SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C., 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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COMMISSION FILE # 0-8027
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EASTCO INDUSTRIAL SAFETY CORP.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-1874010
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(State or other jurisdiction of (I.R.S.Employer I.D.#)
incorporation or organization)
130 West 10th Street, Huntington Station, N.Y. 11746
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(Address of principal executive offices and zip code)
(516) 427-1802
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at September 30, 1998
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Common Stock, par value 1,683,079
$.12 per share
INDEX
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Page
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Part I - Financial Information:
Consolidated Balance Sheets at September 30, 1998
and June 30, 1998.......................................1
Consolidated Statements of Operations and Deficit
for the three months ended September 30, 1998 and
September 30, 1997......................................3
Consolidated Statement of Cash Flows for the three
months ended September 30, 1998 and September 30, 1997..4
Notes to Consolidated Financial Statements..............5
Management's Discussion and Analysis of Financial
Condition and Consolidated Results of Operations........7
Part II - Other Information:
Legal Proceedings.......................................9
Exhibits and Reports on Form 8-K........................9
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PART I - FINANCIAL INFORMATION
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
1998 1998
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ASSETS(Unaudited)
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CURRENT ASSETS:
Cash and cash equivalents $ 58,395 $ 223,125
Accounts receivable - (less allowance
for doubtful accounts of $183,000
at September 30, 1998 and $185,000
at June 30, 1998) 5,804,763 6,191,916
Inventories - (note 2) 7,363,853 7,849,665
Other 570,458 692,595
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TOTAL CURRENT ASSETS 13,797,469 14,957,301
PROPERTY, PLANT AND EQUIPMENT, net 2,240,767 2,276,677
EXCESS OF COST OVER NET ASSETS ACQUIRED 420,529 426,229
OTHER ASSETS 15,427 24,794
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TOTAL ASSETS $16,474,192 $17,685,001
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See accompanying notes.
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EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
1998 1998
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(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES:
Loans Payable $ 8,027,254 $ 8,189,842
Current maturities of long-term debt 278,463 277,628
Accounts payable 3,790,612 4,384,580
Accrued expenses 294,532 395,860
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TOTAL CURRENT LIABILITIES 12,390,861 13,247,910
LONG-TERM DEBT, less current maturities 468,346 538,283
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TOTAL LIABILITIES 12,859,207 13,786,193
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SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred stock; $.01 par value;
authorized 1,000,000 shares;
no shares issued and outstanding
Common stock, $.12 par value authorized-
20,000,000 shares, issued 1,683,079
shares in September 1998 and June 1998 201,970 201,970
Additional paid-in capital 9,807,708 9,807,708
(Deficit) (6,394,693) (6,110,870)
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TOTAL SHAREHOLDERS' EQUITY 3,614,985 3,898,808
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,474,192 $17,685,001
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See accompanying notes.
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EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
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Three Months Ended September 30,
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1998 1997
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(Unaudited) (Unaudited)
Net Sales $8,000,263 $7,709,241
Cost of Sales 6,714,718 6,217,725
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Gross Profit 1,285,545 1,491,516
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Selling, general & administrative expenses 1,304,395 1,283,470
Interest expense, net 277,624 187,214
Other (Income), net (12,651) (16,583)
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Net (Loss) Income (283,823) 37,415
Opening (deficit) (6,110,870) (5,622,385)
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Closing (deficit) $(6,394,693) $(5,584,970)
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(Loss)/Income per common share
Basic $ (.17) $ .02
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Diluted $ (.17) $ .02
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Average number of shares used in
computing per share amounts:
Basic 1,683,079 1,683,079
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Diluted 1,683,079 1,716,479
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See accompanying notes.
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EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS
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Three Months Ended September 30
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1998 1997
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(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss)/Income $(283,823) $ 37,415
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Adjustment to reconcile results of operations
to net cash effect of operating activities:
Depreciation and amortization 70,010 60,410
Provision for loss on accounts receivable 18,600 -0-
Net changes in assets and liabilities:
Accounts receivable 368,553 (921,435)
Inventories 485,812 (703,002)
Other current assets 122,137 (69,832)
Other assets 9,367 12,353
Accounts payable (593,968) 143,807
Accrued expenses (101,328) 12,304
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Total Adjustments 379,183 (1,465,395)
Net cash provided by (used in) ------- -----------
operating activities 95,360 (1,427,980)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (28,400) (106,393)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (69,102) (68,155)
Borrowings under line of credit agreement 8,392,395 8,500,902
Repayments under line of credit agreement (8,554,983) (6,970,290)
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Net cash (used in)/provided by
financing activities (231,690) 1,462,457
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NET (DECREASE) IN CASH (164,730) (71,916)
CASH, beginning of period 223,125 112,258
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CASH, end of period $ 58,395 $ 40,342
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 277,958 $ 187,214
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Income taxes $ -0- $ 3,375
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See accompanying notes.
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EASTCO INDUSTRIAL SAFETY CORP.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. Company's Opinion on Unaudited Financial Statements
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In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
accruals) necessary to present fairly the consolidated balance sheets as of
September 30, 1998 and June 30, 1998 (audited) and the related statements
of operations and deficit for each of the three months in the periods ended
September 30, 1998 and 1997.
The results of operations for the three months ended September 30, 1998 and
1997 are not necessarily indicative of the results for the entire year.
The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial
statements prepared in conformity with generally accepted accounting
principles. Such disclosures were included with the consolidated financial
statements of the Company at June 30, 1998, included in its annual report
on Form 10-K. Such statements should be read in conjunction with the data
herein.
2. Inventories
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Inventories consist of the following:
September 30, June 30,
1998 1998
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Raw materials $1,309,416 $1,579,096
Work-in-process 487,919 802,011
Finished goods 5,566,518 5,468,558
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Total $7,363,853 $7,849,665
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3. Litigation
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The Company is a party to various asbestos lawsuits alleging damages from
exposure to asbestos products sold by the Company. Refer to Part II, Other
Information, Item I"Legal Proceedings" in this form 10-Q, and Note 11 to
the June 30, 1998 Audited Consolidated Financial Statements regarding the
asbestos litigation.
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4. Net Income Per Common Share
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In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", basic earnings per common share amounts were
computed by dividing net earnings by the weighted average number of common
shares outstanding, excluding any potential dilution. Diluted earnings per
common share amounts are computed by reflecting potential dilution from the
exercise of stock options. As there were no dilutive securities for the
quarter ended September 30, 1998, no reconciliation is presented herein.
The number of shares of common stock subject to stock options included in
diluted earnings per share were 33,400 for the quarter ended September 30,
1997.
5. Comprehensive Income
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In the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which requires companies to report all
changes in equity during a period, except those resulting from investment
by owners and distributions to owners, in a financial statement for the
period in which they are recognized. Comprehensive income is the total of
net income and all non-owner changes in equity (or other comprehensive
income) such as unrealized gains/ losses on securities available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive income must be reported on the face of the
annual financial statements or in the case of interim reporting, in the
footnotes to the financial statements. For the quarters ended September
30, 1998 and 1997, the Company's operations did not give rise to items
included in comprehensive income which were not already included in net
income. Therefore, the Company's comprehensive income is the same as its
net income for all periods presented.
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EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
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FINANCIAL CONDITION AND CONSOLIDATED RESULTS OF OPERATIONS
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Results of Operations
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Net sales for the three months ended September 30, 1998 were $8,000,000 as
compared to $7,709,000 for the three months ended September 30, 1997, an
increase of $291,000 or 3.8%. Sales in the manufacturing segment increased
7.4% to $5,668,000 from $5,278,000 for the same quarter last year, while
sales in the distribution segment decreased 4.1% to $2,332,000 compared to
$2,431,000 for the comparable quarter last year. The decreased sales in
the distribution segment for this quarter was due to lower than expected
sales to environmental customers that were partially offset by increased
sales to industrial customers.
The Company's overall gross margin decreased from 19.3% of sales for the
first quarter in the prior fiscal year to 16.1% for the first quarter in
fiscal 1999. The manufacturing division's gross margin dropped from 19.6%
to 15.8% as the competitive environment in the marketplace in the first
quarter reduced gross margins. The General Motors strike and the
unseasonably hot weather intensified the competition during the quarter.
In a continued effort to abate lower gross margin levels, the Company has
increased its production levels in Mexico at lower costs for products
previously produced in Puerto Rico and Alabama. The distribution division
also had a reduction in gross margins from 18.6% last year to 16.8% this
year due to the continued sales emphasis to industrial customers from
environmental customers.
Selling, general and administrative expenses for the quarter ended
September 30, 1998 were approximately $1,304,000 or 16.3% of sales compared
to approximately $1,283,000 or 16.6% for the same period last year. The
decrease in selling, general and administrative expenses as a percentage of
sales was due to the increase in sales volume experienced in the quarter
and the Company's continuing effort to reduce costs.
Interest expense was approximately $278,000 for the first quarter of fiscal
1999, an increase of approximately $90,000 when compared to the same
quarter of fiscal 1998, and was principally due to the increased average
borrowings from Congress Financial Corporation.
Late in the first quarter of fiscal 1999, Hurricane Georges struck the
Island of Puerto Rico, causing serious damage to the Island's
infrastructure. The Company's manufacturing facility in Aguadilla was
closed for approximately three weeks due to disruption of utility services;
however, only minimal damage was sustained by the facility. The facility
was at full production by mid-October. There was no significant impact on
the results of operations for this quarter.
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Liquidity and Capital Resources
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The Company had working capital as of September 30, 1998 of approximately
$1,407,000 as compared to approximately $1,709,000 as of June 30, 1998. A
substantial portion of the Company's working capital consists of inventory,
which was approximately $7,364,000 and $7,850,000 as of September 30, 1998
and June 30, 1998, respectively. The Company is required to maintain
substantial inventories of its numerous products in order to meet the
immediate shipping requirements of its customers who require products on
short notice. The Company believes that its current working capital position
will be sufficient to satisfy its needs for the current fiscal year.
The amounts outstanding under the Company's loan agreement with Congress
Financial Corporation at September 30 and June 30, 1998 were $8,027,000 and
$8,190,000, respectively. The Company had $48,000 available for borrowing at
September 30, 1998.
Net cash provided by operating activities was principally a result of a
decrease in inventory, accounts receivable and other current assets,
partially offset by a decrease in accounts payable and accrued expenses.
Cash flows used in investing activities was for the purchase of property,
plant and equipment. Cash flows used in financing activities were
principally from the Company's loan agreement with Congress Financial
Corporation.
At the present time, the Company, together with a variety of defendants, is
party to various asbestos-related lawsuits involving a number of plaintiffs
alleging damages from exposure to asbestos products sold by the Company. The
Company may become a party to additional asbestos-related actions in the
future. The Company is also party to other non-asbestos-related litigation.
The Company cannot, at this time, determine the outcome of this uncertainty.
To date, the Company's insurance coverage has been adequate and the Company's
costs relative to asbestos litigation against it has not been material.
Year 2000
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The Company does not believe, based upon its internal reviews and other
factors, that future external and internal costs to be incurred relating to
the modification of internal-use software for the Year 2000 will have a
material effect on the Company's results of operations or financial position.
Although the Company cannot control the efforts of the third parties with
which it interfaces, it does not currently anticipate that there will be any
significant disruption of the Company's ability to transact business.
Risks and Other Considerations
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Reference is made to "Risks and Other Considerations" set forth in Item 7,
Management's Discussion and Analysis in the Company's Form 10-K for the
year ended June 30, 1998, which is incorporated herein by reference thereto.
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PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
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During the quarter ended September 30, 1998, there were 599 asbestos actions
involving 1,069 plaintiffs instituted against the Company and Puerto Rico
Safety Equipment Corporation. All of these actions have been brought by one
firm of attorneys. The actions are all pending in the Supreme Court of the
State of New York within the City of New York and involve a multitude of
defendants and are either actions, pursuant to standard complaints, for
personal injury, or wrongful death setting forth a number of causes of action
each in the amount of $10,000,000 for compensatory damages and $10,000,000
for punitive damages. One additional asbestos action involving 1 plaintiff
and a multitude of defendants was instituted against the Company in the State
of New Jersey, Law Division, Middlesex County. All of the foregoing actions
have been submitted to the Company's and Puerto Rico Safety Equipment
Corporation's insurance carriers for defense. A schedule of these cases is
annexed hereto as Exhibit 99.05.01.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
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Exhibits
99.05.01 Schedule of asbestos actions filed against the Company
and Puerto Rico Safety Equipment Corporation during the quarter ended
September 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1998
EASTCO INDUSTRIAL SAFETY CORP.
By: /S/Lawrence Densen
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LAWRENCE DENSEN
PRESIDENT
CHIEF EXECUTIVE OFFICER
By: /S/Arthur J. Wasserspring
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ARTHUR J. WASSERSPRING
VICE PRESIDENT OF FINANCE/
CHIEF FINANCIAL OFFICER