 1995, respectively. Management believes that its current relationship with
DuPont is satisfactory.
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. Various of the Company's products are
subject to other government standards. 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. 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
32
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. The Small Business Job Protection Act
of 1996 further limits the Possession tax credit for years beginning after 2001
with the credit being eliminated for tax years beginning after 2005. No
dividends have been declared on the aggregate undistributed earnings of Puerto
Rico Safety Equipment and Disposable (which through June 30, 1996, aggregates
approximately $2,321,000) 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
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 September 7, 1996, the Company has 195 employees in its Manufacturing
Operations and 15 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 a group of investors (the
"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. See "Certain Relationships
and Related Transactions" regarding the extension of this mortgage for five
years.
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.
33
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
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 670 plaintiffs were settled or discontinued, for which the
Company's obligations on these settlements were approximately $19,000. 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 $1,400,000 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 $30,000 has been paid by the Company's insurance carriers. The
foregoing is based upon information available to the Company to date. 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 and an
additional period of approximately thirteen months for excess coverage insurance
34
companies in liquidation where there is likely to be no coverage. 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 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 is presently aware of only one
pending case 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
provided 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.
35
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 of fourteen months on primary
coverage and forty-two months on excess coverage.
An action entitled Michael F. Cilone and Marie Cilone v. Willson Safety
Products, Inc., Standard Coating Corporation, National Paint Co., Inc., E.I.
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 expense 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 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 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.
36
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 62 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 62 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. He is the father of Lawrence
Densen.
Lawrence Densen, Senior Vice President and director of the Company, has
been a Vice President and a director of the Company since 1986. He is the son
of Alan E. Densen.
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 to 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 has been a director of the Company since 1989.He holds
a Ph.D. in biochemistry from New York University, and has been an attending
clinical chemist at Memorial Sloan-Kettering Cancer Center since 1967. He
devotes only a limited portion of his time to the business of the Company.
37
James Favia has been a director of the Company since July 26, 1995. He has
been a consultant during the past five years to Donald & Co., which has acted 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 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 a director of the Company since July 26,1995.
He has been President of the Casablanca Group, L.P. during the past five years,
a manufacturer of diversified women's sportswear. He devotes only a limited
portion of his time to the business of the Company.
There is no key man insurance on the lives of the executive officers 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.
38
EXECUTIVE COMPENSATION
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 117,661 -0- 35,672(3) -0- 8,348(4) -0- -0-
Densen, 1995 107,930 -0- 32,875(3) -0- 82,158(2) -0- -0-
CEO 1994(1) 117,154 -0- 30,078(3) -0- -0- -0- -0-
Lawrence 1996 101,778 -0- 4,200 -0- 8,348(4) -0- -0-
Densen, 1995 89,130 -0- 4,200 -0- 82,158(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 80,158 shares exercisable at $5.302 per share, each
exercisable until January 19, 2005. Because it was determined
that the audited pre-tax profit for fiscal 1995 was greater
than $50,000, non-qualified options can now be exercised for 40,079
shares of Common Stock.The remaining 40,079 non-qualified options
can not be exercised during the first five years. The non-qualified
options provide for adjustment in the event of dilution as a
result of sales of securities at less than the exercise price. Each
set of the options to acquire 40,079 shares at $5.302 per share
will,as a result of anti-dilution rights, following the consummation
of this Offering, be adjusted to acquire 41,110 shares at $5.169
per share.
(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) Warrants to acquire 8,348 shares of Common Stock at $5.771 granted
February 23, 1996 until February 22, 2001, in consideration of the
guaranty of overadvances by Congress to the Company. These warrants
provide for adjustment in the event of dilution, and will be adjusted
to acquire 8,870 shares at $5.431 as a result of this Offering.
(5) Each person's options including only options directly held by such
person.
39
Stock Options
OPTION/SAR GRANTS IN LAST FISCAL YEAR
[Individual Grants]
Number of Percent of
securities total options/
underlying SARs granted Exercise
Options/SARs in fiscal or base Expiration
Name granted (#)(1) year (1) price ($/Sh) Date
- ----- -------------- -------------- ------------- -----------
Alan E. 8,348 33.3% $5.771 2/22/2001
Densen,
CEO
Lawrence 8,348 33.3% $5.771 2/22/2001
Densen,
Senior V.P.
(1) See note (4) above in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number
of securities Value
underlying unexercised in-
unexercised the-money options
Shares SARs at FY-end (#) SARs at FY-end($)
acquired on Value exercisable/ exercisable/
Name exercise (#) realized ($) unexercisable(2) unexercisable
- ----- ------------ ------------ ------------------ ------------------
Alan E. 0 0 50,427/40,079 $108,909/$100,619
Densen,
CEO (1)
Lawrence 0 0 51,108/40,079 $108,909/$100,619
Densen,
Senior VP
(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. Anthony P. Towell has a
similar contract. 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. Each may also terminate
their agreements upon 30 days written notice. The base annual salaries for
40
Alan E. Densen and Lawrence Densen were $117,661 and $101,778, 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 or the composition of the board
changes so that officers of the Company no longer hold a majority of the seats.
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, with the exception of qualified incentive stock
option plans,to them shall become immediately exercisable at an exercise price
of $0.10 per share. In the event that 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 balance of $215,000 ($35,000 has been repaid to Lawrence Densen) 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.
Messrs. A. Densen, L. Densen, and A. Towell, in modification agreements to
41
their employment agreements, have waived: (i) their right to bonuses based upon
the Company's earnings before interest and taxes for the fiscal years ended June
30, 1996 through June 30, 2000; (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 and waivers provide that
their right to terminate their employment agreements and waiver of their bonuses
shall not be waived in the event that there is a material breach of such
agreements by the Company.
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 8,348 shares of Common Stock at an exercise
price of $5.771 per share commencing February 23, 1996. These warrants provide
for adjustment in the event of dilution, and will be adjusted to acquire 8,870
shares at $5.431 as a result of this Offering. 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 personal
liability of directors to the corporation or its shareholders for damages for
any breach of duty in such capacity is eliminated to the fullest extent
permitted by law. The bylaws of the corporation provide that directors or
officers of the corporation shall be indemnified by the corporation in the
manner and to the fullest extent permitted by law, as amended from time. 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. The Company maintains
directors and officers liability insurance.
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,
42
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. See "Underwriting" with reference to provisions in
the Standby Agreement pertaining to reciprocal indemnification of the Company
and the Underwriter.
1996 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 the grant of 300,000 shares of
Common Stock, subject to adjustment as provided in the plan, to key employees,
consultants and others. 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
43
utilize a "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.
44
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(A)
- -------------- ------------------- ------------------ -------- -----------
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
- ------------------
(A) Assumes no Rights, warrants or options will be exercised as a result of
this Offering. However, this column takes into consideration additional
shares issuable under the anti-dilution rights of certain options and
warrants.
(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 82,645 shares of Common Stock exercisable at
$6.292 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 will be adjusted to acquire
90,941 shares at $5.718 as a result of this Offering.
45
(4) Includes non-qualified options to acquire 40,079 shares to each
Messrs. A. Densen, A. Towell and L. Densen exercisable until January
19, 2005 at an exercise price of $5.302. Does not include options
to acquire an additional 40,079 shares to each Messrs. A. Densen, A.
Towell and L. Densen which cannot be exercised until January 20,
2000. These options provide for a dilution adjustment as a
result of sales of securities at less than the exercise price. Each
of the options to acquire 40,079 shares at $5.302 per share will, as
a result of anti-dilution rights, following the consummation of this
Offering, become options to acquire 41,110 shares at $5.169 per
share. See "Certain Relationships and Related Transactions".
(5) Includes warrants to acquire 8,348 shares of Common Stock exercisable
at $5.771 per share, which expire February 22, 2001. These warrants
provide for a dilution adjustment as a result of
sales of securities at less than the exercise price, and will be
adjusted to acquire 8,870 shares at $5.431 as a result of this
Offering. 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 after nine months from the
Effective Date.
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(A)
- ---------------- ------------------- -------- -----------
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%
- ------------------
46
* Less than 1%
(A) Assumes no Rights, warrants or options will be exercised as a result of
this Offering. However, this column takes into consideration additional
shares issuable under the anti-dilution rights of certain options and
warrants.
(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.
47
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.
48
Each Class B Warrant entitles its holder to purchase one share of Common
Stock at an exercise price of $6.25 per share commencing twelve months (or
sooner with the consent of the Underwriter)until three years after the date of
this Prospectus.The Class B Warrants may be redeemed by the Company at any time,
commencing eighteen months after the Effective Date, but no sooner than 12
months from the date the Warrants become exercisable, at a redemption price of
$.01 per Warrant upon 30 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. All Class B Warrants must be redeemed if any are redeemed.
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 by certified or bank check. 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 based upon the average of
the closing sales prices for the Common Stock on the NASDAQ SmallCap Market (or,
if applicable, NASDAQ National Market) during the ten day trading period
immediately preceding the date of exercise.
49
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.
50
SHARES ELIGIBLE FOR FUTURE SALE
There are 879,488 shares of Common Stock of the Company outstnding as of the
Effective Date. Of these shares 528,607 shares are restricted securities, as
that term is defined in Rule 144 promulgated under the Securities Act of 1933
(the "Securities Act"). Of the restricted securities, 513,000 shares are being
registered for sale, of which 114,000 shares are to be registerd for sale after
nine months, by certain shareholders. See "Recent Private Placements" and
"Concurrent Registration of Common Stock". 14,602 of the shares are restricted
securities owned by officers and directors of the Company. Absent registration
under the Securities Act, the sale of such shares is subject to Rule 144. 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 twelve months
from the Effective Date and an additional six months without the prior consent
of the Underwriter. The Underwriter may consent to the sale of such shares at
any time after 12 months from the date of this Prospectus, 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.
51
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.
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 and
security interest on the Company's personal property. 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
owning approximately 38% thereof. During the fiscal year ended June 30, 1996,
the Company paid Associates $121,107 in principal and interest on the mortgage,
of which $72,346 constituted interest.
On January 20, 1995, the Company granted non-qualified options to acquire
80,158 shares of Common Stock to each of Messrs. A. Densen, A. Towell, and L.
Densen. Because it was determined that the audited pre-tax profit for fiscal
1995 was greater than $50,000, non-qualified options can now be exercised for
40,079 shares of Common Stock.The remaining 40,079 non-qualified options can not
be exercised during the first five years. The non-qualified options provide for
adjustment in the event of dilution as a result of sales of securities at less
than the exercise price. Each set of the options to acquire 40,079 shares at
$5.302 per share will,as a result of anti-dilution rights, following the
consummation of this Offering, become options to acquire 41,110 shares at $5.169
per share. 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; 82,645 warrants purchased by Anthony P.
Towell, the Company's Chief Financial Officer, from Scorpio Partners, L.P.
(90,941, as adjusted for this Offering); 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 were all adjusted as indicated
so as to treat them on an equal basis and to provide incentives for them to be
exercised.
52
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 before interest and taxes for the fiscal years ended June 30, 1996
through June 30, 2000; (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 and waivers provide that
their right to terminate their employment agreements and waiver of their bonuses
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. Towell, and L. Densen to purchase 8,348
shares of Common Stock at $5.771 per share will, as a result of anti-dilution
rights, following the consummation of this offering, become options to acquire
8,870 shares of Common Stock at $5.431 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.
53
The first mortgage held by Associates which they agreed on in 1992 and upon
which interest was being paid at the rate of 14% comes due on July 1, 1997 in
the amount of approximately $438,000. Associates and the Company have agreed to
extend the mortgage for five years from July 1, 1997 with interest at 12% per
annum or 3% over prime, whichever is greater. At the end of five years, the
mortgage will come due in the amount of approximately $283,000. The Company
intends to explore the refinancing of this mortgage with various lenders.
Considering the circumstances of each transaction, the Company believes
that all transactions heretofore with officers/directors and shareholders of the
Company and their affiliates have been made, and in the future will be made on
terms no less favorable to the Company than those available from unaffiliated
parties and will be approved by a majority of the disinterested directors.
RECENT PRIVATE PLACEMENTS
On June 28, 1996, the Company completed a 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 this 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
this 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 this 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 this 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 for use as working capital to 5 investors, pursuant to
provisions for exemption from registration under the Securities Act of 1933 as
amended. Royce Investment Group, Inc. did not act as placement agent, nor was it
involved in any way with the private placement which closed on July 9, 1996. The
shares sold in the foregoing private placements are being registered
concurrently herewith. None of the foregoing purchasers of these private
placements have had a prior relationship with the Company, with the exception of
Heather Reiser whose husband is affiliated with Donald & Co., the Company's
investment advisor. See "Concurrent Registration of Common Stock".
THE OFFERING
The Rights
The Company is granting to holders of all its outstanding Common Stock of
record on September 24, 1996("Record Date"), in those states where qualified, or
exempt from qualification, (see page 3 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.
54
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 Company
40 Wall Street, 46th Floor
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 Company as agent
for Eastco Industrial Safety Corp. on or before the Expiration Date. Wire
transfers may be directed to an account maintained by American Stock Transfer
and Trust Company at Chase Manhattan Bank, Account No. 323-294723;
ABA No. 021 000 021. There is no broker protect period.
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 third business day after
the Underwriter receives notice from the Subscription Agent as to the number of
unsubscribed Units for which it is committed to purchase. 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
55
the Subscription Price will be jointly determined by the 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 such number of units that will bring the number of units
to be purchased by the underwriter up to a total 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 the components of the
Units it acquires from the Company pursuant to the Standby Agreement (the
"Standby Offering") at prices not to exceed the lowest asked prices then
existing at the time of sale 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
56
cancel their subscriptions. The Company has the 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.
57
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)the Company having sustained a material loss of any
nature which, in the sole and absolute opinion of the Underwriter substantially
affects the value of the property of the Company and materially interferes with
the operation of the business of the Company (not covered by insurance); (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 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 (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 Units in accordance with the market out
conditions, shareholders who have exercised the Rights will not have a right to
cancel their subscription. In addition, in the event that all of the Units
58
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 not to exceed the lowest 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 a market if it should be a market
59
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 twelve months after the Effective Date
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 the Underwriter or a member of the NASD; (3) the
Warrant was not held in a discretionary account; (4) disclosure of compensation
arrangements were made both at 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 (as such rule or any successor rule may be in
effect as of such time of exercise) promulgated under the Securities and
Exchange Act of 1934. See Risk Factor entitled "Relationship of Underwriter to
Trading" with reference to the Underwriter's inability to make a market during
any solicitation period.
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 for reciprocal indemnification between the
Company and the Underwriter against certain liabilities in connection with the
Registration Statement, including liabilities arising under the Act. Insofar as
indemnification for liabilities arising under the Act may be provided to
officers, directors or persons controlling the Company, the Company has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy and is therefore unenforceable.
60
The Standby Agreement provides that the Underwriter shall have the 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.
61
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 resale. The holders of 114,000
of these 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.
See "Recent Private Placements" regarding issuance of these shares. The
following table sets forth the number of shares of Common Stock of the Company
owned by each of these shareholders:
Name of Shareholder Number of Shares
- ------------------- ----------------
RONALD SPINELLI & RICHARD SPINELLI 9,500
RAMESH PATEL 9,500
BRENDA FURINO 19,000
CINDY DOLGIN 9,500
JOHN CZINGER 9,500
LEONARD MOSKOWITZ & VICKIE MOSKOWITZ 9,500
ALOYSIUS G. FREEMAN & MARY FREEMAN 9,500
RAYMOND KAYAL 9,500
DAVID COHEN 9,500
JOANN WEAN & CHARLES WEAN III 9,500
ASHDOWN HOLDINGS LIMITED 38,000
BLAISE FINANCIAL CORP. 38,000
ELLIOT S. SCHLISSEL & LOIS C. SCHLISSEL 19,000
GLOBALSIDE LIMITED 38,000
CORNELIA COMPANY LIMITED 38,000
WAAL INVESTMENTS LTD 38,000
HARRIET REUTER 19,000
EDMOND O'DONNELL 19,000
DOMINICK LELIA & ALICE LELIA 9,500
MELINDA N. TYRWHITT 38,000
GEORGE SCHIAVONI (A)(B) 76,000
ANTHONY C. SALVO (A) 5,000
ANDREW J. FINKLESTEIN (A) 6,667
HEATHER REISER (A) 21,667
ROBERT W. BURKE (A) 4,666
- --------------
(A) Have agreed not to sell any shares for a period of nine months from the
Effective Date.
(B) Has agreed not to exercise rights resulting in his ownership of more than
5% of the outstanding shares of the Company following the Offering.
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 are members
of Associates and hold warrants to acquire 1,667 shares of Common Stock
exercisable until April 11, 1999 at $13.00 per share. 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
62
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 emphasis of a matter with
respect to 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.
63
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
[LETTERHEAD OF CORNICK, GARBER & SANDLER, LLP]
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, 1996 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, 1996. 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, 1996 and the results of
their operations and their cash flows for each of the two years in the period
ended June 30, 1996, 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 alleging exposure by plaintiffs to
asbestos and products containing asbestos sold by the Company. Since the
ultimate outcome or range of liability, if any, resulting from these lawsuits
cannot presently be determined, 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 11, 1996
F-2
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
ASSETS
Current assets:
Cash and cash equivalents (Note 1) $ 646,030
Accounts receivable, net of allowance for
doubtful accounts of $155,000 at June 30,
1995 (Notes 5 and 6) 4,669,070
Inventories (Notes 1, 2 and 5) 5,230,237
Other 441,763
-----------
Total current assets 10,987,100
Property, plant and equipment, net
(Notes 1, 3, 5 and 6) 1,278,095
Other assets 206,910
-----------
T O T A L $12,472,105
===========
LIABILITIES
Current liabilities:
Loans payable (Note 5) $ 5,853,075
Current maturities of long-term debt (Note 6) 56,044
Accounts payable 3,234,127
Accrued expenses 291,341
-----------
Total current liabilities 9,434,587
Long-term debt, less current maturities (Note 6) 433,738
-----------
Total liabilities 9,868,325
-----------
Commitments and contingencies (Notes 9, 10 and 11)
SHAREHOLDERS' EQUITY
(Notes 1, 5, 6, 7, 12 and 13)
Common stock, $.12 par value; authorized 20,000,000
shares; outstanding 765,488 91,859
Additional paid-in capital 6,742,476
(Deficit) (statement attached) (4,230,555)
-----------
2,603,780
-----------
T O T A L $12,472,105
===========
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,
------------------------------
1996 1995
----------- ------------
Net sales $26,982,699 $24,024,897
----------- -----------
Costs and expenses:
Cost of sales (Note 1) 21,495,693 19,254,571
Selling, general and
administrative (Note 1) 4,546,222 4,148,517
Interest (Notes 5, 6 and 7) 836,359 583,665
Other expense (income) (net) 16,388 (39,793)
Settlement with former underwriter (Note 7) 78,000
----------- -----------
Total costs and expenses 26,972,662 23,946,960
----------- -----------
NET INCOME $ 10,037 $ 77,937
=========== ===========
Income per share (Note 1):
Primary $.02 $.20
===== ====
Assuming full dilution $.02 $.17
===== ====
Average number of shares used in computing
per share amounts:
Primary 595,758 392,529
=========== ===========
Assuming full dilution 595,758 471,698
=========== ===========
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, 12 and 13)
Additional
Common Stock* Paid-in
Shares Amount Capital (Deficit) Total
---------- ------ --------- ---------- --------
BALANCE - JULY 1, 1994 347,738 $41,729 $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 347,738 41,729 6,224,509 (4,240,592) 2,025,646
Shares issued on settlement with
former underwriter 10,000 1,200 70,825 72,025
Exercise of Class A warrants 3,750 450 48,300 48,750
Shares issued on conversion
of subordinated debenture 26,374 3,165 121,963 125,128
Purchase and retirement of
common stock (21,374) (2,565) (177,435) (180,000)
Shares issued in private placement 399,000 47,880 454,314 502,194
Net income for the year ended
June 30, 1996 10,037 10,037
---------- ------- ---------- ----------- -----------
BALANCE - JUNE 30, 1996 765,488 $91,859 $6,742,476 $(4,230,555) $ 2,603,780
========== ======= ========== =========== ===========
*As restated to give retroactive effect to the 1-for-10 reverse stock split in
August 1996.
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,
INCREASE (DECREASE) IN CASH AND -------------------------------
CASH EQUIVALENTS 1996 1995
---------- ----------
Cash flows from operating activities:
Net income $ 10,037 $ 77,937
---------- ----------
Adjustments to reconcile results of
operations to net cash effect of
operating activities:
Depreciation and amortization 134,290 164,533
Provision for (recovery of) losses on
accounts receivable 105,732 (38,655)
Shares issued for settlement
with former underwriter 72,025
Net changes in assets and liabilities:
Accounts receivable (876,629) (430,003)
Inventories (866,339) (1,197,860)
Other current assets 40,105 (37,608)
Other assets (75,122) 20,247
Accounts payable 343,084 401,146
Accrued expenses (40,566) (102,136)
----------- -----------
Total adjustments (1,163,420) (1,220,336)
----------- -----------
Net cash used for operating
activities (1,153,383) (1,142,399)
----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (93,274) (191,242)
----------- -----------
(Continued)
F-6
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
---------------------------------
1996 1995
------------ ------------
Cash flows from financing activities:
Repayments of long-term debt $ (48,762) $ (42,426)
Borrowings under line of credit
agreements 28,621,372 25,789,531
Repayments under line of credit
agreements (27,697,205) (24,044,483)
Borrowing under Bridge loan 500,000
Repayment of Bridge loan (500,000)
Net proceeds from private placement
of common stock 502,194
Net proceeds from convertible subordinated
debenture 225,128
Repurchase of convertible subordinated
debenture (100,000)
Proceeds from excercise of Class A warrants 48,750
(Decrease) in bank overdrafts (365,277)
Purchase of common stock (180,000)
------------ ------------
Net cash provided by
financing activities 1,371,477 1,337,345
------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 124,820 3,704
Cash and cash equivalents - Beginning 521,210 517,506
------------ ------------
CASH AND CASH EQUIVALENTS - END $ 646,030 $ 521,210
============ ============
Supplemental disclosure of cash paid for:
Interest $ 836,359 $ 583,665
============ ============
Income taxes $ 5,440
============
Supplemental disclosure of noncash financing activities:
Conversion of convertible subordinated
debenture into common stock $ 150,000
============
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, 1996 AND 1995
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), which is only
available from one supplier, to produce disposable clothing. Products
made of Tyvek(R) accounted for approximately 41% and 35% of
consolidated sales for the years ended June 30, 1996 and 1995,
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.
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.
(Continued) F-8
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 1 - Summary of Significant Accounting Policies (Continued):
Cash:
Cash includes certificates of deposit of approximately $300,000 and
$500,000 at June 30, 1996 and 1995, respectively, which are considered
cash equivalents. 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:
The Company accounts for its income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 (FASB 109).
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. Per share amounts give effect to the
retroactive adjustment for the 1-for-10 reverse stock split approved by
the shareholders 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.
(Continued) F-9
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 2 - Inventories:
Inventories at June 30, 1996 consist of the following:
Raw materials $1,701,676
Work-in-process 514,555
Finished goods 3,014,006
----------
Total $5,230,237
==========
NOTE 3 - Property, Plant and Equipment:
Property, plant and equipment at June 30, 1996 is comprised of the
following:
Estimated
Useful Life
(Years)
-----------
Cost:
Land $ 382,000
Building and leasehold
improvements 827,451 5 - 40
Machinery and equipment 1,187,178 3 - 10
Furniture and fixtures 229,074 7 - 10
----------
Total 2,625,703
Less accumulated depreciation
and amortization 1,347,608
----------
Balance $1,278,095
==========
(Continued) F-10
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 4 - Income Taxes:
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 (SFAS 109). 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 and the amount of its net income for the two years ended June
30, 1996 and 1995, it has recorded valuation allowances equal to its
net deferred tax asset account.
Deferred income taxes relate to the following temporary differences and
carryforwards at June 30, 1996:
Deferred tax assets:
Net operating loss carryforwards $1,800,000
Allowance for doubtful accounts
and credits 66,000
Tax basis adjustments to inventory 56,000
----------
1,922,000
Total
Less deferred tax liability:
Accelerated depreciation of
property and equipment 11,000
----------
Balance 1,911,000
Less valuation allowance 1,911,000
----------
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, 1996 AND 1995
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 on 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
limitations on computing the Possession Tax Credit under Section 936
for tax years beginning after 1993. In addition, the Act makes the 100%
dividends received deduction subject to the Alternative Minimum Tax
calculation. The Small Business Job Protection Act of 1996 further
limits the Possession Tax Credit for years beginning after 2001 with
the credit being eliminated for tax years beginning after 2005.
Dividends, if paid by the Puerto Rico based subsidiaries, are subject
to a withholding tax of 10%; however, no taxes have been provided on
their aggregate undistributed earnings (of approximately $2,321,000 at
June 30, 1996) 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,
------------------------
1996 1995
--------- ---------
Income tax expense
at the statutory rate $ 3,000 $ 26,000
Effect of net operating loss of
Puerto Rican subsidiaries for
which there is no current tax
benefit
Effect of domestic net operating
loss for which there is no
current tax benefit (3,000)
Benefit of utilization of net
operating loss carryforwards (26,000)
-------- --------
Actual income tax expense $ -- $ --
======== ========
(Continued)
F-12
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 4 - Income Taxes (Continued):
At June 30, 1996, the Company has net operating loss carryforwards of
approximately $4,738,000 for federal income tax purposes. Such
carryforwards expire in 2005 through 2011. As a result of the private
placement offering in June 1996, the amount of the loss carryforwards
which can be utilized to offset future taxable income are limited to
approximately $345,000 a year, plus any loss carryforwards incurred
after June 30, 1996.
The annual limitation of the Company's net operating loss deductions
may be further reduced as a result of the proposed public offering
(see Note 13).
NOTE 5 - Loans Payable:
Loans payable are comprised of short-term bank borrowings of $295,000
at June 30, 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.
In July 1996, the line of credit with Congress was amended and extended
until October 1, 1999 with an option by Congress to extend the loan for
one year. The line was increased from $6,000,000 to $9,000,000 with
interest at 1.25% above the prime rate. 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 charged will be reduced to 1% above
prime. The limit on borrowings was increased to 85% of eligible
accounts receivable and 55% of eligible inventory. 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
(Continued) F-13
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 5 - Loans Payable (Continued):
the Company an additional $500,000 in borrowing 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.
NOTE 6 - Long-Term Debt:
Long-term debt consists of a mortgage payable, collateralized by land,
building, accounts receivable and personal property. In June 1992, a
group of investors ("investors"), including a director and the spouses
of certain officers and directors of the Company, acquired for
$650,000, the mortgage on the Company's building with a balance of
approximately $962,000 and $500,000 of subordinated debt from a bank.
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 at 14% a year, with the remaining balance of
approximately $439,000 due in June 1997. Interest on the mortgage was
$72,346 and $78,682 for the years ended June 30, 1996 and 1995,
respectively, approximately 38% of which was paid to a director and the
spouses of the officers and directors of the Company.
In September 1996, investors extended the mortgage until July 1, 2002,
with interest at 12% a year or 3% above the prime rate, whichever is
greater. The remaining balance of approximately $283,000 will be due on
July 1, 2002.
Based upon the new terms, the non-current portion of the mortgage is
due as follows:
Year ending June 30,
--------------------
1998 $ 27,000
1999 27,000
2000 30,000
2001 34,000
2002 38,000
2003 283,000
--------
Total $439,000
========
(Continued) F-14
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
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.
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 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. 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 year ended June 30, 1996.
(Continued) F-15
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 7 - Shareholders' Equity (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 a $500,000 bridge loan, with
interest at 10%, made on May 17, 1996. In connection with the bridge
loan, the Company issued warrants to purchase 2,500 shares at a $10.00
per share which expire on June 30, 1999. On July 9, 1996, an additional
3 units were sold for net proceeds of $171,000. No fees were paid to
the placement agent for these units. The 513,000 shares issued will be
registered in the proposed public offering (see Note 13). However, the
shares underlying the 3 units cannot be sold until nine months after
the effective date of the proposed public offering.
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, including accrued interest. The $20,000 excess has been
included with interest expense for the year ended June 30, 1996.
Other Warrants:
In January 1994, a corporate officer/director of the Company purchased
a warrant from a prior lender. The warrant is for the purchase of
82,645 shares at $6.29 per share. The warrant expires on March 31,
1997.
On May 13, 1996, warrants to purchase 8,348 shares each were granted to
the Company's president and two vice presidents for their gurantees of
overadvances by Congress (see Note 5). The warrants are exerciseable
until February 23, 2001 at $5.77 per share.
On July 26, 1995, the Company issued to a consulting firm, which is the
employer of a 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, 1996 AND 1995
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, 1996, 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 has agreed not to issue any additional
options under this plan.
The Company's 1994 Incentive Stock Option Plan provides for the
granting of options for 10,000 shares of the Company's common stock to
January 2004. Options for 1,500 shares may be issued under this plan.
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 - June 30, 1994 1,178 $26.40 to $ 30.00
Granted 8,500 $10.63
Expired (13)
------
Outstanding - June 30, 1995
and 1996 9,665 $10.63 to $30.00
=======
(Continued)
F-17
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 7 - Shareholders' Equity (Continued):
1995 Stock Options:
On January 20, 1995, the Board of Directors granted to the Company's
president and two vice-presidents each 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.
Other nonqualified options outstanding at June 30, 1996, under prior
years' grants, aggregate 3,108 shares at $16.875 to $30.00 a share.
The following summarizes shares reserved at June 30, 1996 under options
and warrants outstanding:
Price Per
Number Share
-------- ---------------
Stock options:
Incentive stock option plans 9,665 $10.63 - $30.00
Nonqualified options 243,582 $ 5.30 - $30.00
Warrants:
Class A 226,250 $13.00
Other 138,433 $ 5.77 - $13.00
(Continued) F-18
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
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:
1997 $ 116,000
1998 127,000
1999 137,000
2000 157,000
2001 142,000
Thereafter 332,000
----------
Total $1,011,000
==========
Rent expense, including month-to-month rentals, was $226,000 and
$219,000 in the fiscal years ended June 30, 1996 and 1995.
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 5 years $121,000
Senior Vice-President* 5 years $105,000
Vice-President of Finance
and Treasurer 5 years $ 55,000
(Continued)
F-19
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 8 - Commitments and Contingencies (Continued):
Employment Agreements (Continued):
* This officer is entitled to a bonus of 3/4 of 1% of net
sales in excess of $20,500,000 after June 30, 1997.
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 in the
ordinary course of business, 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 additional compensation
payable resulting from a change in control due to the private
placements and the proposed public offering (see Notes 7 and 13).
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,
1996 and 1995.
(Continued)
F-20
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 10 - Industry Segment Information:
Information for the Company's distribution and manufacturing segments
for the years ended June 30, 1996 and 1995 is summarized as follows:
1996 Distribution Manufacturing Total
---- ------------ ------------- -----------
Net sales $9,094,046 $17,888,653 $26,982,699
========== =========== ===========
Operating profit $ 133,760 $ 2,124,131 $ 2,257,891
========== ===========
General corporate expenses (1,411,495)
Interest expense (836,359)
Income before provision for -----------
income taxes $ 10,037
===========
Identifiable assets $5,182,514 $ 7,289,591 $12,472,105
========== =========== ===========
Capital expenditures $ 43,704 $ 49,570 $ 93,274
========== =========== ===========
Depreciation and amortiza-
tion expense $ 58,941 $ 75,349 $ 134,290
========== =========== ===========
1995
----
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)
Loss 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 amortiza-
tion expense $ 37,462 $ 127,071 $ 164,533
========== =========== ===========
(Continued)
F-21
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
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 $1,400,000 has been agreed to in settlements to
date with regard to the terminated actions of which all but $30,000
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
(Continued)
F-22
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 11 - Litigation (Continued):
to fully ascertain the extent of 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 one other product liability action 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 this matter, 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:
Reverse Stock Split, Preferred Stock, Stock Option Plans and Stock
Options:
On May 13, 1996, the Board of Directors approved the following
proposals 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.
(Continued) F-23
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 13 - 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. Each
unit is comprised of one share of common stock and a Class B warrant
to purchase one share of common stock. The warrants are exercisable
twelve months after the effective date of the offering or earlier with
the underwriters consent and expire three years from the effective
date of the offering. These warrants are redeemable by the Company
eighteen months after the effective date 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 additional units that will bring the
total up to 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. 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.
F-24
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
Forward-Looking Statements
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
Certain Relationships and Related
Transactions
Recent Private Placements
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)
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
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, 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
(Continued on next page)
THESE ARE SPECULATIVE SECURITIES. 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 11 AND "DILUTION" BEGINNING
ON PAGE 24.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES 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.
(Alternate Page for Common Prospectus)
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" and on the closing of the Unit Offering will be listed
on the Boston Stock Exchange under the symbol "_____". On September 17, 1996,
the reported closing sale price for the Common Stock as reported by NASDAQ was
$7.25 per share.
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 Class B Common Stock purchase warrant (the
"Warrants"). The Company's concurrent offering (the "Unit Offering") is being
offered through Royce Investment Group, Inc. (the "Underwriter"). The Unit
Offering grants to the Company's stockholders as of September 24, 1996, in
those states where qualified, or exempt from qualification, the
nontransferable right to subscribe for Units. Any Units not subscribed for will
be sold to the Underwriter pursuant to a Standby Agreement.
2
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3
(Alternate Page for Common Prospectus)
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.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. SUCH
STATEMENTS REFLECT SIGNIFICANT ASSUMPTIONS AND SUBJECTIVE JUDGMENTS BY THE
COMPANY'S MANAGEMENT CONCERNING ANTICIPATED RESULTS. THESE ASSUMPTIONS AND
JUDGMENTS MAY OR MAY NOT PROVE TO BE CORRECT. MOREOVER, SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS.
FOR A DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS". INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE UNDERWRITER HAS NOT ATTEMPTED TO VERIFY THE BASIS FOR
ANY SUCH STATEMENTS INDEPENDENTLY AND NEITHER THE UNDERWRITER NOR THE COMPANY
UNDERTAKES ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OCCURRING OR CIRCUMSTANCES ARISING
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
4
(Alternate Page for Common Prospectus)
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)(3) 1,583,079 shares of Common Stock (as
adjusted for prior stock splits and
estimated rounding for fractional
shares)
Common Stock to be outstanding
after the Offering(1)(2)(3)(4) 1,583,079 shares of Common Stock
Use of Proceeds None to the Company.
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
Boston Stock Exchange Symbol Common Stock --
- ---------------------
(1) Includes 703,591 shares of common stock issued concurrently as part
of the Unit Offering.
(2) 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.
(3) Does not include Common Stock which may be issued upon the exercise
of any options or warrants currently outstanding. The Company
6
(Alternate Page for Common Prospectus)
currently has outstanding options and warrants to purchase 617,930
shares of Common Stock exercisable at prices between $5.302 and $30.00
per share which will be adjusted to acquire 630,887 shares at prices
between $5.169 and $30.00 as a result of anti-dilution rights as a
result of the Unit Offering.
(4) Does not include Common Stock which may be issued upon exercise of
Underwriter's Purchase Option and Optional Units.
7
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8
(Alternate Page for Common Prospectus)
SELECTED CONSOLIDATED FINANCIAL DATA (Cont'd)
Consolidated Balance Sheet Data:
As at June 30, 1996
------------------------------------
As at PRO-FORMA
June 30, PRO- AS
1995 Historical FORMA(1) ADJUSTED(2)
----------- ----------- ----------- ------------
Current
Assets $ 9,265,149 $10,987,100 $11,158,100 $11,228,459
Current
Liabilities 8,200,620 9,434,587 9,434,587 6,809,325
Working Capital 1,064,529 1,552,513 1,723,513 4,419,134
Total
Assets 10,716,048 12,472,105 12,643,105 12,713,464
Long-
Term Debt 489,782 433,738 433,738 433,738
Total
Liabilities 8,690,402 9,868,325 9,868,325 7,243,063
Shareholders'
Equity 2,025,646 2,603,780 2,774,780 5,470,401
- ----------
(1) Adjusted to give effect to shares issued in a private placement with
net proceeds to the Company of $171,000.
(2) Adjusted to give effect to shares issued in the Unit Offering and the
sale of units offered and the receipt of $2,695,621 in net proceeds and
their initial application which is to prepay the Underwriter $70,359
for a one year consulting agreement with the balance going to pay down
the amount outstanding on the Company's line of credit.
10
(Alternate Page for Common Prospectus)
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 41% and 35% of
consolidated sales for the fiscal years ended June 30, 1996 and June 30, 1995,
respectively. 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.
15
(Alternate Page for Common Prospectus)
LIMITATION ON NET OPERATING LOSS CARRYFORWARDS. As of June 30, 1996, the
Company had Federal net operating loss carryforwards for income tax purposes of
approximately $4,738,000 which expire through the year 2011. 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 two 1996 private placements ("Recent
Private Placements"). See "Recent Private Placements". Based upon the number of
shares offered in the Recent Private Placements and the applicable long-term tax
exempt rate, the Company's ability to utilize its net operating carryforward
losses in future years is limited to approximately $345,000 per year. A change
in ownership may also occur upon the completion of the Unit 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. There is no key man insurance on the
life of the executive officers of the Company.
CONTROL BY MANAGEMENT. As of the date of this Prospectus, the Company's
executive officers and directors own of record and beneficially (assuming
exercise of all their options and warrants), 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
16
(Alternate Page for Common Prospectus)
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 before interest and
taxes for the fiscal years ended June 30, 1996 through June 30, 2000; (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 and waivers
provide that their right to terminate their employment agreements and waiver of
their bonuses 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 617,930
shares of Common Stock subject to issuance upon currently outstanding options
and warrants at exercise prices between $5.302 and $30.00 per share, which will
be adjusted to acquire 630,887 shares at prices between $5.169 and $30.00 as a
result of anti-dilution rights as a result of the Unit Offering. 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. Outstanding options and warrants did not
materially dilute earnings per share in 1996, 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.
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
17
(Alternate Page for Common Prospectus)
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, 1996, aggregates approximately
$2,321,000) 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 Omnibus Act will not
have a material effect on the Company for the foreseeable future. The Small
Business Job Protection Act of 1996 further limits the Possession tax credit for
years beginning after 2001 with the credit being eliminated for tax years
beginning after 2005.
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.
18
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SHARES ELIGIBLE FOR FUTURE SALE. There are 1,583,079 shares of Common Stock
(assuming the issuance of 703,591 shares of Common Stock as part of the Unit
Offering to be registered and sold herewith) of the Company outstanding as of
the Effective Date. Of these shares 528,607 shares are restricted securities, as
that term is defined in Rule 144 promulgated under the Securities Act of 1933
(the "Securities Act"). Of the restricted securities, 513,000 shares have been
registered for sale, of which 114,000 shares have been registered for sale after
nine months, by certain shareholders. See "Recent Private Placements" and
"Concurrent Registration of Common Stock". 14,602 of the restricted securities
are owned by officers and directors of the Company. Absent registration under
the Securities Act, the sale of such shares is subject to Rule 144. 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".
RECENT ISSUANCE OF SUBSTANTIAL SHARES AT REDUCED PRICE. During June and
July of 1996, the Company issued 513,000 shares at $1.50 per share at a time
when the current market price was approximately $8 to $12 per share and the
Company was contemplating a prospective rights offering of $5.00 per share. This
offering was authorized to provide proceeds to pay loans and provide working
capital. The shares issued are being registered for sale concurrently herewith.
Holders of 114,000 of these shares have agreed not to sell their shares for nine
months from the date hereof. See "Concurrent Registration of Common Stock" and
"Recent Private Placements".
AUTHORITY TO ISSUE BLANK CHECK PREFERRED STOCK. The Company is authorized
to issue 1,000,000 shares of $.01 preferred stock without further action of the
stockholders 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.
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All the shares of any one series of the Preferred Stock shall be identical in
all respects. The Company's board of directors has broad discretion with regard
to the issuance of such shares. No preferred shares are currently outstanding.
See "Description of Securities - Preferred Stock".
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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.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996: (i) on an historical basis; (ii) on a pro-forma basis giving effect to
the sale of 114,000 shares in a private placement; and (iii) on such pro-forma
basis as adjusted giving effect to the Unit 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 June 30, 1996
---------------------------------------
Pro-
Pro- Forma As
Actual Forma (1) Adjusted (2)
------ --------- ------------
Current Liabilities:
Loans Payable $5,853,075 $5,853,075 $3,227,813
========== ========== ==========
Long-Term Debt(including the $ 489,782 $ 489,782 $ 489,782
current portion) ---------- ---------- ----------
Stockholders' Equity:
Common Stock, $.12 par value;
authorized 20,000,000 shares;
issued and outstanding;
765,488 actual outstanding,
879,488 pro-forma outstanding,
1,583,079 pro-forma as
adjusted outstanding 91,859 105,539 189,970
Additional paid-in capital 6,742,476 6,899,796 9,510,986
Accumulated Deficit (4,230,555) (4,230,555) (4,230,555)
---------- ---------- ----------
Total Stockholders' Equity 2,603,780 2,774,780 5,470,401
---------- ---------- ----------
Total Capitalization $3,093,562 $3,264,562 $5,960,183
========== ========== ==========
- ----------------------
(1) Adjusted to give effect to the issuance of 114,000 shares in a
private placement with net proceeds of approximately $171,000 during
July, 1996. See Note 7 in the "Consolidated Financial Statements" and
"Recent Private Placements".
(2) Adjusted to give the effect to shares issued in the Unit Offering and
the sale of units offered hereby and the receipt of $2,695,621 in net
proceeds and their initial application which is to prepay the
Underwriter $70,359 for a one year consulting agreement with the
balance going to paydown the amount outstanding on the Company's line
of credit.
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resulted primarily from the sale of stock in a private placement in June 1996. A
substantial portion of the Company's working capital consists of inventory,
which was $5,230,000 and $4,364,000, as of June 30, 1996 and 1995, 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 had a line of credit agreement with Congress whereby the
Company could borrow up to $6,000,000, with interest payable at 2.25% above the
prime rate, plus an unused line fee of .25% per year. Borrowings under this
agreement were limited to 50% of the eligible inventory up to a maximum of
$2,875,000 and 80% of eligible accounts receivable. In July, 1996, the line of
credit was amended and extended until October 1, 1999 with an option by Congress
to extend the loan for an additional year. The line was increased to $9,000,000
with an interest rate at 1.25% above the prime rate which will be reduced to
prime plus 1% subject to the consummation of the Company's proposed public
offering by December 31, 1996 and the net proceeds of this offering being at
least $2,500,000. The limits on borrowings were increased to 85% of eligible
accounts receivable and 55% of eligible inventory. The amounts outstanding at
June 30, 1996 and June 30, 1995 were $5,558,000 and $4,829,000, respectively.
The Company had $76,000 available for borrowing at June 30, 1996. The loan is
subject to certain working capital and net worth requirements and is
collateralized by all of the assets of the Company not previously pledged under
other loan agreements. The loan agreement prohibits the payment of cash
dividends by the Company.
In September 1993, the Company received an overadvance of $500,000 from
Congress. In connection therewith, Messrs. A. Densen, L.Densen, and A. Towell
obtained the Junior Participation from Congress by advancing $250,000 of their
funds to Congress. $250,000 of this overadvance has been repaid to Congress.
The balance of $215,000, after repayment of $35,000 to L. Densen, will be repaid
by Congress, at its option, to Messrs. A.Densen, L.Densen, and A. Towell subject
to the availability of funds.
The Company believes that its current working capital position, line of
credit and operations will be sufficient to satisfy its cash needs through June
30, 1997. In addition, the net proceeds of $171,000 from the second private
placement in July, 1996 and the net proceeds of the Unit Offering will provide
the Company with additional funds to be utilized substantially to paydown the
amount outstanding on the Company's line of credit thereby increasing the amount
available under such line of credit for working capital and other needs such as
acquisitions. The Company has not entered into any definitive agreement or
understanding regarding any acquisition.
Net cash used for operating activities was principally a result of an
increase in accounts receivable and inventories which was only partially offset
by an increase in accounts payable. Cash flows used in investing activities was
for the purchase of property, plant, and equipment. Cash flows provided by
financing activities was principally from increased borrowings under the
Company's line of credit and from the proceeds of a private placement of the
Company's Common Stock.
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 in "Business-Legal Proceedings" 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.
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EXECUTIVE COMPENSATION
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 117,661 -0- 35,672(3) -0- 8,348(4) -0- -0-
Densen, 1995 107,930 -0- 32,875(3) -0- 82,158(2) -0- -0-
CEO 1994(1) 117,154 -0- 30,078(3) -0- -0- -0- -0-
Lawrence 1996 101,661 -0- 4,200 -0- 8,348(4) -0- -0-
Densen, 1995 89,130 -0- 4,200 -0- 82,158(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 80,158 shares exercisable at $5.302 per share, each
exercisable until January 19, 2005. Because it was determined
that the audited pre-tax profit for fiscal 1995 was greater
than $50,000, non-qualified options can now be exercised for 40,079
shares of Common Stock.The remaining 40,079 non-qualified options
can not be exercised during the first five years. The non-qualified
options provide for adjustment in the event of dilution as a
result of sales of securities at less than the exercise price. Each
set of the options to acquire 40,079 shares at $5.302 per share
will,as a result of anti-dilution rights, following the consummation
of the Unit Offering, be adjusted to acquire 41,110 shares at $5.169
per share.
(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) Warrants to acquire 8,348 shares of Common Stock at $5.771 granted
February 23, 1996 until February 22, 2001, in consideration of the
guaranty of overadvances by Congress to the Company. These warrants
provide for adjustment in the event of dilution, and will be adjusted
to acquire 8,870 shares at $5.431 as a result of the Unit Offering.
(5) Each person's options including only options directly held by such
person.
39
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their employment agreements, have waived: (i) their right to bonuses based
upon the Company's earnings before interest and taxes for the fiscal years ended
June 30, 1996 through June 30, 2000; (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 the Unit Offering; and (iii) their right to terminate
their relationship with the Company, as per the terms of their respective
employment agreements. The modification agreements and waivers provide that
their right to terminate their employment agreements and waiver of their bonuses
shall not be waived in the event that there is a material breach of such
agreements by the Company.
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 8,348 shares of Common Stock at an exercise
price of $5.771 per share commencing February 23, 1996. These warrants provide
for adjustment in the event of anti-dilution, and will be adjusted to acquire
8,870 shares at $5.431 as a result of the Unit Offering. 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 personal
liability of directors to the corporation or its shareholders for damages for
any breach of duty in such capacity is eliminated to the fullest extent
permitted by law. The bylaws of the corporation provide that directors or
officers of the corporation shall be indemnified by the corporation in the
manner and to the fullest extent permitted by law, as amended from time. 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. The Company maintains
directors and officers liability insurance.
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
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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 Unit After Unit
Title of Class of Beneficial Owner of Beneficial Owner Offering Offering(A)
- -------------- ------------------ ------------------- ----------- -----------
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
- ------------------
(A) Assumes no Rights, warrants or options will be exercised as a result of
the Unit Offering. However, this column takes into consideration
additional shares issuable under the anti-dilution rights of certain
options and warrants.
(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 82,645 shares of Common Stock exercisable at
$6.292 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 will be adjusted to acquire
90,941 shares at $5.718 as a result of the Unit Offering.
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(4) Includes non-qualified options to acquire 40,079 shares to each
Messrs. A. Densen, A. Towell and L. Densen exercisable until January
19, 2005 at an exercise price of $5.302. Does not include options
to acquire an additional 40,079 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
$250,000. These options provide for an anti-dilution adjustment as a
result of sales of securities at less than the exercise price. Each
of the options to acquire 40,079 shares at $5.302 per share will, as
a result of anti-dilution rights, following the consummation of the
Unit Offering, become options to acquire 41,110 shares at $5.169 per
share. See "Certain Relationships and Related Transactions".
(5) Includes warrants to acquire 8,348 shares of Common Stock exercisable
at $5.771 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 will be adjusted to
acquire 8,870 shares at $5.431 as a result of the Unit Offering. 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 after nine months from the Effective
Date.
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 Unit After Unit
Name and Address of Beneficial Owner Offering Offering(A)
- ---------------- ------------------- ----------- -----------
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%
- ------------------
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* Less than 1%
(A) Assumes no Rights, warrants or options will be exercised as a result of
the Unit Offering. However, this column takes into consideration
additional shares issuable under the anti-dilution rights of certain
options and warrants.
(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 the Unit
Offering.
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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 the Unit
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 commencing twelve months (or sooner with the
consent of the Underwriter) until three years after the date of this Prospectus.
The Class B Warrants may be redeemed by the Company at any time, commencing
eighteen months after the Effective Date, but no sooner than 12 months from the
date the warrants become exercisable 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
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changed) per share. Warrantholders shall exercise rights until the close of
business on the day preceding the date fixed for redemption.
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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50
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SHARES ELIGIBLE FOR FUTURE SALE
There are 1,583,079 shares of Common Stock (assuming the issuance of 703,591
shares of Common Stock as part of the Unit Offering to be registered and sold
herewith) of the Company outstanding as of the Effective Date. Of these shares
528,607 shares are restricted securities, as that term is defined in Rule 144
promulgated under the Securities Act of 1933 (the "Securities Act"). Of the
restricted securities, 513,000 shares have been registered for sale , of which
114,000 shares have been registered for sale after nine months by certain
shareholders. See "Recent Private Placements" and "Concurrent Registration of
Common Stock". 14,602 shares of the restricted securities are owned by officers
and directors of the Company. 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 "Concurrent Registration of Common Stock."
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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.
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 and
security interest on the Company's personal property. 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
owning approximately 38% thereof. During the fiscal year ended June 30, 1996,
the Company paid Associates $121,107 in principal and interest on the mortgage,
of which $72,346 constituted interest. The Company intends to explore
refinancing of this mortgage with various lenders.
On January 20, 1995, the Company granted non-qualified options to acquire
80,158 shares of Common Stock to each of Messrs. A. Densen, A. Towell, and L.
Densen. Because it was determined that the audited pre-tax profit for fiscal
1995 was greater than $50,000, non-qualified options can now be exercised for
40,079 shares of Common Stock.The remaining 40,079 non-qualified options can not
be exercised during the first five years. The non-qualified options provide for
adjustment in the event of dilution as a result of sales of securities at less
than the exercise price. Each set of the options to acquire 40,079 shares at
$5.302 per share will,as a result of anti-dilution rights, following the
consummation of the Unit Offering, become options to acquire 41,110 shares at
$5.169 per share. 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; 82,645 warrants purchased by Anthony P.
Towell, the Company's Chief Financial Officer, from Scorpio Partners, L.P.
(90,941, as adjusted for the Unit Offering); 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 were
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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 before interest and taxes for the fiscal years ended June 30, 1996
through June 30, 2000; (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 the Unit Offering; and (iii) their right to terminate
their relationship with the Company, as per the terms of their respective
employment agreements. The modification agreements and waivers provide that
their right to terminate their employment agreements and waiver to their bonuses
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.
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Towell, and L. Densen to purchase 8,348 shares of Common Stock at $5.771 per
share, which will, as a result of anti-dilution rights following the Unit
Offering become options to purchase 8,870 shares of Common Stock at $5.431 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.
The first mortgage held by Associates which they agreed on in 1992 and upon
which interest was being paid at the rate of 14% comes due on July 1, 1997 in
the amount of approximately $438,000. Associates has agreed to extend the
mortgage for five years from July 1, 1997 with interest at 12% per annum or 3%
over prime, whichever is greater. At the end of five years, the mortgage will
come due in the amount of approximately $283,000.
Considering the circumstances of each transaction, the Company believes
that all transactions heretofore with officers/directors and shareholders of the
Company and their affiliates have been made, and in the future will be made on
terms no less favorable to the Company than those available from unaffiliated
parties and will be approved by a majority of the disinterested directors.
RECENT PRIVATE PLACEMENTS
On June 28, 1996, the Company completed a 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 this 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
this 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 this 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 this 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 for use as working capital to 5 investors, pursuant to
provisions for exemption from registration under the Securities Act of 1933 as
amended. Royce Investment Group, Inc. did not act as placement agent, nor was it
involved in any way with the private placement which closed on July 9, 1996. The
shares sold in the foregoing private placements are being registered
concurrently herewith. None of the foregoing purchasers of these private
placements have had a prior relationship with the Company, with the exception of
Heather Reiser whose husband is affiliated with Donald & Co., the Company's
investment advisor.
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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 Stock after Sale(B)
- -------------------- ---------------------- --------------------
RONALD SPINELLI &
RICHARD SPINELLI 9,500 0
RAMESH PATEL 9,500 0
BRENDA FURINO 19,000 0
CINDY DOLGIN 9,500 0
JOHN CZINGER 9,500 0
LEONARD MOSKOWITZ &
VICKIE MOSKOWITZ 9,500 0
ALOYSIUS G. FREEMAN
& MARY FREEMAN 9,500 0
RAYMOND KAYAL 9,500 0
DAVID COHEN 9,500 0
JOANN WEAN &
CHARLES WEAN III 9,500 0
ASHDOWN HOLDINGS LIMITED 38,000 0
BLAISE FINANCIAL CORP. 38,000 0
ELLIOT S. SCHLISSEL
& LOIS C. SCHLISSEL 19,000 0
GLOBALSIDE LIMITED 38,000 0
CORNELIA COMPANY LIMITED 38,000 0
WAAL INVESTMENTS LTD 38,000 0
HARRIET REUTER 19,000 0
EDMOND O'DONNELL 19,000 0
DOMINICK LELIA &
ALICE LELIA 9,500 0
MELINDA N. TYRWHITT 38,000 0
GEORGE SHIAVONI (A) 76,000 0
ANTHONY C. SALVO (A) 5,000 0
ANDREW J. FINKLESTEIN (A) 6,667 0
HEATHER REISER (A) 21,667 0
ROBERT W. BURKE (A) 4,666 0
- ------------------
(A) Has agreed not to sell their shares for 9 months from the date hereof.
(B) Assumes no exercise of rights in the Unit Offering.
60
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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.
Sales of common stock by the Selling Stockholders 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 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.
61
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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 are members
of Associates and hold warrants to acquire 1,667 shares of Common Stock
exercisable until April 11, 1999 at $13.00 per share.
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
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TABLE OF CONTENTS Page
----
Restrictions in Certain States
Statement of Available Information
Forward-Looking Statements
Prospectus Summary
Summary Financial
Information
Risk Factors
Use of Proceeds 513,000 Shares
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
Certain Relationships and
Related Transactions
Recent Private Placements
Selling Stockholders
Plan of Distribution
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. The Company's Certificate
of Incorporation provides that the personal liability of directors to the
corporation or its shareholders for damages for any breach of duty in such
capacity is eliminated to the fullest extent permitted by law. The bylaws of the
corporation provide that directors or officers of the corporation shall be
indemnified by the corporation in the manner and to the fullest extent permitted
by law, as amended from time to time. Article VII, Sections 719-726 of the
Business Corporation law of the State of New York, provide various provisions
with respect to indemnification and liability of directors and officers of the
corporation.
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* 80,000.00
Legal Fees and Expenses* 120,000.00
Accounting Fees and Expenses* 75,000.00
Blue Sky Fees and Expenses* 60,000.00
Miscellaneous Expenses* 17,184.27
----------
TOTAL 365,000.00
- ------------
*Indicates expenses that have been estimated for the purpose of filing.
Item 27. List of Exhibits
Exhibit Description of Exhibit
- ------- ----------------------
1.01 Form of Standby Agreement
1.02 Warrant Exercise Fee Agreement
3.01.1 Certificate of Amendment to Certficate of Incorporation filed
August 12, 1996
3.01.2 Certificate of Amendment to Certificate of Incorporation dated
February 15, 1989
3.02.1 Amendments to By-Laws
4.01 Form of Common Stock Certificate
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.
5.01 Opinion of Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP
10.05 Amendment to Financing Agreements with
Congress dated July, 1996
10.07 Form of Modification Agreement to
Employment Agreements with Alan Densen,
Lawrence Densen and Anthony Towell and Waiver
10.08 Joint Participation Agreement between Congress and Alan E.
Densen dated September 20,1993 (referred to as Exhibit 10.4)(A)
10.09 Joint Participation Agreement between Congress and Anthony
P. Towell dated September 20,1993 (referred to as Exhibit
10.5)(A)
10.10 Joint Participation Agreement between Congress and Lawrence
Densen dated September 20,1993 (referred to as Exhibit 10.6)(A)
11.01 Statement re: Computation of per share
earnings
21.01 Subsidiaries of the Registrant (Note that this
was filed as part of the original filing and is not included
herein).
23.01 Consent of Cornick, Garber & Sandler, LLP
23.02 Consent of Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
27.01 Financial Data Schedule
- ------------------
(A) Incorporated by reference to Form 10K for the year ended June 30, 1993.
II-1
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 Amendment to the
Registration Statement to be signed on its behalf by the undersigned, in
Huntington Station, New York on September 20, 1996.
EASTCO INDUSTRIAL SAFETY CORP.
By: /S/ Alan E. Densen
-------------------
ALAN E. DENSEN, President
/s/ Alan E. Densen Date: September 20, 1996
- ----------------------------
ALAN E. DENSEN, President,
and Director
/s/ Anthony P. Towell Date: September 20, 1996
- -----------------------------
ANTHONY P. TOWELL
Vice President of Finance, Secretary,
Treasurer, and Chief Financial Officer
/s/ Lawrence Densen Date: September 20, 1996
- -----------------------------
LAWRENCE DENSEN
Executive Vice-President and
Director
/s/ Herbert Schneiderman Date: September 20, 1996
- ------------------------------
HERBERT SCHNEIDERMAN
Director
/s/ Martin Fleisher Date: September 20, 1996
- ------------------------------
MARTIN FLEISHER
Director
/s/ James A. Favia Date: September 20, 1996
- ------------------------------
JAMES A. FAVIA
Director
II-2
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
1.01 Form of Standby Agreement
1.02 Warrant Exercise Fee Agreement
3.01.1 Certificate of Amendment to Certficate of Incorporation filed
August 12, 1996
3.01.2 Certificate of Amendment to Certificate of Incorporation dated
February 15, 1989
3.02.1 Amendments to By-Laws
4.01 Form of Common Stock Certificate
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.
5.01 Opinion of Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP
10.05 Amendment to Financing Agreements with
Congress dated July, 1996
10.07 Form of Modification Agreement to
Employment Agreements with Alan Densen,
Lawrence Densen and Anthony Towell and Waiver
10.08 Joint Participation Agreement between Congress and Alan E.
Densen dated September 20,1993 (referred to as Exhibit 10.4)(A)
10.09 Joint Participation Agreement between Congress and Anthony
P. Towell dated September 20,1993 (referred to as Exhibit
10.5)(A)
10.10 Joint Participation Agreement between Congress and Lawrence
Densen dated September 20,1993 (referred to as Exhibit 10.6)(A)
11.01 Statement re: Computation of per share
earnings
21.01 Subsidiaries of the Registrant (Note that this and was
filed as part of the original filing and is not included herein)
23.01 Consent of Cornick, Garber & Sandler, LLP
23.02 Consent of Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
27.01 Financial Data Schedule
- ------------------
(A) Incorporated by reference to Form 10K for the year ended June 30, 1993.