<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 31, 1998 Commission File Number 1-4338
EAC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York 21-0702336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22 Blackstone Avenue
Branford, CT 06405
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-315-8020
Securities registered pursuant to Section 12 (B) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10
par value (Title of Class)
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 Exchange Act of 1934 during
the preceding 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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Issuers revenues for the most recent fiscal year - $5,992,174.
The aggregate market value of voting stock held by non-affiliates of the
registrant as of April 30, 1998 was $545,105.
Indicate by check mark whether the registrant has filed all documents and
reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes X No___
As of April 30, 1998, the registrant had outstanding 2,311,687 shares of Common
Stock ($.10 par value).
<PAGE> 2
PART I
ITEM 1. BUSINESS
The Registrant (also referred to as "EAC" or "the Company") was organized in
1958 as a New York corporation. The common stock of the Company is currently
traded on the over-the-counter market and the principal market makers are Bishop
Rosen & Company and Troster, Singer Corporation.
The Company has three operating subsidiaries, Goodren Products Corporation
("Goodren"), Athena Packaging, Inc. ("Athena") and Flexible Printed Products,
Inc. ("Flexible"). Goodren designs and provides point-of-purchase advertising
displays and wall decorations on semi-durable plastic. Goodren's major market is
consumer product manufacturers and one marketer of children's wall decorations.
Goodren's sales were backlogged at approximately $175,000 and $218,000 at
January 31, 1998 and 1997, respectively.
On January 8, 1998, EAC announced the restructuring of Goodren by ceasing
operations related to the production and printing of its point of purchase
products and the establishing an outsourcing and distribution arrangement with
another full line producer of such materials. Over 60% of Goodren's sales in the
current year, primarily wall decorations, have already been outsourced for the
last several years.
The business and all of the outstanding common shares of Athena were acquired on
September 27, 1996. Athena produces printed, laminated, embossed and hot stamped
labels, wraps, seals and decals for the cosmetics, pharmaceutical and health and
beauty aids industries. Athena's production equipment and administrative
operations were moved to Goodren's facility in Englewood, New Jersey in January
1997. Athena's sales were backlogged at approximately $70,000 and $65,000 at
January 31, 1998 and 1997, respectively. Athena believes that it can fulfil the
1998 backlog on a timely basis.
Goodren and Athena both face strong competition in their respective businesses,
based mainly on quality, service and price. Goodren and Athena combined, employ
30 persons of whom 12 are represented by unions.
The business and certain of the assets of Flexible were acquired on December 11,
1994. Flexible produces and prints on plastic, pre-cure in-mold heat transfer
labels for the identification and decoration of rubber and silicone hoses, belts
and tire patches. Flexible's sales were backlogged at approximately $75,000 at
January 31, 1998 and $80,000 at January 31, 1997. Flexible believes that it can
fulfill its 1998 backlog on a timely basis.
Flexible also faces strong competition in its business and its competition has
been mainly on the basis of quality, service and price. Flexible employs 14
persons, none of whom are represented by unions.
- 2 -
<PAGE> 3
FINANCIAL CONDITION OF THE COMPANY
The following is a discussion concerning the Company, Goodren, Athena and
Flexible.
The Company's financial condition has declined from January 31, 1997. The
primary reasons for this decline were: (a) the Company's operating loss for the
1998 fiscal year, (b) the restructuring of Goodren including the elimination of
goodwill related to Goodren and (c) the write-off of the deferred tax asset
established in fiscal 1996. The combination of the above factors has resulted in
the Company's working capital declining to $465,587 in 1998 from $581,412 in
1997. Current assets decreased to $1,561,112 in 1998 from $1,636,936 in 1997
while current liabilities increased to $1,095,525 in 1998 from $1,055,524 in
1997. Also due to the above factors, shareholder's equity decreased to $818,132
in 1998 from $1,818,627 in 1997. The Company's secured debt obligations are
lower in 1998 that 1997, having decreased to $118,372 in 1998 from $290,966 in
1997.
The Company's and Goodren's credit line and Note Agreement with Chemical Bank of
New Jersey, N.A., which was originally entered into on September 29, 1994,
expired February 1998. The Company is currently negotiating a new borrowing
facility.
POINT-OF-PURCHASE ADVERTISING
Goodren designs and markets point-of-purchase advertising and sales aids such as
signs, posters, decals and product identifiers. These products are used in
retail stores on shelves, price channels, floor graphics and display cases.
Other products include wall decorations. Goodren's products are produced for
them by several outside suppliers and are printed on semi-durable plastic
through processes known as flexographic, lithographic and silk screen printing.
Goodren's products are sold nationwide to manufacturers of consumer products by
both an in-house sales force as well as regional, independent manufacturers'
representatives. Goodren is a service business which competes on the basis of
its ability to supply quality printing on very short notice. The following table
summarizes the percentage of sales attributable to major classes of products:
<TABLE>
<CAPTION>
For the Fiscal Years
ended January 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Point-of-Purchase 41% 45%
Wall coverings 59% 55%
--- ---
100% 100%
=== ===
</TABLE>
- 3 -
<PAGE> 4
Management estimates that Goodren has a 5% share in its portion of the printed
on plastic point-of-purchase ("P.O.P.") advertising industry. Overall, the
P.O.P. industry is a $16 billion business with over 200 manufacturing companies
involved. Products for the entire industry range from a wide variety of counter
displays and large end-of-aisle displays to small printed products produced by
Goodren. The total printed-on-plastic portion of the industry in which Goodren
competes, represents approximately $40 million. The Company estimates that
approximately ten companies compete directly with Goodren.
PRESSURE SENSITIVE LABELS, WRAPS, SEALS AND DECALS
Athena produces and markets primarily pressure sensitive labels for the premium
cosmetics, pharmaceutical, health and beauty aids industries. Other products
include non-pressure sensitive labels, soap wraps, decals and seals. Athena's
products are sold primarily in the Northeast by manufacturer's representatives
as well as in-house sales personnel.
IN-MOLD HEAT TRANSFER LABELS
Flexible produces and markets in-mold, pre-cure heat transfer labels to the
rubber and silicone industry primarily for identification and decoration of
hoses and belts. Other products include post cure heat transfer labels for
rubber patches, tires and other rubber and silicone products.
Flexible's products are sold nationwide primarily to rubber and silicone hose
and belt manufacturers, principally by its in-house sales personnel. The
remainder is sold by a limited number of manufacturers' representatives.
Management believes that the total in-mold decal/label market for decorating
rubber hoses and belts is approximately $9 million with Flexible's share
estimated at approximately 19%. The Company estimates that approximately five
companies compete directly with Flexible, including the parent company of one of
its customers. Flexible is a service business which competes on the basis of its
ability to produce and deliver high quality printing on short notice.
- 4 -
<PAGE> 5
ITEM 2. PROPERTIES
The following table shows the location of each plant or facility of the
Registrant and its subsidiaries and sets forth related information. The
properties listed below are believed adequate to serve the Company's needs for
the foreseeable future.
<TABLE>
<CAPTION>
Approx. Lease
Area Expiration Annual
(Sq. Ft.) Date Rental Principal Use
--------- ---- ------ -------------
<S> <C> <C> <C> <C>
101 W. Forest Avenue
Englewood, New Jersey 20,000 6/2000 $57,000 Manufacturing and general offices
for Goodren and Athena
1600 North Orangethorp Avenue
Anaheim, California 7,500 3/2001 $41,600 Manufacturing and general office for
Flexible
2911 East Miraloma Avenue, #20
Anaheim, California 500 Month to $6,000 Ink manufacturing and screen
Month supplies for Flexible
22 Blackstone Avenue
Branford, Connecticut 500 Month to $6,000 Office space and headquarters
Month for the Company
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Goodren is included in a threatened claim concerning environmental cleanup
costs. Goodren is included among a large number of companies involved, and is
not one of the major parties. Goodren previously settled the Federal claims
related to such cleanup costs and is in the process of settling the State of New
Jersey claims related thereto. The amount, if any, that Goodren may ultimately
have to pay, is subject to change and is uncertain at this time. It is
management's opinion that the Company is adequately reserved for this matter and
the ultimate resolution of this case should not have a material impact on the
financial condition of the Company.
For additional information regarding contingencies and/or litigation see Note
12c of notes to consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
- 5 -
<PAGE> 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's stock is traded on the over-the-counter market. Bishop Rosen &
Company (212-602-0681) and Troster, Singer Corporation are the principal market
makers. As of April 15, 1998, the Company believes there were approximately
1,650 shareholders of record. The Company's line of credit agreement (which is
presently being renegotiated) with Chemical Bank prohibits it from paying
dividends without the lender's consent. No dividends have been declared or paid
during the past two fiscal years. The following table sets forth, by fiscal
quarters, the closing bid prices of the Registrant's Common Stock per share for
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------------------------- -----------------------------------
<S> <C> <C> <C>
First Quarter $ 3/8 First Quarter $ 3/6
Second Quarter 1/4 Second Quarter 3/8
Third Quarter 3/16 Third Quarter 3/16
Fourth Quarter 3/16 Fourth Quarter 3/16
</TABLE>
The volume of trading is sporadic and infrequent and the prices quoted may not
be representative.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
In fiscal 1998, the Company had a net loss of $1,000,495 ($.43 per share) as
compared to a net loss of $161,270 ($.07 per share) in fiscal 1997.
The loss for fiscal 1998 was due to lower sales and gross profit margins at
Goodren and the costs associated with the write offs of Goodren's goodwill and
deferred tax asset. EAC's selling, general and administrative costs declined
approximately 12% in 1998 compared to 1997.
On September 27, 1996, the Company acquired the business and all of the
outstanding shares of Athena Packaging, Inc., a manufacturer of labels, wraps,
seals, and decals for premium cosmetics, pharmaceutical and health and beauty
aids manufacturers. Athena's operations are included in the consolidated
operations of the Company from the date of acquisition.
- 6 -
<PAGE> 7
NET SALES
1998 TO 1997
Goodren's sales for 1998 declined 16% from 1997, due to lower sales of both the
point of purchase and wall covering segments of its business. Flexible's sales
increased by 13% compared to last year. Athena's sales for fiscal 1998 were
$728,272. Sales for the period commencing October 1, 1996 (when Athena was
acquired) through January 31, 1997 were $238,338.
EARNINGS FROM CONSOLIDATED CONTINUING OPERATIONS
1998 TO 1997
The decrease in the Company's loss from operations from $459,296 in 1997 to
$312,194 in 1998 was primarily attributable to the increased sales and profit
margins at both Flexible and Athena and the decline in EAC's selling, general
and administrative expenses, all of which exceeded the decline in Goodren's
operating income due to its lower sales and gross profit margins.
Goodren's gross profit margins decreased from 25% in 1997 to 10% in 1998.
Goodren's selling, general and administrative expenses decreased 27%,
representing 21% of sales in 1998 compared to 26% of sales in 1997.
Flexible's gross profit margins increased from 30% in 1997 to 35% in 1998.
Flexible's selling, general and administrative expenses decreased 27%,
representing 21% of sales in 1998 compared to 37% of sales in 1997. Gross profit
for Athena for fiscal 1998 was 46% as compared to 30% in fiscal 1997.
INFLATION
The Company expects inflation to be moderate and to be offset by cost reduction
programs and price increases.
INTEREST AND OTHER
The Company's interest expense increased in 1998 over 1997 as a result of higher
average borrowings for the year. The Company's outstanding debt was $471,611 at
January 31, 1998 compared to $664,504 at January 31, 1997.
PROVISION (BENEFIT) FOR INCOME TAXES
The 1998 and 1997 federal income tax provisions are offset in their entirety by
net operating loss carryforwards from prior years. The Company has a loss
carryforward of approximately $7,500,000 at January 31, 1998 which is available
to offset future operating earnings. These carryforward losses will expire in
years after 2005. At January 31, 1998 the Company wrote off its deferred tax
asset of $510,000 since there was no assurance it would be realized.
- 7 -
<PAGE> 8
FINANCIAL RESOURCES AND LIQUIDITY
The Company's financial condition declined in 1998 from 1997. The Company had
working capital of $465,587 as of January 31, 1998 compared to $581,412 as of
January 31, 1997. The Company and its subsidiaries, Goodren, Athena and Flexible
are current on all of their accounts payable and accrued expenses.
In March 1996, the Company entered into an agreement to make quarterly payments
of $7,548 against a union pension withdrawal liability/shortfall (see Note 12d
of Notes to the Consolidated Financial Statements). Subsequently, on September
30, 1996, the Company and Goodren entered into a Settlement Agreement with the
Trustees of the union pension plan whereby Goodren's pension fund liability was
reduced from $560,000 to $360,000 payable in 80 equal quarterly payments of
$8,752 including annual interest at a rate of 8%. The Company applied for a
hardship case pursuant to the Settlement Agreement, whereby the Company would
reduce its quarterly obligations to $3,000 until such time as the Company is out
of hardship. The hardship application and settlement was approved in December
1997.
The Company believes that its cash on hand will be sufficient to fund planned
operations for at least the next 12 month period. The Company (primarily
Flexible) is anticipating capital expenditures of approximately $50,000, during
the next year. Management believes that these expenditures can be funded from
existing resources.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENT
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Independent Auditors' Report F - 1
Consolidated Balance Sheets F - 2
Consolidated Statements of Operations F - 3
Consolidated Statement of Changes in Shareholders' Equity F - 4
Consolidated Statements of Cash Flows F - 5
Notes to the Consolidated Financial Statements F - 6
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None
- 8 -
<PAGE> 9
PART III
ITEMS 9, 10, 11 AND 12, DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The response to these items will be included in a definitive proxy statement
filed within 120 days after the end of the Registrant's fiscal year, which proxy
statement is incorporated herein by reference.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS
ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Consolidated Financial Statements of the Registrant
(Included in Part II, Item 7)
2. EXHIBITS
(22) Subsidiaries of the Registrant
Goodren Products Corporation
Flexible Printed Products, Inc.
Athena Packaging, Inc.
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
- 9 -
<PAGE> 10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EAC INDUSTRIES, INC.
(REGISTRANT)
By: /s/Peter B. Fritzsche
-------------------------------
Peter B. Fritzsche
President, Chief Executive
Officer and Principal Financial
and Accounting Officer
Date: May 11, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Peter B. Fritzsche May 11, 1998
- ---------------------------------
Peter B. Fritzsche, Director
/s/ P. Bartley Fritzsche May 11, 1998
- ---------------------------------
P. Bartley Fritzsche, Director
/s/ John B. Millet, Jr May 11, 1998
- ---------------------------------
John B. Millet, Jr., Director
/s/ E. Donald McKenzie, Jr. May 11, 1998
- ---------------------------------
E. Donald McKenzie, Jr., Director
- 10 -
<PAGE> 11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
EAC Industries, Inc.
Branford, Connecticut
We have audited the accompanying consolidated balance sheets of EAC Industries,
Inc. and subsidiaries as of January 31, 1998 and 1997 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the two year period ended January 31, 1998. 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 the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EAC Industries, Inc.
and subsidiaries as of January 31, 1998 and 1997 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
LAZAR LEVINE & FELIX LLP
New York, New York
April 23, 1998
F - 1
<PAGE> 12
EAC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 1998 AND 1997
- ASSETS (NOTE 6) -
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash (Notes 2d and 2h) $ 450,031 $ 619,412
Accounts receivable - net of allowance for doubtful accounts of $55,000
and $45,566 for 1998 and 1997, respectively (Note 2d) 775,748 666,379
Inventories (Notes 2e and 4) 293,089 300,238
Prepaid taxes and expenses 42,244 50,907
------------ ------------
TOTAL CURRENT ASSETS 1,561,112 1,636,936
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET (NOTES 2F, 5 AND 8) 472,291 710,166
------------ ------------
OTHER ASSETS:
Costs in excess of net assets acquired (Notes 2g and 3) 269,269 453,601
Deferred taxes (Notes 2i and 9) -- 510,000
Other assets (Note 2h) 4,182 4,182
------------ ------------
273,451 967,783
------------ ------------
$ 2,306,854 $ 3,314,885
============ ============
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable $ 434,383 $ 247,152
Accrued expenses (Note 7) 580,528 579,441
Capital lease obligations - current portion (Note 8b) 30,500 34,589
Long-term liabilities - current portion (Note 8a) 8,914 14,181
Acquisition note payable (Note 3) 39,000 175,000
Income taxes payable (Notes 2i and 9) 2,200 5,161
------------ ------------
TOTAL CURRENT LIABILITIES 1,095,525 1,055,524
------------ ------------
LONG-TERM DEBT - NET OF CURRENT PORTION (NOTE 8):
Capital lease obligations 48,872 81,377
Other liabilities 344,325 359,357
------------ ------------
393,197 440,734
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 10, 11 AND 12)
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value; 20,000,000 shares authorized;
2,319,285 shares issued 231,929 231,929
Capital in excess of par value 10,504,380 10,504,380
Accumulated deficit (9,867,577) (8,867,082)
------------ ------------
868,732 1,869,227
Less: Common stock in treasury, 7,598 shares at cost (50,600) (50,600)
------------ ------------
818,132 1,818,627
------------ ------------
$ 2,306,854 $ 3,314,885
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 2
<PAGE> 13
EAC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------
1998 1997
----------- -----------
<S> <C> <C>
NET SALES (NOTE 11) $ 5,992,174 $ 5,988,315
----------- -----------
COSTS AND EXPENSES:
Cost of products sold 4,495,241 4,392,978
Selling, general and administrative expenses 1,809,127 2,054,633
----------- -----------
TOTAL COSTS AND EXPENSES 6,304,368 6,447,611
----------- -----------
(LOSS) FROM OPERATIONS (312,194) (459,296)
----------- -----------
OTHER INCOME (EXPENSE):
Goodwill impairment charge (Note 2g) (147,000) --
Interest expense (40,364) (22,176)
Gain on sale of fixed assets 19,745 242,000
Interest and other income 4,688 99,072
----------- -----------
(162,931) 318,896
(LOSS) BEFORE PROVISION FOR INCOME TAXES (475,125) (140,400)
Provision for income taxes (Notes 2i and 9) 525,370 20,870
----------- -----------
NET (LOSS) $(1,000,495) $ (161,270)
=========== ===========
BASIC LOSS PER SHARE (NOTE 2J) $ (.43) $ (.07)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,311,687 2,311,687
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 3
<PAGE> 14
EAC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in Common Total
Number of Common Excess Accumulated Stock in Shareholders'
Shares Stock of Par Deficit Treasury Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996 2,319,285 $ 231,929 $10,504,380 $(8,705,812) $ (50,600) $ 1,979,897
Net loss for the year -- -- -- (161,270) -- (161,270)
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 31, 1997 2,319,285 231,929 10,504,380 (8,867,082) (50,600) 1,818,627
Net loss for the year -- -- -- (1,000,495) -- (1,000,495)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
JANUARY 31, 1998 2,319,285 $ 231,929 $10,504,380 $(9,867,577) $ (50,600) $ 818,132
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 4
<PAGE> 15
EAC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------
1998 1997
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,000,495) $ (161,270)
Adjustments to reconcile net (loss) to cash (utilized) by operating activities:
Depreciation and amortization 180,006 141,035
Allowance for doubtful accounts 9,470 75,000
Amortization of deferred rental income -- (75,268)
Gain on sale of fixed assets (19,745) (242,000)
Goodwill impairment charge 147,000 --
Deferred income taxes 510,000 --
Changes in assets and liabilities:
(Increase) decrease in accounts and notes receivable (114,369) 461,728
Decrease in inventories 7,149 105,166
Decrease in prepaid expenses 8,663 116,880
Increase (decrease) in accounts payable, accrued expenses and accrued
income taxes 199,945 (442,961)
----------- -----------
NET CASH (UTILIZED) BY OPERATING ACTIVITIES (72,376) (21,690)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 113,249 242,000
Capital expenditures (2,773) (48,598)
Investment in new subsidiary -- (175,000)
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 110,476 18,402
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term debt (29,604) --
Payments of capital lease obligations (36,594) (25,870)
Payments of long-term debt (141,283) (4,810)
----------- -----------
NET CASH (USED BY) FINANCING ACTIVITIES (207,481) (30,680)
----------- -----------
(DECREASE) IN CASH AND CASH EQUIVALENTS (169,381) (33,968)
Cash and cash equivalents, at beginning of year 619,412 653,380
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 450,031 $ 619,412
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 40,364 $ 17,906
Income taxes paid 15,170 6,260
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 5
<PAGE> 16
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 1 - DESCRIPTION OF THE COMPANY:
EAC Industries, Inc., the Company, was organized in 1958 as a
New York corporation. The Company is a holding company with
three wholly-owned operating subsidiaries, Goodren Products
Corporation ("Goodren"), Flexible Printed Products, Inc.
("Flexible") and Athena Packaging, Inc. ("Athena"), see Note 3.
Goodren designs and produces point-of-purchase advertising
displays and wall decorations on semi-durable plastic.
Goodren's major market is consumer product manufacturers and
one marketer of children's wall decorations. Flexible produces
and prints on plastic, pre-cure in-mold heat transfer labels
for the identification and decoration of rubber and silicone
hoses, belts and tire patches. Athena produces printed
laminated, embossed and hot stamped labels, wraps, seals and
decals for the cosmetics, pharmaceutical and health and beauty
aids industries. Each of these subsidiaries sells their
products to customers throughout the United States.
In December 1997, the Company decided to cease Goodren's
production operations and establish an outsourcing arrangement
with another manufacturer. Goodren still continues to market
and distribute these products (see also Note 2g).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles. Outlined below are
those policies considered particularly significant.
(a) USE OF ESTIMATES:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results
could differ from those estimates, management does not expect
such variances, if any, to have a material effect on the
financial statements.
(b) BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of
the Company and its operating subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation.
(c) STATEMENTS OF CASH FLOWS:
For purposes of the statements of cash flows, the Company
considers all investments purchased with a remaining maturity
of three months or less to be a cash equivalent.
F - 6
<PAGE> 17
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) CONCENTRATION OF CREDIT RISK/ FAIR VALUE:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash
investments and accounts receivable.
The Company and its subsidiaries maintain, at times, deposits,
in federally insured financial institutions, in excess of
federally insured limits. Management attempts to monitor the
soundness of these financial institutions and feels the
Company's risk is negligible.
Concentrations of credit risk with respect to accounts
receivable are limited.
The carrying value of cash and cash equivalents, accounts
receivable and accounts payable reasonably approximate fair
value because of the short maturity of those instruments.
(e) INVENTORIES:
Inventories are stated at the lower of cost or market,
determined on a first-in, first-out basis.
(f) PROPERTY, PLANT AND EQUIPMENT:
Fixed assets are reflected at cost. The Company principally uses
the straight-line method to compute depreciation of fixed
assets. Depreciation lives generally range from three to ten
years for furniture and fixtures, machinery and equipment and
transportation equipment. Buildings are being amortized over 20
years and leasehold improvements are amortized over the useful
life of the asset or the term of the lease, whichever is
shorter. Major renewals and betterments of fixed assets are
capitalized while maintenance and repairs are expensed as
incurred. Upon retirement of fixed assets, the related cost and
accumulated depreciation are written off and any gain or loss is
reflected in income.
(g) GOODWILL:
Costs in excess of net assets acquired are considered goodwill
and are being amortized over periods ranging from 15 to 40 years
on a straight line basis. Amortization costs were $37,332 and
$24,208 for the years ended January 31, 1998 and 1997,
respectively. Accumulated amortization as of January 31, 1998
and 1997 aggregated $294,582 and $257,250, respectively.
The Company periodically reviews the valuation and amortization
of goodwill to determine possible impairment by comparing the
carrying value to the undiscounted future cash flows of the
related assets in accordance with Statement of Financial
Accounting Standard No. 121 Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of.
F - 7
<PAGE> 18
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) GOODWILL (CONTINUED):
During the current year the Company recorded a goodwill
writedown of $147,000, thereby eliminating all remaining
goodwill of Goodren. The asset of goodwill was determined to be
impaired because of the cessation of production operations at
Goodren (see Note 1). Anticipated future cash flows of Goodren,
from its marketing and distribution efforts, is uncertain,
indicating that the recoverability of the asset is not
reasonably assured.
(h) RECLASSIFICATIONS:
Certain reclassifications have been made to the 1997 financial
statements in order to conform to the 1998 presentation.
(i) INCOME TAXES:
The Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS No. 109")
effective February 1, 1993. The standards of SFAS No. 109
require that the Company utilize an asset and liability approach
for financial accounting and reporting for income taxes. The
primary objectives of accounting for income taxes under SFAS No.
109 are to (a) recognize the amount of tax payable for the
current year and (b) recognize the amount of deferred tax
liability or asset based on management's assessment of the tax
consequences of events that have been reflected in the Company's
financial statements or tax returns. See also Note 9.
(j) INCOME PER SHARE:
The Company has adopted SFAS 128 "Earnings Per Share" ("SFAS
128"), which has changed the method of calculating earnings per
share. SFAS 128 requires the presentation of "basic" and
"diluted" earnings per share on the face of the income
statement. Basic loss per common share is computed by dividing
net loss by the weighted average number of common shares
outstanding during each period.
(k) NEW ACCOUNTING PRONOUNCEMENTS:
SFAS 130 "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997 and early adoption is
permitted. This statement prescribes standards for reporting
comprehensive income and its components. The Company will adopt
these standards effective for the year ending January 31, 1999.
SFAS 131 "Disclosures About Segments of an Enterprise and
Related Information" is effective for years beginning after
December 15, 1997 and early adoption is encouraged. The Company
does not presently believe that it operates in more than one
identifiable segment.
See also Earnings (Loss) Per Share.
F - 8
<PAGE> 19
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(l) IMPACT OF THE YEAR 2000 ISSUE:
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could potentially
result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or
engage in other similar normal business activities. The Company
has ensured that its software is already year 2000 compliant,
and as such this issue is not expected to have a material effect
on the operations of the Company.
NOTE 3 - ACQUISITION:
On September 27, 1996, the Company purchased all of the
outstanding capital stock of Athena Packaging, Inc. ("Athena"),
for $350,000. The acquisition agreement required that 50% of the
purchase price be paid at closing and the balance paid on March
1, 1997. As of January 31, 1998, the Company still owned $39,000
to the sellers. The acquisition was accounted for as a purchase,
accordingly, the acquired assets and liabilities assumed through
this purchase have been recorded at their estimated fair market
values at the date of acquisition. The cost of the acquisition
exceeded the fair market value of the assets acquired by
$124,050, which amount was assigned to goodwill and is being
amortized on a straight-line basis over 15 years (see Note 2g).
The Company's consolidated statements of operations include the
revenues and expenses of Athena beginning September 27, 1996,
the date of acquisition. The following pro forma results were
developed assuming the acquisition had occurred at the beginning
of the earliest period presented (February 1, 1996).
<TABLE>
<CAPTION>
1997
----
(Unaudited)
<S> <C>
Net sales $6,541,000
Net (loss) earnings $(135,000)
(Loss) earnings per share $(.06)
</TABLE>
NOTE 4 - INVENTORIES:
Inventories at January 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Raw materials $248,393 $234,768
Work in process 5,000 5,000
Finished goods 39,696 60,470
-------- --------
$293,089 $300,238
======== ========
</TABLE>
F - 9
<PAGE> 20
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
Fixed assets and accumulated depreciation at January 31, 1998
and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Building and improvements $ 203,529 $ 343,874
Machinery and equipment 1,095,943 1,093,170
Label artwork 150,000 150,000
Transportation equipment 22,275 22,275
Furniture and fixtures 65,977 65,977
---------- ----------
1,537,724 1,675,296
Less: accumulated depreciation and amortization 1,065,433 1,002,630
---------- ----------
472,291 672,666
Add: Land -- 37,500
---------- ----------
$ 472,291 $ 710,166
========== ==========
</TABLE>
For the years ended January 31, 1998 and 1997, depreciation expense aggregated
$147,144 and $116,827, respectively.
NOTE 6 - SHORT-TERM DEBT:
In May 1997, Goodren entered into a loan agreement with its bank
for a line of credit in the aggregate amount of $500,000 through
March 31, 1998. Interest is payable at an annual rate of 2% in
excess of the bank's prime lending rate. Borrowings are
collateralized by all assets of Goodren and are guaranteed by
the Company and its other subsidiaries. This line of credit
replaced a previous facility which expired in January 1997. As
of January 31, 1998 there were no outstanding borrowings under
this new facility.
NOTE 7 - ACCRUED EXPENSES:
At January 31, 1998 and 1997 accrued expenses consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Salaries and wages $ 39,978 $ 47,649
Employee benefits 216,591 282,558
Other 323,959 249,234
-------- --------
$580,528 $579,441
======== ========
</TABLE>
F - 10
<PAGE> 21
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 8 - LONG-TERM DEBT:
(a) OTHER LIABILITIES:
At January 31, 1998 and 1997 long-term liabilities included the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
9% equipment note payable in monthly installments of
$427, inclusive of interest $ -- $ 5,283
Union pension withdrawal liability/shortfall, presently
payable in quarterly installments of $3,000 (including
interest at 8% per annum (see Note 12d) 353,239 368,255
-------- --------
353,239 373,538
Less: current portion 8,914 14,181
-------- --------
$344,325 $359,357
======== ========
</TABLE>
Aggregate maturities of long-term liabilities for the next five
and in the aggregate are $8,914, $9,603, $10,346, $11,146,
$12,007 and $301,223 thereafter.
(b) CAPITAL LEASE OBLIGATIONS:
The Company and its subsidiaries are the lessees of machinery
and equipment under leases expiring at various dates through
July 2001. The assets and liabilities are recorded at the lower
of the present value of the minimum lease payments or the fair
market value of the assets. The assets are depreciated over
their estimated useful lives. Depreciation of assets under
capital leases included in depreciation expense for the years
ended January 31, 1998 and 1997, aggregated $8,880 and $4,440,
respectively.
Minimum future lease payments under capital leases as of January
31, 1998 and for each of the next five years are as follows:
<TABLE>
<S> <C> <C>
1999 $ 40,978
2000 33,228
2001 17,448
2002 8,724
---------
Total minimum lease payments 100,378
Less: amount representing interest 21,006
---------
$ 79,372
=========
</TABLE>
F - 11
<PAGE> 22
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 9 - INCOME TAXES:
The provision for income taxes consisted of the following for the years ended
January 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current:
Federal $ -- $ --
State and local 15,370 20,870
---------- ----------
15,370 20,870
Deferred:
Federal, state and local 510,000 --
---------- ----------
PROVISION FOR INCOME TAXES $ 525,370 $ 20,870
========== ==========
</TABLE>
The components of the net deferred income tax asset, pursuant
to SFAS 109, as of January 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 3,700 $ 5,400
Inventory 2,800 1,800
Operating loss carryforward 3,000,000 2,040,000
---------- ----------
Total deferred tax asset 3,006,500 2,047,200
Valuation allowance 3,006,500 1,537,200
---------- ----------
NET DEFERRED INCOME TAX ASSET $ -- $ 510,000
========== ==========
</TABLE>
The Company has available operating loss carryforwards for
federal tax purposes of approximately $8,000,000. These losses
expire in various years beginning in 2005 and may result in
deferred tax assets. The Company had previously recorded a
deferred tax asset based on the assumed recoverability of the
net operating loss carryforward. Since the Company realized a
significant net operating loss for the current year, this
deferred tax asset has been reversed. The Company has provided
a 100% valuation allowance against its deferred tax asset since
it is not more likely than not that such asset will be realized
in the near future. This allowance will be evaluated at the end
of each year, considering both positive and negative evidence
concerning the realizability of the asset, and will be
increased or reduced accordingly.
Reconciliation of the statutory Federal income tax rate to the
Company's negative effective tax rate for the years ended
January 31, 1998 and 1997 is not meaningful and therefore not
provided due to the reversal of the deferred tax asset.
F - 12
<PAGE> 23
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 10 - RETIREMENT PLANS:
Goodren has a defined contribution profit sharing plan covering
substantially all of its employees. Contributions are based on
a percentage of each participant's compensation or a fixed
annual contribution for union employees based on a collective
bargaining agreement. The cost of the plan approximated $35,000
in 1998 and 1997. See also Note 12d.
NOTE 11 - ECONOMIC DEPENDENCY:
One of the Company's customers accounted for approximately 39%
of net sales for each of the years ended January 31, 1998 and
1997.
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
(a) OPERATING LEASES:
The Company and its subsidiaries lease certain administrative
and manufacturing facilities and equipment under operating
leases expiring at various times through 2002. Other locations
are rented on a month to month basis. Rental and lease expense
aggregated approximately $102,000 and $136,000 for the years
ended January 31, 1998 and 1997, respectively.
Future minimum rental commitments for existing operating
leases and in the aggregate are as follows:
<TABLE>
<S> <C>
Fiscal year ending January 31, 1999 - $103,762
2000 - 108,325
2001 - 71,075
2002 - 3,639
--------
$286,801
========
</TABLE>
(b) EMPLOYMENT CONTRACTS:
The Company has an employment contract (the "Contract") with the
President of Goodren which originally expired on January 31,
1994 and is subject to automatic renewals for successive one
year terms. The contract specifies base compensation of $155,000
for the initial term and is subject to annual increases based on
changes in the consumer price index. The contract also provides
for additional compensation equal to 5% of the operating income
of Goodren provided such operating income exceeds $650,000 for
the fiscal year. In December 1994, Goodren entered into a
further agreement with this executive whereby the proceeds of a
newly purchased term life insurance policy in the amount of
$250,000 will be paid to the spouse upon the death of this
executive.
F - 13
<PAGE> 24
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
(b) EMPLOYMENT CONTRACTS (CONTINUED):
Flexible entered into an employment contract with its President
for a three year period ending December 15, 1997, which is
subject to renewals for successive one year terms. The base
compensation under this contract is $75,000 with adjustments to
be made annually based on changes in the consumer price index.
The contract also provides for additional compensation based on
annual sales revenue and/or gross profit performance of
Flexible. The contract also encompasses non-compete provisions,
availability of medical benefits and the use of an automobile.
(c) LITIGATION:
Goodren is included in a threatened claim concerning
environmental cleanup costs. Goodren is included among a large
number of companies involved, and is not one of the major
parties. The amount, if any, that Goodren may ultimately have to
pay, is not considered material, is subject to change and is
uncertain at this time. It is management's opinion that the
Company is adequately reserved for this matter and the ultimate
resolution of this case should not have a material impact on the
financial condition of the Company.
(d) OTHER:
Goodren has withdrawn from participating in the District 65
Union Pension Plan (the "Plan"), see Note 10. The withdrawal has
resulted in the assessment of a withdrawal liability owed to the
Plan by Goodren. During the year ended January 31, 1995, the
Company accrued a reserve for an estimated liability of $560,000
which counsel to the Company believed would be payable over a
period of approximately 22 years beginning approximately one
year from the withdrawal date. In March of 1996, the Company
signed an agreement with the Plan whereby they will make
quarterly payments of $7,548. At September 30, 1996, the Company
and Goodren entered into a Settlement Agreement with the
Trustees of the union pension plan whereby Goodren's pension
fund liability was reduced to $360,000 payable in 80 equal
quarterly payments of $8,752 including annual interest at a rate
of 8%. The Company applied for relief as a "hardship case"
pursuant to the Settlement Agreement, and received approval to
reduce its quarterly obligations to $3,000 until such time as
the Company is out of hardship. See also Note 8a.
F - 14
<PAGE> 25
EAC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
(e) In November 1997, the Company filed a statement with the
Securities and Exchange Commission to register 2,283,551
shares of its common stock to be issued upon exercise of the
rights to subscribe for such shares, "the Rights Offering".
Shareholders holding 100 shares of common stock or more at the
close of business on November 10, 1997 (the record date) will
receive one non-transferable Right for each share of common
stock held. Each Right entitles the holder to purchase one
share of Company common stock at an exercise price of $.22 per
share. This offering closed in February 1998, subsequent to
the balance sheet date. Simultaneously with the closing, the
Company effected (i) a 100 to 1 reverse split of its common
stock through a reclassification of its common stock and (ii)
an immediate subsequent reclassification with a forward stock
split pursuant to which each holder of the reclassified common
stock would receive 99 additional shares of reclassified
common stock. The effect of this was to eliminate all holders
of less than 100 shares (pre-reverse split) of common stock,
such stockholders receiving cash of $.28125 per share in lieu
of their fractional interests.
F - 15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from consolidated
financial statements for the year ended January 31, 1998 and is qualified in its
entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 450,031
<SECURITIES> 0
<RECEIVABLES> 830,748
<ALLOWANCES> 55,000
<INVENTORY> 293,089
<CURRENT-ASSETS> 1,561,112
<PP&E> 1,537,724
<DEPRECIATION> 1,065,433
<TOTAL-ASSETS> 2,306,854
<CURRENT-LIABILITIES> 1,095,525
<BONDS> 393,197
231,929
0
<COMMON> 0
<OTHER-SE> 586,203
<TOTAL-LIABILITY-AND-EQUITY> 2,306,854
<SALES> 5,992,174
<TOTAL-REVENUES> 5,992,174
<CGS> 4,495,241
<TOTAL-COSTS> 6,304,368
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,470
<INTEREST-EXPENSE> 40,364
<INCOME-PRETAX> (475,125)
<INCOME-TAX> 525,370
<INCOME-CONTINUING> (1,000,495)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,000,495)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
</TABLE>
