SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File No. 0-8027
EASTCO INDUSTRIAL SAFETY CORP.
(Name of small business issuer in its charter)
NEW YORK 5098 11-1874010
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification
incorporation or Code Number) Number)
organization)
130 West 10th Street, Huntington Station, New York 11746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 427-1802
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Class on Which Registered
- -------------- -------------------
a) $.12 par value common stock ("Common Stock") Boston Stock Exchange
b) Class B Redeemable common stock purchase Boston Stock Exchange
warrant ("Class B Warrant")
Securities registered pursuant to Section 12 (g) of the Act:
a) $.12 par value common stock ("Common Stock")
b) Class A Redeemable Common Stock Purchase Warrant ("Class A Warrant")
c) Class B Redeemable Common Stock Purchase Warrant ("Class B Warrant")
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act of 1934 during the past twelve (12)
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to the filing requirements for the past
ninety (90) days.
YES [X] NO [_]
<PAGE>
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB: [X]
State registrant's revenues for its most recent fiscal year. $27,987,969
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 15, 1997 was approximately $3,825,054. Non-affiliates
include all shareholders other than officers, directors and 5% shareholders of
the Company. Market value is based upon the price of the Common Stock as of the
close of business on September 15, 1997 which was $2.4375 per share as reported
by NASDAQ.
As of September 15, 1997, the number of shares outstanding of the Common Stock
was 1,683,079 shares. The number of shares has been adjusted for prior stock
splits and estimated rounding for fractional shares.
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
(b) Business of Issuer.
Manufacturing Operations
(7) Puerto Rico Safety Equipment is engaged in manufacturing in Puerto Rico and
was granted an exemption for seventeen (17) years under the Puerto Rico
Industrial Tax Exemption Act of 1963 (the "Industrial Tax Act") with respect to
Puerto Rico income taxes on the production of such items as safety clothing,
protective sleeves, coats, pants, hoods and jackets for the period commencing
January 1, 1970. On July 1, 1989 Puerto Rico Safety Equipment was granted an
extension of its exemption and has a 90% exemption from Puerto Rico income taxes
for the ten-year period ending on June 30, 1999. During this period, Puerto Rico
Safety Equipment has a 75% exemption from Puerto Rico municipal taxes on its
real and personal property utilized in its operations.
Disposable has been granted a fifteen-year exemption under the Industrial
Tax Act with respect to Puerto Rico income taxes on its operations covering the
production of limited use clothing and with respect to the property used in its
operations for the period commencing June 4, 1977, subject to the terms of the
grant. This exemption has been extended until June 30, 2006 on the basis of a
90% exemption on Puerto Rico income taxes and a 60% exemption on municipal taxes
on its real and personal property.
As Puerto Rico tax exemptions are reduced or expire the Company may be
required to pay taxes on income earned in Puerto Rico. The Company is unable to
predict the amount of such impact after such exemptions are reduced or expire.
Puerto Rico Safety Equipment and Disposable have elected to apply Section
936 of the Internal Revenue Code, effective July 1, 1979. The provisions of
Section 936 are effective until revoked by the Company. If the conditions of
Section 936(a)(2) are satisfied, the Section 936 credit equals the portion of
the United States income tax that is attributable to taxable income from sources
outside the United States derived from the active conduct of a trade or business
within a United States possession, or the sale or exchange of substantially all
of the qualified possession source investment income. Dividends payable by each
subsidiary to the Company from operations are entitled to a 100% dividends
received deduction but are subject to a 10% withholding tax in Puerto Rico. The
Omnibus Budget Reconciliation Act of 1993 (the "Omnibus Act") imposes new
limitations on computing the Possession Tax Credit under Section 936 for tax
years beginning after 1993. The Company made an election in 1995 which reduced
the credit to 60% of the 1994 level and which further phases out the credit by
5% in each subsequent year to a maximum credit of 40% in 1998. Since the credit
is a function of future earnings, if any, the effect of such limitations cannot
be determined at the present time. In addition, the Omnibus Act makes the 100%
dividends received deduction subject to the Alternative Minimum Tax Calculation.
The Small Business Job Protection Act of 1996 further limits the Possession tax
credit for years beginning after 2001 with the credit being eliminated for tax
years beginning after 2005. No dividends have been declared on the aggregate
undistributed earnings of Puerto Rico Safety Equipment and Disposable (which
through June 30, 1997, aggregates approximately $1,868,000) and none are
intended to be declared because it is management's intention to reinvest the
earnings, if any, from such subsidiaries indefinitely. The Company believes that
based upon current operations, the Omnibus Act will not have a material effect
on the Company for the foreseeable future.
<PAGE>
PART II
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
a) Not Applicable
b) Results of Operations
---------------------
The Company's net loss for fiscal 1997 was $1,392,000, as compared to net
income of $10,000 in fiscal 1996.
Consolidated net sales during fiscal 1997 increased by 3.7% to
approximately $27,988,000 from $26,983,000 during fiscal 1996. In fiscal 1997,
Manufacturing Operations revenues increased 11.3% to $19,907,000 from
$17,889,000 in fiscal 1996 while Distribution Operations revenues decreased
11.1% to $8,081,000 in fiscal 1997 from $9,094,000 in fiscal 1996. The Company
believes that the overall increase in sales was due to continued increased
demand for the Company's products in the manufacturing segment. The decrease in
distribution sales was due to a change in focus in the Company's customers from
end users engaged in hazardous material abatement ("environmental customers") to
other industrial end users ("industrial customers"). This caused a $1,631,000
decrease in sales to environmental customers, only partially offset by a
$618,000 increase in sales to industrial customers.
The Company's overall gross profit percentage decreased in fiscal 1997 to
14.8% as compared to 20.3% in fiscal 1996. The gross profit percentage for the
Distribution Operations decreased from 18.5% in fiscal 1996 to 16.8% in fiscal
1997 due to a change in the customer base from environmental customers to
industrial customers where the customer base is more stable and credit worthy.
The gross profit percentage for the Manufacturing Operations was 14.0% for
fiscal 1997 as compared to 21.2% for fiscal 1996. This reduction was caused in
part by (1) our contractor in Mexico not meeting our expected production levels,
which forced higher production domestically at higher costs, (2) higher
manufacturing costs due to payroll and other overhead increases, (3) increased
sales in lower gross profit products, and (4) continued intense competition in
the marketplace.
During the first three months ended September 30, 1996 the Company
sustained a decrease in sales due to hurricanes in Puerto Rico that affected
both production and shipments and therefore sales for that quarter. This loss in
production for the quarter caused lower production efficiencies in Puerto Rico
because of the weather related down-time.
<PAGE>
Selling, general, and administrative expenses for fiscal 1997 were
$4,870,000 or 17.4% of sales compared to $4,546,000 or 16.8% for the prior
fiscal year. This increase was principally due to increased marketing expenses,
including a new telemarketing program and catalogs, an increase in bad debt
expense and operating expenses of the new glove manufacturing subsidiary in
Minnesota acquired during April 1997.
Interest expense was $681,000 for fiscal 1997 as compared to $836,000 in
the prior year. This decrease was due principally to a reduction in interest
rates from the Company's major lender from 2 1/2% to 1% over the prime rate and
average lower borrowings during fiscal 1997.
Net cash used for operating activities was principally a result of the
Company's net loss, an increase in inventories and a reduction in accounts
payable. Cash flows used in investing activities was for the purchase of
property, plant, and equipment, and the acquisition of the glove manufacturing
business in Minnesota completed in April 1997. Cash flows provided by financing
activities was principally from the proceeds of the rights and public offering
completed during November 1996.
The Company, in connection with the purchase of the glove manufacturing
business in Minnesota during the fourth quarter of fiscal 1997, borrowed
$440,000 from Congress, issued 100,000 shares of its common stock valued at
approximately $412,000, has agreed to make additional payments over the next
three to five years aggregating at least $240,000, and paid cash of
approximately $295,000(see Note 12 of the Notes to the Consolidated Financial
Statements).
As a result of the magnitude of the net loss recorded by the Company in the
fourth quarter of its year ended June 30, 1997, management is analyzing its
previously issued interim financial statements during said year in order to
determine the extent, if any, that such fiscal data requires restatement.
Outstanding options and warrants did not materially dilute earnings per
share in fiscal 1996, but could do so in the future if there is a significant
increase in the spread between their exercise price and the quoted market price
of the Company's Common Stock. Such options and warrants were omitted from the
loss per share calculations in fiscal 1997, as their inclusion would be
antidilutive.
Adoption of New Accounting Standards
- ------------------------------------
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation" for stock options and warrants granted to its employees, officers
and directors and, therefore, continues to apply the provisions of Accounting
Principles Board Opinion No. 25 and related interpretations in its accounting
for such grants. Accordingly, no compensation cost is recognized for these
grants at issuance unless they are for less than fair value or are considered a
variable award. If the Company had recognized compensation cost under the fair
value method of SFAS 123, the net loss would have been approximately $1,453,000
and the related per share loss would have been $1.03 per share.
<PAGE>
Under Financial Accounting Standards Statement No. 128, "Earnings Per
Share", public companies are required to calculate their primary earnings per
share based upon the weighted average number of common shares outstanding during
the period presented. Diluted earnings per share is to be calculated giving
effect to all potentially dilutive common shares that could be issued. This new
rule becomes effective for annual and interim periods ending after December 15,
1997 and it is not currently expected to have a material effect on the Company's
reported earnings per share.
Liquidity and Capital Resources
- -------------------------------
The Company has working capital as of June 30, 1997 of $2,474,000 as
compared to working capital of $1,553,000 as of June 30, 1996. The increase
resulted primarily from the net proceeds of the Company's shareholder rights and
public offering offset in part by the effect of the loss for the year ended June
30, 1997. A substantial portion of the Company's working capital consists of
inventory, which was $5,973,000 and $5,230,000 as of June 30, 1997, and 1996,
respectively. The Company is required to maintain substantial inventories of its
numerous products to meet the immediate requirements of its customers who need
products on short notice and who do not maintain an inventory of such products.
In July 1996, the line of credit with Congress was amended and extended
until October 1, 1999 with an option by Congress to extend the loan for an
additional year. The line was increased to $9,000,000 with an interest rate at 1
1/4% above the prime rate which was reduced to prime plus 1% subsequent to the
consummation of the Company's shareholder rights and public offering. The limits
on borrowings were increased to 85% of eligible accounts receivable and 55% of
eligible inventory. The amounts outstanding at June 30, 1997, and June 30, 1996
were $5,418,000 and $5,558,000, respectively. The Company had $629,000 available
for borrowing at June 30, 1997 based on its formula with Congress. The loan is
subject to certain working capital and net worth requirements and is
collateralized by all of the assets of the Company not previously pledged under
other loan agreements. Although the Company, at June 30, 1997, was not in
compliance with the tangible net worth requirement of the loan agreement,
Congress waived this default for this fiscal year and reduced the requirement
for future periods (see Note 5 of the Notes to the Consolidated Financial
Statements). The loan agreement prohibits the payment of cash dividends by the
Company.
The Company believes that its current working capital position, line of
credit and operations will be sufficient to satisfy its cash needs through June
30, 1998.
Management is addressing the causes of the loss incurred in fiscal 1997.
The Company has negotiated better pricing for materials used in its products and
switched to a new contractor in Mexico, who is able to produce higher quantities
of the Company's major products at an expected cost reduction of approximately
10%. The Company's efficiency at the new glove manufacturing business in
Minnesota is also continuing to improve.
The Company has no material commitments for capital expenditures.
<PAGE>
As the present time, the Company, together with a variety of defendants, is
a party to various asbestos-related lawsuits involving a number of plaintiffs
alleging damages from exposure to asbestos products sold by the Company. The
Company may become a party to additional asbestos-related actions in the future.
The Company is also party to a non-asbestos product liability action. While as
indicated in Item 3, Legal Proceedings, legal and settlement costs to the
Company have not been material to date, the Company cannot, at this time,
determine the outcome of these uncertainties which may have an adverse effect
upon the liquidity of the Company in the future.
Risks
- -----
From time to time, information provided by the Company or statements made
by its employees, or information provided in its filings with the Securities and
Exchange Commission may contain forward looking information. The Company's
actual future results may differ materially from those projections or statements
made in such forward looking information as a result of various risks and
uncertainties, including but not limited to competition, management, losses,
availability of capital, asbestos litigation, substantial availability of
Tyvek(R), the absence of dividends, and tax incentives. There can be no
assurances that asbestos litigation will not have an adverse effect upon the
Company in the future. The market price of the Company's Common Stock may be
volatile at times in response to fluctuations in the Company's quarterly
operating results, changes in analyst earnings estimates, market conditions, as
well as general conditions and other factors general to the Company.
Item 7. FINANCIAL STATEMENTS
See Consolidated Financial Statements annexed hereto.
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
Eastco Industrial Safety Corp.
Huntington Station, New York
We have audited the accompanying consolidated balance sheet of EASTCO
INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES as at June 30, 1997 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the two years in the period ended June 30, 1997. 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 aforementioned consolidated financial statements
present fairly, in all material respects, the consolidated financial position of
Eastco Industrial Safety Corp. and Subsidiaries as at June 30, 1997 and the
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Cornick, Garber & Sandler, LLP
------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Uniondale, New York
October 27, 1997
F-2
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
------
Current assets:
Cash $ 112,258
Accounts receivable, net of $219,000 allowance for doubtful
accounts (Note 5) 4,561,053
Inventories (Notes 1, 2 and 5) 5,972,904
Other 670,155
------------
Total current assets 11,316,370
Property, plant and equipment, net (Notes 1, 3, 5 and 6) 2,213,971
Excess of cost over net assets acquired (Note 1) 448,910
Other assets 61,338
------------
T O T A L $ 14,040,589
============
LIABILITIES
-----------
Current liabilities:
Loans payable (Note 5) $ 5,417,675
Current maturities of long-term debt (Note 6) 278,821
Accounts payable 2,770,626
Accrued expenses 374,764
------------
Total current liabilities 8,841,886
Long-term debt, less current maturities (Note 6) 811,410
------------
Total liabilities 9,653,296
------------
Commitments and contingencies (Notes 8 and 11)
SHAREHOLDERS' EQUITY
--------------------
(Notes 1, 6 and 7)
Preferred stock, $.01 par value; authorized 1,000,000
shares; no shares outstanding --
Common stock, $.12 par value; authorized 20,000,000
shares; 1,683,079 shares outstanding 201,970
Additional paid-in capital 9,807,708
(Deficit) (statement attached) (5,622,385)
------------
Total shareholders' equity 4,387,293
------------
T O T A L $ 14,040,589
============
The notes to consolidated financial statements are made a part hereof
F-3
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
---------------------------
1997 1996
------------ -----------
Net sales $ 27,987,969 $26,982,699
------------ -----------
Costs and expenses:
Cost of sales (Note 1) 23,838,094 21,495,693
Selling, general and
administrative (Note 1) 4,870,030 4,546,222
Interest 680,749 836,359
Other (income) expenses (net) (9,074) 16,388
Settlement with former underwriter (Note 7) 78,000
------------ -----------
Total costs and expenses 29,379,799 26,972,662
------------ -----------
NET INCOME (LOSS) $ (1,391,830) $ 10,037
============ ===========
Income (loss) per share (Note 1):
Primary $(.98) $.02
===== ====
Assuming full dilution $(.98) $.02
===== ====
Average number of shares used in computing
per share amounts:
Primary 1,413,775 595,758
============ ===========
Assuming full dilution 1,413,775 595,758
============ ===========
The notes to consolidated financial statements are made a part hereof.
F-4
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NOTES 1, 6 and 7)
<TABLE>
<CAPTION>
Additional
Common Stock* Paid-In
Shares Amount Capital (Deficit) Total
--------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE - JULY 1, 1995 347,738 $41,729 $6,224,509 $(4,240,592) $ 2,025,646
Shares issued on settlement
with former underwriter 10,000 1,200 70,825 72,025
Exercise of Class A warrants 3,750 450 48,300 48,750
Shares issued on conversion
of subordinated debenture 26,374 3,165 121,963 125,128
Purchase and retirement of
common stock (21,374) (2,565) (177,435) (180,000)
Shares issued in private
placement 399,000 47,880 454,314 502,194
Net income for the year ended
June 30, 1996 10,037 10,037
--------- -------- ---------- ----------- -----------
BALANCE - JUNE 30, 1996 765,488 91,859 6,742,476 (4,230,555) 2,603,780
Shares issued in private
placement 114,000 13,680 140,320 154,000
Shares issued in shareholder
rights and public offering 703,591 84,431 2,524,405 2,608,836
Sale of warrants to
underwriter 7 7
Shares issued for acquisition
of glove manufacturing business 100,000 12,000 400,500 412,500
Net loss for the year ended
June 30, 1997 (1,391,830) (1,391,830)
--------- -------- ---------- ----------- -----------
BALANCE - JUNE 30, 1997 1,683,079 $201,970 $9,807,708 $(5,622,385) $ 4,387,293
========= ======== ========== =========== ===========
</TABLE>
* Gives effect to the 1-for-10 reverse stock split in August 1996.
The notes to consolidated financial statements are made a part hereof.
F-5
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
-------------------------
INCREASE (DECREASE) IN CASH AND 1997 1996
CASH EQUIVALENTS ----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,391,830) $ 10,037
----------- -----------
Adjustments to reconcile results of
operations to net cash effect of
operating activities:
Depreciation and amortization 144,606 134,290
Provision for losses on
accounts receivable 104,736 105,732
Shares issued for services and settlement
with former underwriter 72,025
Net changes in assets and liabilities (excluding
assets related to glove manufacturing
business acquisition):
Accounts receivable 3,281 (876,629)
Inventories (603,667) (866,339)
Other current assets (228,392) 40,105
Other assets 145,572 (75,122)
Accounts payable (463,505) 343,084
Accrued expenses 83,423 (40,566)
----------- -----------
Total adjustments (813,946) (1,163,420)
----------- -----------
Net cash used for operating activities (2,205,776) (1,153,383)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (281,362) (93,274)
Acquisition of glove manufacturing business (734,526)
----------- -----------
Net cash used for investing activities (1,015,888) (93,274)
----------- -----------
(Continued)
F-6
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-2-
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from financing activities:
Repayments of long-term debt $ (79,551) $ (48,762)
Borrowings under line of credit agreements 32,054,480 28,621,372
Repayments under line of credit agreements (32,489,880) (27,697,205)
Borrowing under Bridge loan 500,000
Repayment of Bridge loan (500,000)
Net proceeds from private placement of common stock 154,000 502,194
Net proceeds from convertible subordinated debenture 225,128
Net proceeds from shareholder rights and public offering 2,608,843
Borrowings to finance acquisition of
glove manufacturing business 440,000
Repayment of convertible subordinated debenture (100,000)
Proceeds from exercise of Class A warrants 48,750
Purchase of treasury stock (180,000)
----------- -----------
Net cash provided by financing activities 2,687,892 1,371,477
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (533,772) 124,820
Cash and cash equivalents - July 1 646,030 521,210
----------- -----------
CASH AND CASH EQUIVALENTS - JUNE 30 $ 112,258 $ 646,030
=========== ===========
Supplemental disclosure of cash paid for:
Interest $ 680,749 $ 836,359
=========== ===========
Taxes $ 12,758 $ 5,440
=========== ===========
Supplemental disclosure of noncash
financing activities:
Noncash consideration for acquisition of
glove manufacturing business:
Common stock issued $ 412,500
===========
Minimum guaranteed payments $ 240,000
===========
Conversion of convertible subordinated
debenture into common stock $ 150,000
===========
Retirement of treasury stock $ 128,000
===========
</TABLE>
The notes to consolidated financial statements are made a part hereof.
F-7
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 1 - Summary of Significant Accounting Policies:
Operations:
The Company operates in two industry segments. The first is the
manufacture and sale of industrial protective clothing products to
distributors throughout the United States and in Puerto Rico. The
second is the distribution and sale of industrial protective clothing
and other protective products directly to "end users" located
primarily in the Northeastern United States.
The Company's manufacturing division uses Tyvek(R) to produce
disposable clothing. Tyvek(R) is sold solely by E.I. Dupont
Industries, Inc. Products made of Tyvek(R) accounted for approximately
44% and 41% of consolidated sales for the years ended June 30, 1997
and 1996, respectively.
Principles of Consolidation:
The consolidated financial statements include the accounts of Eastco
Industrial Safety Corp. and its subsidiaries, all of which are
wholly-owned. All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(Continued)
F-8
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 1 - Summary of Significant Accounting Policies (Continued):
Cash Equivalents:
Cash equivalents include certificates of deposit with original
maturities of 90 days or less.
Inventories:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market, which represents estimated net realizable
value.
Depreciation and Amortization:
Property, plant and equipment are depreciated on a straight-line basis
over the estimated useful lives of the related assets. Leasehold
improvements are amortized on a straight-line basis over the shorter
of their estimated useful lives or the remaining term of the lease.
Excess of Cost Over Net Assets Acquired:
The excess of cost over the net assets of a business acquired in April
1997 is being amortized on a straight-line basis over its estimated
useful life of 20 years (Note 12). Management intends to periodically
evaluate this asset for impairment using estimated future cash flows
from the acquired business and other estimates of cost recoverability.
Fair Value of Financial Instruments:
Cash and cash equivalents, receivables, loans payable and long-term
debt are reflected in the balance sheet at amounts considered by
management to reasonably approximate their fair value because of their
relative short-term maturities, recent incurrance or because they bear
variable interest rates.
Stock Options and Warrants:
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock
Based Compensation" for stock options and warrants granted to its
employees, officers and directors and, therefore, continues to apply
the provisions of Accounting Principles Board Opinion No. 25 and
related interpretations in its accounting for such grants.
Accordingly, no compensation cost is recognized for these grants
unless they are for less than fair value at issuance or are considered
a variable award.
(Continued)
F-9
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 1 - Summary of Significant Accounting Policies (Continued):
Per Share Amounts:
Primary earnings per share amounts have been computed utilizing the
weighted average number of common and, if material, common equivalent
shares outstanding during the period. Fully diluted earnings per share
is based upon the weighted average number of common and common
equivalent shares outstanding. Per share amounts give effect to the
1-for-10 reverse stock split approved by the shareholders in August
1996. All other per share amounts and information set forth in the
attached financial statements and the notes thereto have also been
adjusted to give effect to the reverse stock split. Common equivalent
shares have not been included in the loss per share amounts for the
year ended June 30, 1997 as the result would be anti-dilutive.
NOTE 2 - Inventories:
Inventories consist of the following at June 30, 1997:
Raw materials $2,049,328
Work-in-process 1,145,395
Finished goods 2,778,181
----------
Total $5,972,904
==========
NOTE 3 - Property, Plant and Equipment:
Property, plant and equipment is comprised of the following at June
30, 1997:
Estimated
Useful Life
(Years)
-------
Cost:
Land $ 382,000
Building and leasehold improvements 833,741 5 - 40
Machinery and equipment 2,106,191 3 - 10
Furniture and fixtures 246,163 7 - 10
-----------
Total 3,568,095
Less accumulated depreciation
and amortization 1,354,124
-----------
Balance $ 2,213,971
===========
(Continued) F-10
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 4 - Income Taxes:
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109). While
SFAS 109 requires the recognition of a deferred tax asset for the
benefit of net operating loss carryforwards, it also requires the
recognition of a valuation allowance when it is more likely than not
that such benefit will not be realized. As a result of the Company's
history of losses, it has recorded a valuation allowance equal to the
net deferred tax asset account as of June 30, 1997.
Deferred income taxes relate to the following temporary differences
and carryforwards as of June 30, 1997:
Deferred tax assets:
Net operating loss carryforwards $ 2,121,000
Allowance for doubtful accounts
and credits 88,000
Tax basis adjustments to inventory 51,000
-----------
Total 2,260,000
Less deferred tax liability:
Accelerated depreciation of
property and equipment 37,000
-----------
Balance 2,223,000
Less valuation allowance (2,223,000)
-----------
Net deferred income taxes after
valuation allowance $ --
===========
(Continued)
F-11
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 4 - Income Taxes (Continued):
Two wholly-owned Puerto Rico based subsidiaries have been granted
exemptions from paying Puerto Rico income taxes under provisions of
the Puerto Rico Industrial Tax Exemption Act of 1963, provided such
subsidiaries continue to meet the terms and conditions of their
grants. One subsidiary's exemption expires June 30, 1999. This
subsidiary has received a 90% exemption from Puerto Rico income taxes
and a 75% exemption from Puerto Rico municipal and property taxes. The
second subsidiary has received a 90% exemption from Puerto Rico income
and property taxes and a 60% exemption from Puerto Rico municipal
income taxes to June 2006. These subsidiaries have elected, pursuant
to Section 936 of the Internal Revenue Code, to receive credits
equivalent to the amount of Federal income taxes which would otherwise
be due on their income. The Omnibus Budget Reconciliation Act of 1993
imposes limitations on computing the Possession Tax Credit under
Section 936 for tax years beginning after 1993. In addition, the Act
makes the 100% dividends received deduction subject to the Alternative
Minimum Tax calculation. The Small Business Job Protection Act of 1996
further limits the Possession Tax Credit for years beginning after
2001 with the credit being eliminated after the years beginning after
2005.
Dividends, if paid by the Puerto Rico based subsidiaries, are subject
to a withholding tax of 10%; however, no taxes have been provided on
their aggregate undistributed earnings (of approximately $1,868,000 at
June 30, 1997) because it is management's intention to reinvest such
earnings indefinitely.
A reconciliation between the expected tax expense at the statutory
federal income tax rate and the Company's actual income tax expense is
as follows:
Year Ended
June 30,
------------------------
1997 1996
---------- ----------
Income tax expense (benefit)
at the statutory rate $ (529,000) $ 3,000
Effect of net operating loss of
Puerto Rican subsidiaries for
which there is no current tax
benefit 172,000
Effect of domestic net operating
loss for which there is no
current tax benefit 357,000
Benefit of utilization of net
operating loss carryforwards (3,000)
---------- ----------
Actual income tax expense $ -- $ --
========== ==========
(Continued)
F-12
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 4 - Income Taxes (Continued):
At June 30, 1997, the Company has net operating loss carryforwards of
approximately $5,582,000 for federal income tax purposes. Such
carryforwards expire in 2005 through 2012. As a result of the private
placement offering in June 1996, the amount of the loss carryforwards
which can be utilized to offset future taxable income will be limited
to approximately $345,000 a year, plus any loss carryforwards incurred
after June 30, 1996. However, to the extent such annual limitation is
not utilized in any year, it may be further carried forward until the
carryforward would have otherwise expired.
NOTE 5 - Loans Payable:
Loans payable at June 30, 1997 are comprised of borrowings under the
Company's line of credit agreement with Congress Financial Corporation
("Congress").
The Company amended and extended its line of credit agreement with
Congress during 1997. The line which expires in October 1999 provides
for borrowings up to $9,000,000 with interest payable monthly at 1%
above the prime rate, plus an unused line fee of 1/4% a year.
Borrowings are limited to 85% of eligible accounts receivable and 55%
of eligible inventory up to maximum inventory borrowings of
$2,875,000. The loans are subject to certain working capital and net
worth requirements and are collateralized by all assets of the Company
not previously pledged under other loan agreements. The loan agreement
prohibits the payment of dividends by the Company. In September 1993,
Congress sold to three individuals, who are officers and directors of
the Company, a $250,000 junior participation in the loans made to the
Company. The Company had an informal agreement with Congress, whereby
Congress agreed to provide the Company an additional $500,000 in
borrowing availability of which $250,000 was repaid at $11,250 a week
beginning November 1, 1993. Congress repurchased $35,000 of the junior
participations in May 1996 and the remaining balance during November
1996.
The Company was not in compliance with the tangible net worth
requirement at June 30, 1997. However, Congress has waived such
covenant and amended it downward to $3,600,000 for the year ending
June 30, 1998, $4,100,000 commencing July 1, 1998 and for the year
ending June 30, 1999 and $4,600,000 thereafter.
(Continued)
F-13
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 6 - Long-Term Debt:
Long-term debt is comprised of the following:
Mortgage payable - interest at 12% per
annum, collateralized by land, building
and personal property (a) $ 433,736
Mortgage payable - interest at 1 1/4% above
the prime rate, collateralized by all assets
of the Puerto Rico subsidiaries (b) 215,311
Term loan - interest at 1 1/4% above the
prime rate, collateralized by all assets of the
Company not previously pledged (c) 209,517
Guaranteed payments for purchase of glove
manufacturing business (see Note 12) (d) 231,667
----------
Total 1,090,231
Less current maturities 278,821
----------
Noncurrent portion $ 811,410
==========
Maturities of the noncurrent portion of long-term debt are as follows:
Year ending June 30:
1999 $277,600
2000 151,400
2001 53,000
2002 54,000
2003 275,410
--------
Total noncurrent portion $811,410
========
(Continued) F-14
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 6 - Long-Term Debt (Continued):
(a) The mortgage, with an original interest rate of 14.0% per annum
and which was due in July 1997, was amended and extended on
September 26, 1996. The amendment reduced the annual interest
rate to 12.0% commencing July 1, 1997, with monthly payments of
$6,223 until July 1, 2002 when the remaining balance of
approximately $275,000 is payable. In connection with the
original mortgage in 1992, the Company issued five year warrants
to acquire 10,833 shares at $30.00 a share. In January 1995, the
Company reduced the exercise price to $13.00 and extended the
expiration date until April 1999. Approximately 38% of this
mortgage is held by a group of investors which includes the
spouses of certain officers and directors and a past director of
the Company. Interest on the mortgage aggregated approximately
$65,000 and $72,000 for the years ended June 30, 1997 and 1996,
respectively.
(b) The mortgage is repayable in 29 monthly principal installments of
$7,690 plus interest to October 1, 1999. The funds received were
used for the acquisition of the glove manufacturing business (see
Note 12).
(c) The term loan is repayable in 29 monthly principal installments
of $7,483, plus interest to October 1, 1999. The funds received
were also used for the acquisition of the glove manufacturing
business (see Note 12).
(d) This amount is comprised of guaranteed payments to two
individuals in connection with the acquisition of the glove
manufacturing business. One individual is entitled to 10% of
income before taxes (as defined) of the glove manufacturing
business for the five year period commencing July 1, 1997, up to
a maximum of $180,000, but in no event less than $18,000 per
year, for which the Company has accrued the $90,000 minimum
payment. The second individual entered into a consulting
agreement with the Company for a three year period commencing
April 17, 1997, which calls for a fee of $50,000 per year,
payable in monthly installments. The Company has accrued the
$150,000 required payment.
The $240,000 aggregate minimum payments, which are due regardless
of continued employment, have been recorded as additional
purchase price. No imputed interest has been recorded on these
payments as the effect would be immaterial.
(Continued) F-15
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 7 - Shareholders' Equity:
Preferred Stock:
On August 12, 1996, the shareholders of the Company approved an
amendment to the Company's certificate of incorporation to authorize
1,000,000 shares of preferred stock. No preferred shares have been
issued.
Common Stock:
On August 12, 1996, the shareholders of the Company approved a
1-for-10 reverse stock split of all outstanding shares of the
Company's common stock. The financial statements and notes thereto
give effect to this split for all periods presented.
In April 1991, the Company sold, pursuant to a rights offering, 48,007
shares of common stock. In this connection, the underwriter was sold a
warrant to purchase 4,078 shares of common stock at $53.30 per share,
which was exercisable until February 28, 1996. The Company also had
borrowed $200,000 with interest at 17% per annum during February 1991
from five unrelated parties. These loans were repaid out of the
proceeds of the rights offering, including interest. In connection
with these loans, the Company issued warrants to purchase 833 shares
of common stock, exercisable at $30.00 per share until May 13, 1996.
In January 1995, the Company reduced the exercise price of the above
warrants to $13.00 and extended their expiration dates until April
1999.
In April 1996, the holder of a $250,000 convertible subordinated
debenture, issued in February 1996, converted $150,000 of the
debenture into 26,374 shares of the Company's common stock. The
Company repurchased 21,374 of these shares for $180,000 and retired
the stock. The remaining $100,000 balance of the debenture was
repurchased for $120,000. The $20,000 excess has been included with
interest expense for the year ended June 30, 1996.
(Continued)
F-16
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 7 - Shareholders' Equity (Continued):
Common Stock (Continued):
On April 19, 1994, the Company sold in a public offering 200,000 units
at $20.00 per unit, each unit consisting of one share of the Company's
common stock and one Class A warrant. Each warrant entitled the holder
to purchase one share of common stock at an exercise price of $24.00 a
share from April 12, 1995 through April 12, 1999. In January 1995, the
Company reduced the exercise price to $13.00 a share. These warrants
are redeemable by the Company commencing April 12, 1995 at $1.00 a
warrant, provided that the high bid price of its stock is at least
$19.50 for the required number of days prior to the Notice of
Redemption. The Company also granted to the underwriter an option to
purchase, at the same price, 30,000 units to cover over-allotments.
This option was exercised in May 1994. In addition, the Company sold
to the underwriter for $10 an option, exercisable from April 12, 1995
to April 12, 1999, to purchase 23,000 additional units at $29.00 a
unit and entered into a two year consulting agreement with the
underwriter at a total cost of $72,000. Subsequent to the public
offering, two officers of the underwriter became directors of the
Company until their resignations on July 10, 1995.
On July 10, 1995, the Company issued 10,000 shares of common stock to
the underwriter of its 1994 public stock offering in exchange for the
cancellation of all of its rights under the Underwriting Agreement.
The $78,000 cost thereof, equal to the market value of the shares
issued and legal expenses incurred, is separately reflected on the
consolidated statement of operations for the year ended June 30, 1996.
In October 1996, the Company sold, pursuant to a combination
shareholder rights and public offering, 703,591 units at $5.00 per
share, with each unit consisting of one share of common stock and one
Class B warrant. Each warrant entitles the holder to purchase one
share of common stock at an exercise price of $6.25 per share during
the period from twelve months to three years after the closing date of
the offering. The warrants may be repurchased by the Company, upon 30
days prior written notice, eighteen months after the offering at $.01
per warrant if the high bid price of the common stock for the 15
consecutive trading days ending on the third day prior to the date of
notice is in excess of 150% of the exercise price of the warrant. The
Company also sold to the offering agent/underwriter, for a total of
$7, warrants to purchase 70,359 units. The warrants are exercisable at
$6.00 per unit for four years commencing in November 1997. In
addition, the Company entered into a one year consulting agreement
with the offering agent/underwriter for approximately $70,000.
(Continued)
F-17
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 7 - Shareholders' Equity (Continued):
Private Placements:
On June 28, 1996, the Company issued, in a private placement, 10 1/2
units at $57,000 a unit, with each unit consisting of 38,000 shares of
the Company's common stock. The net proceeds to the Company were
approximately $501,000 after fees to the placement agent and other
expenses. The proceeds were used to repay a $500,000 bridge loan
obtained in May 1996. On July 9, 1996, an additional 3 units were sold
for net proceeds of approximately $165,000. The Company issued three
year warrants to purchase 2,500 shares of common stock at $10.00 a
share in connection with the foregoing transactions.
Other Warrants:
On May 13, 1996, warrants to purchase 9,003 shares each were granted
to the Company's then president and two of the vice-presidents for
their gurantees of overadvances by Congress (see Note 5). The warrants
are exerciseable until February 23, 2001 at $5.35 per share.
On July 26, 1995, the Company issued to a consulting firm, which is
the employer of a then new director of the Company, a five year
warrant to purchase 12,500 shares of the Company for $12.50 a share.
In January 1994, a corporate officer/director of the Company purchased
a warrant from a prior lender. The warrant is for 92,477 shares at
$5.62 per share. The expiration date of this warrant was extended from
March 31, 1997 until April 11, 1999.
Incentive Stock Option Plans:
Under the Company's 1983 Incentive Stock Option Plan, options could be
granted to June 23, 1993 for a maximum of 5,625 shares of the
Company's common stock. At June 30, 1997, options to purchase 865
shares at $26.64 to $30.00 a share are outstanding; no further options
may be granted under this plan.
The Company's 1992 Incentive Stock Option Plan provides for the
granting of options for 20,000 shares of the Company's common stock to
December 20, 2002. At June 30, 1997, options to purchase 300 shares at
$27.50 are outstanding. The Company has agreed not to issue any
additional options under this plan.
The Company's 1994 Incentive Stock Option Plan provides for the
granting of options for 10,000 shares of the Company's common stock to
January 2004. At June 30, 1997, options to purchase 8,500 shares at
$10.63 are outstanding.
(Continued)
F-18
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 7 - Shareholders' Equity (Continued):
Incentive Stock Option Plans (Continued):
On August 12, 1996, the shareholders approved the adoption of the 1996
Incentive Stock Option Plan, which provides for the granting of
options for 300,000 shares, to key employees, of the Company's common
stock until May 2006. On June 24, 1997, the Company issued options to
purchase 231,400 shares at $2.25 a share; 59,400 of these options
vested on issue date, 32,000 will vest over the next four years based
upon employment and the remaining balance vest based upon the Company
achieving certain sales and income requirements.
Options granted under the incentive stock option plans must be
exercised within such period as stated in the plans and, in any event,
must be exercised no later than ten years after the date they are
granted. The plans provide that the exercise price of the options may
not be less than 100% of the fair market value of common stock at the
date of grant or 110% in the case of an incentive stock option granted
to any employee owning more than 10% of the voting power of all
classes of stock of the Company.
Transactions under the above plans are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price Per Share
------- ------------------------
<S> <C> <C>
Outstanding - June 30, 1995 and 1996 9,665 $12.60
Granted during year ended June 30,
1997 231,400 $2.25
-------
Outstanding - June 30, 1997 241,065 $2.66
=======
</TABLE>
(Continued)
F-19
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 7 - Shareholders' Equity (Continued):
Other Stock Options:
1996 Stock Options:
On August 12, 1996, the shareholders approved the adoption of the 1996
Nonqualified Stock Option Plan which provides for the granting of
options for 300,000 shares of the Company's stock until August 2006.
On June 24, 1997, the Company issued ten-year options to purchase
143,000 shares at $2.25 a share. These options vest based upon the
Company meeting certain sales and income requirements.
1995 Stock Options:
On January 20, 1995, the Board of Directors granted to the Company's
then president and two vice-presidents ten-year nonqualified options
to purchase 82,236 shares each at $5.17 per share. The options are
exercisable after five years but may become exercisable sooner upon
the Company achieving pretax earnings targets. Based on the earnings
for the year ended June 30, 1995, options for 123,355 shares are
currently exercisable.
Other nonqualified options outstanding at June 30, 1997, under prior
years' grants, aggregate 3,108 shares at $16.88 to $30.00 a share.
The following table summarizes information about stock options
outstanding at June 30, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Contractual Price Price
Exercise Prices Shares Life Per Share Shares Per Share
--------------- -------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ .01 - $ 5.00 374,400 10 years $ 2.25 88,000 $ 2.25
$ 5.01 - $10.00 246,708 7.5 years 5.17 123,354 5.17
$10.01 - $20.00 11,500 5.3 years 12.26 11,500 12.26
$20.01 - $30.00 1,273 2.1 years 27.28 1,273 27.28
-------- -------
Totals 633,881 224,127
======== =======
</TABLE>
(Continued)
F-20
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 7 - Shareholders' Equity (Continued):
Stock Options (Continued):
If the Company had elected to recognize compensation cost for option
grants to its employees, officers and directors under the fair value
method of SFAS No. 123, rather than continue to apply Accounting
Principles Board Opinion No. 25 provisions, net income (loss) and the
related per share amounts would have been reported as indicated by the
following pro forma amounts:
Year Ended June 30,
------------------------
1997 1996
----------- -----------
Net income (loss):
As reported $(1,391,830) $10,037
Pro forma (1,452,962) 10,037
Income (loss) per share:
As reported $ (.98) $.02
Pro forma $(1.03) $.02
The fair values of the Company's stock options used to compute the
above pro forma disclosures are their estimated present values at
grant date using the Black-Scholes option pricing model with the
following assumptions for 1997; expected volatility of 80.4%, a risk
free interest rate of 6.7% and an expected holding period of ten
years.
The following summarizes all shares reserved at June 30, 1997 under
options and warrants outstanding:
Price Per
Number Share or Unit
------ -------------
Stock options:
Incentive stock option plans 241,065 $ 2.25 - $30.00
Nonqualified options 392,816 $ 2.25 - $30.00
Warrants:
Class A 226,250 $13.00
Class B 703,591 $ 6.25
Other 220,589 $ 1.00 - $13.00
(Continued)
F-21
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 8 - Commitments and Contingencies:
Rent:
The Company is obligated through August 2003 under several
noncancellable long-term operating leases covering office, factory and
warehouse facilities. Minimum annual rentals under these leases are:
Year ending June 30:
1998 $127,000
1999 137,000
2000 157,000
2001 142,000
2002 151,000
Thereafter 180,000
-------
Total $894,000
========
Rent expense, including month-to-month rentals, was $289,000 and
$226,000 in the fiscal years ended June 30, 1997 and 1996.
Employment Agreements:
The Company had employment agreements with three of its officers which
commenced on July 1, 1995. On March 1, 1997, these officers were
appointed to new positions with certain changes to their agreements
and two new officers were elected. The following is a summary of these
employment agreements as of June 30, 1997:
Expiration Current
Officer Date Annual Salary
---------------------------- ---------- -------------
President (a) July 1, 2000 $125,000
Senior Vice-President (b) July 1, 2000 $133,000
Senior Vice-President and
Treasurer (c) July 1, 2000 $ 85,500
Vice-President of Finance January 31, 2000 $ 92,500
Vice-President of Manufacturing January 31, 2000 $ 96,500
(a) This officer is entitled to a bonus of 3 1/3% of the
Company's income before taxes and interest and a bonus of
3/4 of 1% of net sales in excess of $20,500,000.
(Continued) F-22
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 8 - Commitments and Contingencies (Continued):
Employment Agreements (Continued):
(b) This officer is entitled to a bonus of 3 1/3% of the
Company's income before taxes and interest.
(c) This officer is entitled to a bonus of 3 1/3% of the
Company's income before taxes and interest.
Each of the agreements provides for minimum annual increases of 10%,
commencing at various dates and has automatic renewal provisions.
In addition, should an unrelated party obtain more than 20% of the
Company's then outstanding stock, other than by transactions initiated
by the Company, the following will occur for three of the officers:
(a) Each will be paid a bonus equal to their minimum base salary
for the next three years.
(b) All rights (options, warrants, etc.) will become immediately
vested and exercisable.
For the remaining two officers, should a majority of the Board of
Directors be replaced, other than by voluntary resignation or their
demise, the employees can terminate their agreement within six months
of such occurance and receive a one time bonus of three times their
current salary.
All bonuses for the years ended June 30, 1997 and 1996 have been
waived and the bonuses based on income before taxes and interest have
been waived through June 30, 2000.
NOTE 9 - Profit Sharing Plan:
The Company's qualified profit sharing plan for eligible full-time
employees, which includes a 401(k) salary reduction feature, requires
a matching contribution from the Company of up to $500 per employee
for the 401(k) feature and provides for discretionary profit sharing
contributions by the Company, as approved by its Board of Directors.
Contribution expense was approximately $6,900 for the year ended June
30, 1997. There were no required matching contributions or authorized
contributions for the year ended June 30, 1996.
(Continued)
F-23
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 10 - Industry Segment Information:
Information for the Company's distribution and manufacturing segments
for the years ended June 30, 1997 and 1996 is summarized as follows:
1997 Distribution Manufacturing Total
------------------------ ------------ ------------- -----------
Net sales $ 8,081,082 $19,906,887 $27,987,969
=========== =========== ===========
Operating profit (loss) $ (155,685) $ 874,739 $ 719,054
=========== ===========
General corporate expenses (1,430,135)
Interest expense (680,749)
-----------
Net loss $(1,391,830)
===========
Identifiable assets $ 4,408,928 $ 9,631,661 $14,040,589
=========== =========== ===========
Capital expenditures $ 81,570 $ 993,792 $ 1,075,362
=========== =========== ===========
Depreciation and amortiza-
tion expense $ 62,893 $ 81,713 $ 144,606
=========== =========== ===========
1996 Distribution Manufacturing Total
------------------------ ------------ ------------- -----------
Net sales $ 9,094,046 $17,888,653 $26,982,699
=========== =========== ===========
Operating profit $ 133,760 $ 2,124,131 $ 2,257,891
=========== ===========
General corporate expenses (1,411,495)
Interest expense (836,359)
-----------
Net income $ 10,037
===========
Identifiable assets $ 5,182,514 $ 7,289,591 $12,472,105
=========== =========== ===========
Capital expenditures $ 43,704 $ 49,570 $ 93,274
=========== =========== ===========
Depreciation and amortiza-
tion expense $ 58,941 $ 75,349 $ 134,290
=========== =========== ===========
(Continued)
F-24
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 11 - Litigation:
At June 30, 1997, the Company is a defendant in approximately 300
lawsuits, together with a multitude of other defendants, in actions
alleging exposure by approximately 1,900 first party plaintiffs to
asbestos and products containing asbestos sold by the Company over
unspecified periods of time.
To June 30, 1997 and since 1981, the Company estimates approximately
920 actions on behalf of approximately 8,100 first party plaintiffs
have been instituted against it concerning asbestos related claims and
that claims of approximately 6,200 plaintiffs have been terminated.
The foregoing numbers assume the consummation of pending settlements.
The Company estimates that with the exception of defense costs, a
total of approximately $1,500,000 has been agreed to in settlements to
date with regard to the terminated actions of which all but $30,000
has been paid by the Company's insurance carriers. To June 30, 1997,
the Company has paid less than $40,000 for legal and defense costs to
counsel appointed by the insurance companies to defend it. The Company
entered into an agreement with its primary insurance companies,
wherein its liability is limited to 12% of the cost of the defense
liability and 17% of the settlement claim of certain litigation. The
agreement, which is subject to policy limitations on each insurance
policy, may be terminated at any time upon 90 days notice by any of
the parties provided that termination may not be effective as to any
asbestos action that has already been placed on the trial calendar,
unless it has a scheduled trial date more than 12 months from the date
the notice is given. In May 1991, the Company reached an agreement
with Mount Vernon Fire Insurance Company, one of its primary insurance
carriers, with respect to its pending and future asbestos litigation.
Mount Vernon agreed to contribute 6.25% to the Company's defense costs
and 6.25% to its indemnity costs for so long a period of time as
$100,000 in aggregate has not been paid for indemnity costs. This
agreement applied only during the period Mount Vernon provided
insurance coverage, which is between April 1, 1968 to April 1, 1969.
However, because past results of settlements and defense costs are not
necessarily indicative of future settlements and defense costs and
because, as of this date, management is still unable to fully
ascertain the extent of insurance coverage applicable to asbestos
claims against the Company or the extent to which insurance carriers
will provide coverage, neither management nor counsel is able to
predict the outcome of these matters or the range of any potential
liability that might result. In addition, based on past history,
management believes it is likely that there will be additional
asbestos action instituted against the Company.
(Continued)
F-25
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
NOTE 11 - Litigation (Continued):
The Company is party to other product liability litigation arising in
the ordinary course of business. After consultation with counsel, the
Company considers that its ultimate liability, if any, after available
insurance coverage, in the majority of these matters, would not have a
material adverse effect upon the Company's financial position.
However, there can be no assurances that the Company's insurance
coverage will adequately cover these cases or whether the Company's
insurance will provide coverage for punitive damages should they be
awarded.
NOTE 12 - Acquisition of Glove Manufacturing Business:
In April 1997, the Company, through Eastco Glove Technologies, Inc. (a
newly formed wholly-owned subsidiary) acquired all the common stock of
Protective Knitting, Inc. ("PKI") and certain machinery, equipment and
inventory from a company related to PKI. The purchase price was
approximately $1,387,000 which has been recorded as follows:
Inventory $ 139,000
Machinery and equipment 794,000
Excess of cost over net assets
acquired 454,000
----------
$1,387,000
==========
In connection with this purchase, the Company borrowed $440,000 from
Congress, (see Note 6), issued 100,000 shares of its common stock
valued at approximately $412,000 and has agreed to make additional
payments to PKI's former owners over the next three to five years
which aggregate at least $240,000. The remaining purchase price,
including closing costs was paid in cash. The acquisition has been
accounted for as a purchase transaction. The operations of PKI prior
to its acquisition were immaterial in relation to those of the
Company.
NOTE 13 - Quarterly Results of Operations:
The Company's previously reported unaudited net loss for the nine
months ended March 31, 1997 was $70,422, whereas the attached
financial statements reflect a net loss of $1,391,830 for the year
ended June 30, 1997.
As a result of the magnitude of the net loss recorded by the Company
in the fourth quarter of its year ended June 30, 1997, management is
currently analyzing its previously issued interim financial statements
during such year in order to determine the extent, if any, that such
financial data requires restatement.
F-26
<PAGE>
The following exhibit is annexed hereto:
27.01 Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this amended report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EASTCO INDUSTRIAL SAFETY CORP.
By:/s/LAWRENCE DENSEN Date: 10/29/97
---------------------------
LAWRENCE DENSEN
President and Chief Executive Officer
By:/s/ARTHUR J. WASSERSPRING Date: 10/29/97
---------------------------
ARTHUR J. WASSERSPRING
Vice President of Finance, and
Chief Financial Officer
In accordance with the Exchange Act, this amended report has been signed by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By:/s/LAWRENCE DENSEN Date: 10/29/97
---------------------------
LAWRENCE DENSEN
Director
By:/s/ALAN DENSEN Date: 10/29/97
---------------------------
ALAN DENSEN
Director
By:/s/CHARLES HOLZBERG Date: 10/29/97
---------------------------
CHARLES HOLZBERG
Director
By:/s/MARTIN FLEISHER Date: 10/29/97
---------------------------
MARTIN FLEISHER
Director
By:/s/ANTHONY P. TOWELL Date: 10/29/97
---------------------------
ANTHONY P. TOWELL
Director
By:/s/BRUCE FRIEDMAN Date: 10/29/97
---------------------------
BRUCE FRIEDMAN
Director
By:/s/JAMES A. FAVIA Date: 10/29/97
---------------------------
JAMES A. FAVIA
Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 112,258
<SECURITIES> 0
<RECEIVABLES> 4,780,053
<ALLOWANCES> (219,000)
<INVENTORY> 5,972,904
<CURRENT-ASSETS> 11,316,370
<PP&E> 3,568,095
<DEPRECIATION> (1,354,124)
<TOTAL-ASSETS> 14,040,589
<CURRENT-LIABILITIES> 8,841,886
<BONDS> 0
0
0
<COMMON> 201,970
<OTHER-SE> 4,185,323
<TOTAL-LIABILITY-AND-EQUITY> 14,040,589
<SALES> 27,987,969
<TOTAL-REVENUES> 27,987,969
<CGS> 23,838,094
<TOTAL-COSTS> 23,838,094
<OTHER-EXPENSES> 4,860,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 680,749
<INCOME-PRETAX> (1,391,830)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,391,830)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,391,830)
<EPS-PRIMARY> (.98)
<EPS-DILUTED> (.98)
</TABLE>
