SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the quarterly period ended December 31, 1998 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the transition period from to Commission file number 0-17330 DAINE INDUSTRIES, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 11-2881685 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 240 Clarkson Avenue Brooklyn, New York 11226 (Address of Principal Executive Office) (Zip Code) (718)469-3132 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding twelve months or for such shorter period that the Registrant was required to file such reports, and (2) has been subject to such filing requirements for the past ninety days. Yes / X / No / / APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes / / No / / APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 248,461,935 10Q-1 DAINE INDUSTRIES, INC. FINANCIAL STATEMENTS DECEMBER 31, 1998 I N D E X Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 1 CONSOLIDATED BALANCE SHEETS - ASSETS 2 CONSOLIDATED BALANCE SHEETS - LIABILITIES AND SHAREHOLDERS' EQUITY 3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 4 CONSOLIDATED STATEMENTS OF OPERATIONS 5-6 CONSOLIDATED STATEMENTS OF CASH FLOWS 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8-12 ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Shareholders DAINE INDUSTRIES, INC. Brooklyn, New York 11226 We have reviewed the accompanying consolidated balance sheets of DAINE INDUSTRIES, INC. as of December 31, 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for the six month periods ended December 31, 1998 and 1997, in accordance with standards established by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of management of DAINE INDUSTRIES, INC. A review of interim financial information consists principally of obtaining an understanding of the system for the preparation of interim financial information, applying analytical review procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an examination in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of June 30, 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated August 6, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 1998 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. GREENBERG & COMPANY LLC Springfield, New Jersey January 21, 1999 Page 1 of 12 DAINE INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS A S S E T S Dec. 31, 1998 (Unaudited) June 30, 1998 CURRENT ASSETS Cash and Cash Equivalents $ 987,876 $ 750,874 Accounts Receivable 43,462 392,787 Inventory 570,001 595,194 Prepaid Expenses 5,427 13,978 Deferred Taxes 14,248 14,248 Deferred Offering Costs 7,425 -0- Total Current Assets 1,628,439 1,767,081 FIXED ASSETS, At Cost Machinery and Equipment 394,145 394,145 Leasehold Improvements 9,787 9,787 Less: Accumulated Depreciation and Amortization (281,243) (260,265) 122,689 143,667 OTHER ASSETS Deposits 6,100 6,100 TOTAL ASSETS $1,757,228 $1,916,848 Subject to the comments contained in the Accountants' Review Report. Page 2 of 12 DAINE INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y Dec. 31, 1998 (Unaudited) June 30, 1998 CURRENT LIABILITIES Accounts Payable & Accrued Expenses $ 158,917 $ 329,823 Income tax payable 7,270 -0- Total Current Liabilities 166,187 329,823 OTHER LIABILITIES Deferred Income Tax Liability 8,423 8,423 TOTAL LIABILITIES 174,610 338,246 COMMITMENTS AND CONTINGENCIES (Note 3) SHAREHOLDERS' EQUITY Common Stock (Par Value $.00001) 350,000,000 shares authorized, 248,461,935 shares issued and outstanding 2,485 2,485 Paid-In Capital 1,441,597 1,441,597 Retained Earnings 138,536 134,520 TOTAL SHAREHOLDERS' EQUITY 1,582,618 1,578,602 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,757,228 $1,916,848 Subject to the comments contained in the Accountants' Review Report. Page 3 of 12 DAINE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For The Period July 1, 1996 to December 31, 1998 Total Number $.00001 Share- of Par Paid-In Retained holders' Shares Value Capital Earnings Equity BALANCES AT JULY 1, 1996 248,461,935 $2,485 $1,441,594 $184,805 $1,628,887 Net Income(Loss) for the Year Ended June 30, 1997 (8,909) (8,909) BALANCES AT JUNE 30, 1997 248,461,935 2,485 1,441,594 175,896 1,619,978 Net Income (Loss) for the Year Ended June 30, 1998 (41,376) (41,376) BALANCES AT JUNE 30, 1998 (AUDITED) 248,461,935 2,485 1,441,594 134,520 1,578,602 Net Income(Loss) for the Six Months Ended Dec. 31, 1998 4,016 4,016 BALANCES AT DEC. 31, 1998 (UNAUDITED) 248,461,935 $2,485 $1,441,594 $138,536 $1,582,618 Subject to the comments contained in the Accountants' Review Report. Page 4 of 12 DAINE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For The Three Months Ended December 31, 1998 1997 REVENUES Sales - Net of Returns and Allowances $ 248,129 $ 107,181 COST OF GOODS SOLD Beginning Inventory 550,002 551,127 Purchase and Freight 148,739 88,912 Direct Labor 51,961 44,545 750,702 684,584 Less: Inventory - End of Period (570,001) (615,866) Cost of Goods Sold 180,701 68,718 GROSS MARGIN 67,428 38,463 Interest Income 6,132 7,365 General and Administrative Expenses (141,022) (108,971) Depreciation Expense (10,033) (10,742) INCOME (LOSS) BEFORE INCOME TAXES (77,495) (73,885) Income Tax Expense (Benefit) (20,927) (17,181) NET INCOME (LOSS) $ (56,568) $ (56,704) Earnings Per Share NIL NIL Weighted Average Number of Shares of Common Stock Outstanding 248,461,935 248,461,935 Subject to the comments contained in the Accountants' Review Report. Page 5 of 12 DAINE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For The Six Months Ended December 31, 1998 1997 REVENUES Sales - Net of Returns and Allowances $1,007,979 $ 728,418 COST OF GOODS SOLD Beginning Inventory 595,194 607,127 Purchase and Freight 571,985 374,811 Direct Labor 136,825 139,953 1,304,004 1,121,891 Less: Inventory - End of Period (570,001) (615,866) Cost of Goods Sold 734,003 506,025 GROSS MARGIN 273,976 222,393 Interest Income 12,989 9,778 General and Administrative Expenses (253,391) (234,250) Depreciation Expense (20,978) (21,891) INCOME (LOSS) BEFORE INCOME TAXES 12,596 (23,970) Income Tax Expense (Benefit) 8,580 1,057 NET INCOME (LOSS) $ 4,016 $ (25,027) Earnings Per Share NIL NIL Weighted Average Number of Shares of Common Stock Outstanding 248,461,935 248,461,935 Subject to the comments contained in the Accountants' Review Report. Page 6 of 12 DAINE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Six Months Ended December 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 4,016 $(25,027) Adjustment to Reconcile Net Income to Net Cash Provided By (Used In) Operating Activities: Depreciation and Amortization Expense 20,978 21,891 Change in Assets and Liabilities: Decrease (Increase) in Accounts Receivable 349,325 430,399 Decrease (Increase) in Inventory 25,193 (8,739) Decrease (Increase) in Other Current Assets 1,126 (18,175) Increase (Decrease) in Accounts Payable & Accrued Expenses (170,906) (74,429) Increase (Decrease) in Income Tax Payable 7,270 1,226 Net Cash Provided By (Used In) Operating Activities 237,002 327,146 CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures -0- (359) Net Cash (Used In) Investing Activities -0- (359) Net Increase (Decrease) in Cash and Cash Equivalents 237,002 326,787 Cash and Cash Equivalents at Beginning of Period 750,874 468,991 CASH AND CASH EQUIVALENTS AT END OF PERIOD $987,876 $795,778 Supplemental Disclosures of Cash Flow Information: Cash Paid During the Period for: Interest $ -0- $ -0- Taxes $ 1,309 $ 2,673 Subject to the comments contained in the Accountants' Review Report. Page 7 of 12 DAINE INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS Daine Industries, Inc. (Daine) is a Delaware corporation. Daine owns 100% of the stock of Lite King Corp. (LKC) a New York corporation. Daine's principal purpose is to hold the stock of LKC. LKC's principal business is the manufacture and assembly of electrical wiring devices, cord sets and sockets. LKC's customers consists of manufacturers of lamps, chandeliers, Christmas and Halloween illuminated decorations, novelties, point of purchase displays, signs, and other electrical specialties. The customers are located throughout North America. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Company and its consolidated 100% owned subsidiary, Lite King Corporation, are included in the consolidated financial statements. All intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid, short-term investments with maturities of 90 days or less. ACCOUNTS RECEIVABLE Accounts receivable are judged as to collectibility by management and an allowance for bad debts is established as necessary. As of each balance sheet date, no reserve was considered necessary. RECLASSIFICATIONS Certain prior period financial statement accounts have been reclassified to conform to current presentation. DEFERRED OFFERING COSTS During the quarter ended December 31, 1998 the Company incurred costs of $7,425 in connection with the registration of Lite King's stock. The Company filed a Form 10-SB with the Securities Exchange Commission (SEC) on November 23, 1998. The Company's intention is to distribute Lite King's shares to the Company's shareholders on a pro rata basis. Page 8 of 12 DAINE INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) (Continued) The costs associated with the proposed distribution have been capitalized and will be charged to equity upon distribution. If the distribution is unsuccessful, the costs will be charged to operations. INVENTORY Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Inventories consist of: 12/31/98 6/30/98 Raw Materials $486,875 $506,875 Work-in-Process 67,926 65,427 Finished Goods 15,200 22,892 $570,001 $595,194 CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk are accounts receivable. During the periods ended December 31, 1998 and 1997, three customers accounted for approximately 65%, 10%, 10%, and 45%, 20%, 12%, respectively, of total revenues. The Company performs ongoing credit evaluations of its customers but generally does not require collateral to support customer receivables. The loss of any one of these customers could have a material adverse effect on the financial condition of the Company. PROPERTY AND EQUIPMENT Renewals and betterments are capitalized; maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight line method over the asset's estimated useful life, which generally approximates 10 years. REVENUE RECOGNITION POLICY The Company recognizes sales, for both financial statement purposes and for tax purposes, when the products are shipped to customers. ADVERTISING Advertising costs are expensed as incurred. Page 9 of 12 DAINE INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) (Continued) ESTIMATES IN FINANCIAL STATEMENTS Preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ('SFAS') No. 109, "Accounting for Income Taxes." SFAS 109 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that have been recognized in the financial statements as measured by the provisions of the enacted tax laws. Valuation allowances are established when necessary to reduce deferred tax assets to the estimated amount to be realized. Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities. NOTE 3: COMMITMENTS AND CONTINGENCIES The company is currently in a lease for office and factory space requiring minimum annual base rental payments for the fiscal periods shown as follows: 1999 $ 58,333 2000 60,333 2001 62,000 2002 36,166 Total $216,832 In addition to annual base rental payments, the company must pay an annual escalation for real estate taxes. Page 10 of 12 DAINE INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) (Continued) Certain officers and directors of the company have been included as defendants in a class action entitled "Barker et al v. Power Securities Corp., et al" in the Western District of New York, which action alleges violations of the securities laws, in trading certain securities including those of the company and its formerly affiliated company, Davin Enterprises Inc., by all of the defendants. Certain officers and directors of the company deny the allegations and believe the suit to be without merit. The alleged violations refer to Section 10b and Rule 10b-5 of the Securities and Exchange Act of 1934. A motion has been submitted to the judge by the attorney for the class to discontinue the action against the officers and directors of the company. At this time no date has been set by the judge to hear the motion by the plaintiff's attorney. The company has undertaken to advance any expenses necessary and incurred by the officers and directors in the litigation subject to an undertaking by such officer and director to repay the advances if it be ultimately determined that the officer or director is not entitled to be indemnified. At this date, expenses are not material. In the event that the plaintiffs were to prevail against the officers and directors and a judgment was issued against them, this may have a material adverse effect on the company's future financial condition. Management feels that an estimate of the possible range of loss cannot be made at this time. NOTE 4: INCOME TAXES Income taxes are accrued at the statutory U.S. and state income tax rates. Deferred tax liabilities relate to operating loss carrybacks and depreciation timing differences. December 31, 1998 1997 Current tax expense: Income tax at statutory rates $8,580 $1,057 Total Tax Expense $8,580 $1,057 Page 11 of 12 DAINE INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) (Continued) The tax effect of significant temporary differences, which comprise the deferred tax assets and liabilities are as follows: 12/31/98 6/30/98 Deferred tax asset: Operating loss carryback $14,248 $14,248 Deferred tax liability: Depreciation $ 8,423 $ 8,423 NOTE 5: POSTRETIREMENT EMPLOYEE BENEFITS The company does not have a policy to cover employees for any health care or other welfare benefits that are incurred after employment (postretirement). Therefore, no provision is required under SFAS's 106 or 112. NOTE 6: INTERIM FINANCIAL REPORTING The unaudited financial statements of the company for the period July 1, 1998 to December 31, 1998 have been prepared by management from the books and records of the company, and reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position and operations of the company as of the period indicated herein, and are of a normal recurring nature. Page 12 of 12 Part 1. Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Daine Industries, Inc. ("The Registrant") was incorporated on September 24, 1987 and is currently engaged in the manufacture and assembly of wiring devices. During the quarter ended March 31, 1988, the Registrant completed its proposed public offering. On February 26, 1990, Daine Industries, Inc. purchased the assets of Lite King Corp. The purchase price was $738,079, which was paid $663,079 in cash and $75,000 in a note. Lite King's facilities consist of approximately 16,000 square feet of office and factory space with annual lease payments of $58,000. Lite King's work force fluctuates during the year, from about 6-30 employees, all, except three, which were engaged in manufacturing and assembly activities. As a result of the acquisition of the assets of Lite King Corporation by the Registrant's wholly owned subsidiary, during the six months ended December 31, 1998, the Registrant generated revenues of $1,007,979. During the six months ended December 31, 1997 the Registrant generated revenues of $728,418. During the six months ended December 31, 1998, the Registrant had a net income of $4,016 as compared with a net loss of $25,027 for the six months ended December 31, 1997. The increase in revenues can be attributed to added sales from one of its major customers. Gross Margins for the six months ended December 31, 1998 declined to 27% from 30% for the six months ended December 31, 1997. The decline is due to the Company's inability to pass along price increases to its major customers and a reduction in the profit margin earned on one of the Company's principal products. General and administrative expenses increased by 8% when comparing expenses for the six months ended December 31, 1998 and the six months ended December 31, 1997. This increase can be attributed primarily to higher real estate expenses and taxes. Interest income increased by 133% for the six months ended December 31, 1998 as compared with the six months ended December 31, 1997. This increase is due to higher balances in interest bearing accounts. During the three months ended December 31, 1998 the Registrant generated revenues of $248,129 as compared with revenues of $107,181 for the three months ended December 31, 1997. The increase of 131% can be attributed to added sales from the Registrant's largest customer. For the three months ended December 31, 1998 the Registrant generated a loss of $56,568 as compared with a loss of $56,704 generated during the three months ended December 31, 1997. Much of the loss for the three months ended December 31, 1998 can be attrributed to added general and administrative expenses, principally associated to real estate and related taxes booked during the period and professional fees generated during the period ended December 31, 1998. The gross margin for the three months ended December 31, 1998 was 27% as compared with 36% during the three months ended December 31, 1997. The lower gross margin can be attributed to the inability to pass along price increases to its customers. Management anticipates activities for the quarter ended March 31, 1999 may result in a loss. The Registrant is experiencing added competition from firms with production facilities in China, Mexico and third world nations which resulted in lower gross margins. The Registrant is at a disadvantage in that firms based in the above listed nations have labor rates considerably lower than the Registrant's. As of December 31, 1998, the Registrant had total assets of $1,757,228, current assets of $1,628,439, fixed assets of $122,689, other assets of $6,100, current liabilities of $166,187, other liabilities of $8,423 and total shareholders' equity of $1,582,618. At June 30, 1998, total assets amounted to $1,916,848, current assets of $1,767,081, fixed assets of $143,667, other assets of $6,100, current liabilities of $329,823, other liabilities of $8,423 and shareholders' equity of $1,578,602. Lite King is embarking upon an expansion program which resulted in the addition of new equipment. The Registrant has also begun to manufacture some of the components used in some of its finished products. As part of this program, Lite King has upgraded some existing tooling which should result in having available some improved products. Management believes it has adequate financing to fund Lite King's expansion program. The Registrant has introduced several new products for sale directly to the end user as compared with current sales to original equipment manufacturers. These products will be sold as replacement items for Christmas, Halloween and Easter decorative plastic items. Management does not anticipate sales of these new products to have a material effect on fiscal year 1999 revenues or Company profitability. Lite King's main customer base are manufacturers of Christmas, Easter and Halloween products. Management considers its principal business to be seasonal in nature with sales usually at its lowest point during the quarter ended March 31st, with sales rising steadily during the June, September quarters and declining in the December quarter. The Registrant is experiencing lower gross profit margins because of the introduction of some new components used on some products, mandated by Underwriters Laboratories Inc., and added competition from firms with manufacturing facilities in China. For the six months ended December 31, 1998, Lite King's three largest customers accounted for about 85% of its total sales. The loss of any of these customers could have a material adverse effect on the Registrant's operations. The cash and cash equivalents balances of the Company as of December 31, 1998 and June 30, 1998 were $987,876 and $750,874, respectively. The increase in cash and cash equivalents was principally the result of lower accounts receivable for the quarter ended December 31, 1998. The Company expects that its current balances of cash and cash equivalents will be sufficient to meet its minimum planned capital and liquidity needs for the next year. The Company does not believe that the impact of inflation on its activities is significant. The Company is directing its marketing effort to reach out to new potential customers in non-related fields. No assurance can be given that such marketing activities will result in the Company adding new customers. Management sees added operating problems in fiscal year 1999 (year ended June 30, 1999) as a result of expected added competition from Chinese based manufacturers and their U.S. representatives of electrical cords. These firms may offer their products at lower prices making their products more competitive with the Registrant's products. The Registrant is importing one of its finished products from China as opposed to producing it in its facilities. Importation results in a lower profit margin and selling price (due to added competition) than when the product was being manufactured by the Registrant. No assurance can be given that this product will be available in fiscal year 1999 in the quantity required by the Registrant. Year 2000 Compliance The Registrant has evaluated the impact of the Year 2000 issue on the business and does not expect to incur significant costs with Year 2000 compliance. The Registrant believes that all software and hardware requirements to enable it to cope with the Year 2000 issue have been or are being currently implemented. However, there can be no assurance that unanticipated costs may arise in implementing these requirements. On November 23, 1998, Lite King Corp. (a 100% owned subsidiary of the Registrant) filed a Registration Statement under the Securities Act of 1934 on Form 10-SB relating to a distribution of 100% of the outstanding shares of Lite King Corp., presently owned by the Registrant, on a pro rata basis to the Registrant's shareholders as a dividend. Management of the Registrant believes the two companies as separate entities will create additional value for the shareholders. There is no assurance of any trading market developing. It should be noted that even though the Registrant is a public company its shares have not traded in the past few years. Management will attempt to use the Registrant as a "shell" vehicle to acquire an operating business. PART II. OTHER INFORMATION: Item 1. Legal Proceedings. See 9/30/89 Form 10-Q Re: "Barker et. al v. Power Securities Corp., at al". Item 2. Changes in Securities. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters To A Vote of Security Holders. None. Item 5. Other Materially Important Events. None. Item 6. Exhibits and Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. By: Arthur Seidenfeld President Dated: February 11, 1999