SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C., 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
COMMISSION FILE # 1-06855
WORKSAFE INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1874010
(State or other jurisdiction of (Employer I.D.#)
incorporation or organization)
130 West 10th Street, Huntington Station, N.Y. 11746
(Address of principal executive offices and zip code)
(631) 427-1802
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at October 17, 2000
Common Stock, par value 1,686,579
$.12 per share
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PART I - FINANCIAL INFORMATION
WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2000 2000
---- ----
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 57,050 $ --
Accounts receivable, net of allowance
for doubtful accounts of $73,250 and
$80,500, respectively 3,867,593 4,202,401
Inventories 4,814,589 5,263,245
Other current assets 721,764 598,516
----------- -----------
Total current assets 9,460,996 10,064,162
PROPERTY, PLANT AND EQUIPMENT, net 2,095,036 2,161,123
EXCESS OF COST OVER NET ASSETS ACQUIRED 375,165 380,865
OTHER ASSETS 13,969 75,411
----------- -----------
Total assets $11,945,166 $12,681,561
=========== ===========
See accompanying notes.
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WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2000 2000
---- ----
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 6,170,656 $ 6,563,839
Accounts payable 3,599,019 3,710,860
Accrued expenses and other liabilities 337,044 297,980
Current portion of long-term debt 43,257 43,336
------------ ------------
Total current liabilities 10,149,976 10,616,015
LONG-TERM DEBT 690,188 692,964
------------ ------------
Total liabilities 10,840,164 11,308,979
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized 1,000,000 shares;
no shares issued and outstanding -- --
Common stock, $.12 par value;
authorized 20,000,000 shares;
1,686,579 shares issued and outstanding 202,390 202,390
Additional paid-in capital 9,844,338 9,844,338
Accumulated deficit (8,941,726) (8,674,146)
------------ ------------
Total shareholders' equity 1,105,002 1,372,582
------------ ------------
Total liabilities
and shareholders' equity $ 11,945,166 $ 12,681,561
============ ============
See accompanying notes.
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WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
NET SALES $ 6,658,155 $ 5,787,162
COST OF GOODS SOLD 5,792,111 4,798,138
----------- -----------
Gross profit 866,044 989,024
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 933,459 953,315
----------- -----------
(LOSS)INCOME FROM OPERATIONS (67,415) 35,709
OTHER EXPENSE(INCOME), net 107 (12,127)
INTEREST EXPENSE 200,058 145,829
----------- -----------
Net loss $ (267,580) $ (97,993)
=========== ===========
NET LOSS PER SHARE
Basic and diluted $ (.16) $ (.06)
=========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic and diluted 1,686,579 1,686,579
=========== ===========
See accompanying notes.
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WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (267,580) $ (97,993)
Adjustments to reconcile net loss from
continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 83,749 75,200
Net changes in assets and liabilities:
Accounts receivable 334,808 35,053
Inventories 448,656 (1,612,755)
Other current assets (123,248) 179,751
Other assets 61,442 6,214
Accounts payable (111,841) 992,211
Accrued expenses and other liabilities 39,064 66,155
----------- -----------
Net cash provided by (used in) operating
activities 465,050 (356,164)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (11,962) (60,204)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt repayments (2,855) (71,425)
Borrowings under line of credit 6,828,505 6,481,886
Repayments under line of credit 7,221,688) (6,184,705)
----------- -----------
Net cash (used in) provided by financing
activities (396,038) 225,756
----------- -----------
Net cash provided by (used in) continuing operations
57,050 (190,612)
Net cash provided by discontinued operations -- 95,144
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
57,050 (95,468)
CASH AND CASH EQUIVALENTS, beginning of period -- 129,352
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 57,050 $ 33,884
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 200,067 $ 150,483
=========== ===========
Income taxes $ 1,292 $ 1,405
=========== ===========
</TABLE>
See accompanying notes.
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WORKSAFE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements of Worksafe Industries Inc. and subsidiaries ("Worksafe")
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the consolidated balance sheet as of September 30, 2000 and
the related statements of operations and cash flows for the three months ended
September 30, 2000 and 1999.
The results of operations for the three months ended September 30, 2000 and 1999
are not necessarily indicative of the results for the entire year.
The summarized financial information does not include all disclosures required
to be included in a complete set of financial statements prepared in conformity
with generally accepted accounting principles. Such disclosures were included
with the consolidated financial statements of Worksafe as of June 30, 2000, and
included in its Annual Report on Form 10-K. Such statements should be read in
conjunction with the data herein.
2. Liquidity and Financing
During the year ended June 30, 2000, Worksafe incurred a net loss of $1,671,139.
The net loss was primarily due to a negative inventory discrepancy, between the
Company's physical inventory count and the amount recorded on the general
ledger, which was discovered in connection with the completion of the fiscal
2000 year-end closing. The Company is currently investigating the cause of this
discrepancy and has notified its insurance carriers of its intention to file a
claim. However, there can be no assurance that the Company will be awarded any
benefit as a result of any claim filed. The Company is in technical default of
certain loan covenants contained in its line of credit agreement with Congress
Financial Corporation ("Congress"), whereby Congress has the right to demand
repayment of all amounts outstanding under the line. To date, Congress has not
demanded such repayment. Additionally, under the terms of Worksafe's mortgage on
its Huntington Station, N.Y. facility, should Congress demand repayment of the
line of credit, Worksafe would be in default of the mortgage, which would become
due and payable in full.
While there is no formal agreement, Congress has been providing the Company with
an overdraft facility, and the Company has been engaged in ongoing discussions
with Congress in an effort to obtain additional increases in availability. The
Company is also considering alternative financing sources such as strategic
investors and other lenders.
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Management has been developing a broad operational plan, which provides for
personnel reductions, alternative sources of lower cost raw materials, the
consolidation of certain manufacturing operations, reconfiguration of sales
territories and lower sales commissions. Management believes that with the
successful execution of this plan, and the necessary financing arrangement, they
will have sufficient working capital to continue in operations for the next
twelve months. However, there can be no assurance that Worksafe will be able to
obtain the necessary financing, at favorable terms, needed to implement this
plan. Additionally, even with the necessary financing, due to uncertainties
involved in the execution of this plan, many of which are outside the control of
Worksafe, there can be no assurance that Worksafe will be able to successfully
implement this plan. These factors raise substantial doubt as to Worksafe's
ability to continue as a going concern, and as a consequence, Worksafe's
independent public accountants included an additional paragraph regarding this
uncertainty in their auditors' report on Worksafe's consolidated financial
statements for the year ended June 30, 2000.
In the first quarter of fiscal 2001, Worksafe incurred an unaudited net loss of
$267,580 and has negative working capital. Worksafe has been advised by its
independent public accountants that if management is unable to successfully
execute their plans and improve operations, Worksafe will again receive an
auditors' report for fiscal 2001, which will include an uncertainty with regard
to Worksafe's ability to continue as a going concern.
3. Inventories
Inventories are valued at the lower of first-in, first-out cost or market and
consist of the following:
September 30, June 30,
2000 2000
---- ----
Raw materials $1,152,372 $ 981,235
Work-in-process 978,767 955,236
Finished goods 2,683,450 3,326,774
---------- ----------
Total $4,814,589 $5,263,245
========== ==========
4. Litigation
Worksafe is a party to various asbestos lawsuits alleging damages from exposure
to asbestos products previously sold by Worksafe. Refer to Part II, Other
Information, Item I "Legal Proceedings" in this Form 10-Q, as well as Note 12 to
the audited Consolidated Financial Statements for the year ended June 30, 2000,
regarding the asbestos litigation.
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5. Net Loss Per Share
Basic loss per share amounts were computed by dividing the net loss by the
weighted-average number of common shares outstanding, excluding any potential
dilution. Diluted loss per share amounts were computed by reflecting potential
dilution from the exercise of stock options. As the inclusion of any dilutive
securities for the three months ended September 30, 2000 and 1999, would have
had an antidilutive effect, no reconciliation is presented herein.
6. Comprehensive Loss
For the three months ended September 30, 2000 and 1999, Worksafe's operations
did not give rise to items included in comprehensive loss which were not already
included in net loss. Therefore, Worksafe's comprehensive loss is the same as
its net loss for all periods presented.
7. Recent Accounting Pronouncements
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, became effective in the quarter ended September
30, 2000 SFAS No. 133 does not require retroactive restatement of prior period
financial statements. This statement requires the recognition of all derivative
instruments as either assets or liabilities in the balance sheet measured at
fair value. Derivative instruments are recognized as gains or losses in the
period of change. If certain conditions are met where the derivative instrument
has been designated as a fair value hedge, the hedge items may also be marked to
market through earnings, thus creating an offset. If the derivative is designed
and qualifies as a cash flow hedge, the changes in fair value of the derivative
instrument are recorded in comprehensive income. The Company does not presently
make use of derivative instruments, and therefore, the adoption of SFAS No. 133
did not have an impact on the results of operations of Worksafe.
Shipping and Handling Costs
In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus
with respect to EITF Issue No. 00-10, "Accounting for Shipping and Handling
Revenues and Costs." The purpose of this issue discussion was to clarify the
classification of shipping and handling revenues and costs. The consensus
reached was that all shipping and handling billed to customers is revenue.
8
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Further, a consensus was reached that the classification of shipping and
handling costs is an accounting policy decision that should be disclosed
pursuant to APB Opinion No. 22, "Disclosures of Accounting Policies." A company
may adopt a policy of including shipping and handling costs in cost of goods
sold. If shipping costs are significant and are not included in costs of goods
sold, a company should disclose both the amounts of such costs and the line
items on the statement of operations that included them.
This issue will require a restatement of prior periods for changes in
classification. This consensus is effective for the Company beginning with the
fourth quarter of fiscal 2001. The Company is in the process of quantifying the
impact of the adoption of this issue, which will not change previously reported
(loss) income from operations or net loss.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Worksafe's operations consist of its manufacturing segment which produces
disposable and reusable industrial apparel and protective knit gloves. Worksafe
maintains facilities for warehousing and production in Puerto Rico, Alabama,
Mexico (a contractor), Texas, California, Louisiana and Minnesota.
Results of Operations
Net sales for the three months ended September 30, 2000 were $6,658,000 as
compared to $5,787,000 for the three months ended September 30, 1999, an
increase of 15.1%. This increase was primarily due to increased inventory to
support an increase in customer demand resulting from industry consolidation,
sales of higher priced products, and the realization of additional sales volume
from focusing marketing efforts in new and existing markets and industry
segments.
Worksafe's gross margin decreased to 13.0% for the first quarter of fiscal 2001
from 17.7% for the same quarter in fiscal 2000. This decrease is mainly due to
changes in product mix, and the highly competitive pricing by competition for
disposable products.
Selling, general and administrative expenses for the quarter ended September 30,
2000 were $933,000 (or 14.0% of sales) as compared to $953,000 (or 16.5% of
sales) for the same period in the prior year. This decrease, both in amount and
as a percentage of sales, was due to increased sales as well as lower collection
and legal fees and higher advertising discounts offset by higher freight costs.
Interest expense was $200,000 for the first quarter of fiscal 2001, an increase
of $54,000 when compared to the same quarter of fiscal 2000. This increase was
principally due to higher average borrowings from Congress at higher rates,
along with a higher principal balance on the mortgage of the property for
Worksafe's headquarters.
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Liquidity and Capital Resources
In connection with its fiscal 2000 year-end closing, Worksafe discovered a
negative inventory discrepancy of $1,350,000. This inventory discrepancy was
charged against Worksafe's operations in fiscal 2000. Worksafe hired forensic
consultants to assist in determining the cause of this discrepancy. This
investigation is presently ongoing. However, Worksafe does have $1 million of
insurance coverage for employee theft and $1 million for third party theft.
Worksafe has not yet filed a claim against its policies, but has notified the
applicable insurance carriers of a potential claim. However, there can be no
assurance that Worksafe will be awarded any benefit as a result of any claim
filed.
Worksafe has a line of credit agreement (the "Agreement") with Congress
Financial Corporation ("Congress"), which expires in October 2002. The line
provides for borrowings of up to $8,000,000, with interest payable monthly at
.75% in excess of prime, and an unused line fee of 1/4% per year. The limits on
borrowings are 85% of eligible accounts receivable and 55% of eligible
inventory. The maximum amount Worksafe can borrow on the inventory portion is
$3,600,000. The amounts outstanding under the line as of September 30, 2000 and
June 30, 2000, were approximately $6,171,000 and $6,564,000, respectively. The
loans are subject to certain working capital and net worth requirements and are
collateralized by all of the assets of Worksafe (except for the Huntington
Property, which is subject to a first mortgage of $647,000). The Agreement
prohibits the payment of cash dividends. Worksafe is in technical default of
certain loan covenants contained in the Agreement with Congress, whereby
Congress has the right to demand repayment. To date, Congress has not demanded
repayment. Should Congress demand repayment of the amounts due under the line,
the mortgage on the Huntington Property would be in default and become due and
payable as well.
While there is no formal agreement, Congress has been providing Worksafe with an
overdraft facility, and Worksafe has been in engaged in ongoing discussions with
Congress in an effort to obtain additional increases in availability. Worksafe
is also considering alternative financing sources such as strategic investors
and other lenders. There can be no assurance that Congress will not declare the
indebtedness immediately due payable, and that there will be other sources of
financing for Worksafe, if required.
Management has been developing a broad operational plan, which provides for
personnel reductions, alternative sources of lower cost raw materials,
consolidation of certain manufacturing operations, reconfiguration of sales
territories and lower sales commissions. Management believes that with the
successful execution of this plan, and the necessary financing arrangement, they
will have sufficient working capital to continue in operations for the next 12
10
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months. However, there can be no assurance that Worksafe will be able to obtain
the necessary financing, at favorable terms, needed to implement this plan.
Additionally, even with the necessary financing, due to uncertainties involved
in the execution of this plan, many of which are outside the control of
Worksafe, there can be no assurance that Worksafe will be able to successfully
implement this plan. As a consequence, Worksafe's independent public accountants
have included an additional paragraph in their auditors' report on the
consolidated financial statements for the year ended June 30, 2002 with regard
to the uncertainty as to Worksafe's ability to continue as a going concern.
In the first quarter of fiscal 2001, Worksafe incurred an unaudited net loss of
$267,580 and has negative working capital. Worksafe has been advised by its
independent public accountants that if management is unable to successfully
execute their plans and improve operations, Worksafe will again receive an
auditors' report for fiscal 2001, which will include an uncertainty with regard
to Worksafe's ability to continue as a going concern.
Net cash provided by operating activities was principally a result of a decrease
in inventories and accounts receivable, which was partially offset by a decrease
in other current assets and an increase in accounts payable.
Cash flows used in investing activities was a result purchases of property and
equipment. Worksafe has no material commitments for capital expenditures.
Cash flows used in financing activities were principally a result of net
payments to Congress.
At the present time, Worksafe, together with a variety of defendants, is party
to various asbestos-related lawsuits involving a number of plaintiffs, alleging
damages from exposure to asbestos products at one time sold by Worksafe.
Worksafe may become a party to additional asbestos-related actions in the
future. Worksafe is also party to other non-asbestos-related litigation.
Worksafe cannot, at this time, determine the outcome of these uncertainties. To
date, Worksafe's insurance coverage has been adequate and Worksafe's costs,
relative to asbestos litigation against it, have not been material.
Risks and Other Considerations
From time to time, information provided by Worksafe, statements made by its
employees, or information provided in its filings with the Securities and
Exchange Commission, may contain forward-looking information. Any statements may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "expects," "anticipates," "plans" and similar expressions are
intended to identify forward-looking statements. Worksafe's actual future
results may differ materially from the projections or statements made in such
forward-looking information as a result of various risks and uncertainties,
including, but not limited to, the following:
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Worksafe is dependent upon its revolving line of credit with Congress. In the
event that Worksafe is unable to maintain a favorable relationship with
Congress, Congress could demand repayment of all indebtedness, and in certain
cases, Worksafe's assets could be foreclosed upon. Additionally, should Congress
demand repayment, Worksafe would be in default of their mortgage, which would
also become immediately due and payable. There can be no assurance that Congress
will not demand repayment, or that there will be other sources of financing for
Worksafe, if required.
Worksafe is a party to numerous cases with respect to asbestos litigation and
additional asbestos actions which continue to be brought against it. To date,
Worksafe believes that its insurance coverage has been adequate for those
actions previously terminated. However, there can be no assurance that such
coverage will continue to be adequate in the future. As a result, there can be
no assurance that asbestos litigation will not have an adverse affect upon
Worksafe. See Item 1 of Part II of this Form 10-Q.
Many of Worksafe's competitors have greater financial, management, sales and
technical resources.
Worksafe's success depends to a significant degree on the contributions of its
key management. The loss of services of one or more key members of management
could have an adverse affect upon Worksafe.
Worksafe is also dependent upon Dupont which supplies Worksafe with Tyvek(R)
which is used for various lines of Worksafe's limited-use products. Management
believes that its current relationship with Dupont is satisfactory. Worksafe is
a party to a certain Garment Manufacturer & Seller License Agreement with
Dupont, pursuant to which Dupont provides Worksafe with non-woven fabric under
its trademark. This agreement, subject to its terms, continues in effect until
January 31, 2002.
Worksafe is required to maintain substantial inventory for its customers who
require products on short notice. There can be no assurance that Worksafe will
be able to maintain sufficient inventory, or that Worksafe will not return to
periods where there is not sufficient working capital to maintain its inventory
to meet the needs of its customers.
Worksafe also enjoys the benefits of various tax incentives with respect to its
operations in Puerto Rico. As Puerto Rico's tax exemptions are reduced or
expire, Worksafe may be required to pay taxes on income earned in Puerto Rico.
Worksafe is unable to predict the amount of such impact after such exemptions
are reduced or expire.
Due to the foregoing, the market price of Worksafe's common stock may be
volatile at times in response to fluctuations of Worksafe's operating results,
changes in analyst earnings estimates, market conditions, as well as general
conditions and other factors general to Worksafe.
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PART II - OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS
During the quarter ended September 30, 2000 approximately 201 asbestos actions
involving approximately 539 plaintiffs were instituted against Worksafe and
Puerto Rico Safety Equipment Corporation. These actions are for the most part in
the Supreme Court of the State of New York all counties within the City of New
York and involve a multitude of defendants. They are either actions, pursuant to
standard complaints, for personal injury or wrongful death setting forth a
number of causes of action in amounts of up to $10,000,000 for compensatory
damages and $10,000,000 for punitive damages. All of the foregoing actions have
been submitted to Worksafe's and Puerto Rico Safety Equipment Corporation's
insurance carriers for defense. Reference is also made to Item 3 of Worksafe's
Form 10-K for the year ended June 30, 2000 regarding asbestos actions against
Worksafe and its insurance coverage.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(B) A Form 8-K dated October 12, 2000 was filed with the Securities and Exchange
Commission on October 13, 2000 under Item 5 in connection with the late filing
of the Company's Form 10-K for the fiscal year ended June 30, 2000. This form
10-K has since been filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: November 20, 2000
WORKSAFE INDUSTRIES INC.
By: /s/ Lawrence Densen
------------------------------
LAWRENCE DENSEN
PRESIDENT & CHIEF EXECUTIVE OFFICER
By: /s/ Arthur J. Wasserspring
------------------------------
ARTHUR J. WASSERSPRING
VICE PRESIDENT OF FINANCE/
CHIEF FINANCIAL OFFICER
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