U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
X Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee required) For the fiscal year ended December 31, 1996.
Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required) For the transition period from to
Commission file number 1-11586
PTI HOLDING INC.
(Name of small business issuer in its charter)
Delaware 13-3590980
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
c/o 15 East North Street, Dover, DE 19901
(Address of principal executive offices) (Zip Code)
(302) 678-0855
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
Name of each exchange
on which registered
----------------------
Common Stock, par value
$.01 per share None
Warrants to purchase
Common Stock None
Securities registered under Section 12(g) of the Act:
Check whether the issuer: (1) filed 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 past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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.
State issuer's revenues for its most recent fiscal year. $17,529,509
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days. As of March 27, 1997, based upon the last sale price on such
date ($ 8.50), such aggregate market value was $ 20,106,402.
State the number of shares outstanding of each class of the issuer's
classes of common equity, as of the latest practicable date. As of March 27,
1997, 3,492,936 shares of the issuer's common equity were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
<PAGE>
PART I
ITEM 1. Description of Business.
History
The Company, formally known as Aerial Assault Inc., was incorporated
under the laws of Delaware in March 1990. Until February 28, 1994, the Company
was engaged in the business of designing, developing and marketing distinctive,
high-performance men's athletic footwear for basketball, and related apparel
bearing the Company's name and logo. The Company commenced sales in February
1992.
On March 1, 1994, the Company acquired Foam-O-Rama, Inc. ("Foam"), a
New York corporation which is principally engaged in the business of the design,
marketing and sale of bicycle helmets, by merging it with and into the Company's
wholly-owned operating subsidiary, Protective Technologies International Inc., a
New York corporation (the "Operating Subsidiary") pursuant to a Merger Agreement
and Plan of Reorganization dated February 14, 1994 among the Operating
Subsidiary, Foam and Foam's shareholders. From and after March 2, 1994, Foam had
no separate or independent existence, having been merged into the Operating
Subsidiary. For purposes of the transfer of the economic benefits and risks of
such transaction and the ongoing business of Foam, the acquisition was deemed to
have occurred as of the opening of business on January 1, 1994.
The principal assets of Foam as of the effective date of the
acquisition consisted of: approximately $601,000 of accounts receivable;
approximately $327,000 of inventory (including finished bicycle helmets and raw
materials); approximately $107,000 of molds and related tools (including
equipment deposits) for use in the production of bicycle helmets from raw
plastic; certain proprietary information (including production methods, vendor
contacts, and customer information) having no book value; and all of the issued
and outstanding capital stock of Protective Technologies of America, Inc., a
nonoperating wholly owned subsidiary of Foam that licensed the name Protective
TechnologiesTM to Foam.
Products
The Company competes in mass market channels by offering a complete
line of sport safety helmets in toddler through adult sizes. Currently, the
Company produces and markets four distinctive helmet series, with each offered
in a variety of patterns, colors and sizes. Helmets are made primarily of
expanded EPS foam with a thin PVC or PETG micro shell over the top of the
helmet. All of the Company's helmets meet or exceed the American National Safety
Institute (ANSI) standards for bicycle helmet design. The Company's helmets are
sold at retail for prices as low as $9.99 for a simple opening price point
helmet for children to $49.99 for an advance, multi-vented helmet designed for
adults.
In addition to its own line of brand-name helmets, the Company
manufactures helmets and accessories as a contractor for retailers and other
companies selling private label products. This portion of the Company's business
accounted for less than 10% of the Company's revenues during 1995 and 1996.
The Company's principal models of helmets include:
Cool Cat(TM) and Kid KatTM: These models are the Company's best selling opening
price point helmets for the toddler, child and youth categories. Helmets in
these models retail for $9.99 to $12.99. The Cool CatTM was the best selling
helmet at Toys R Us and Target stores from 1994 through 1996.
Elite(R) Series: These models comprise the Company's line of advanced,
multi-vented helmets to be sold through independent bicycle dealers ("IBDs").
The Company began shipping helmets in these models as of April of 1995, and they
currently retail for prices ranging from $30 to $50.
9000 SeriesTM: The Company's newest line of helmets, designed primarily for
bicycling, is available in youth and adult sizes. This helmet retails in the $20
to $25 dollar range.
The Company's bicycle-related products include, among other items,
bicycles, knee and elbow pads, locks, water bottles and general biking
equipment. A catalog detailing all of the Company's products is available upon
request.
Manufacturing
The Company assembles and distributes helmets, and distributes bicycles
and bicycle accessory products from its manufacturing facility in New York
State. The Company sources out the manufacturing of all the raw components of
its helmets, including the plastic foam liners that constitute the main part of
the helmets, to various manufacturers in the United States. Such independent
manufacturers use molds and tooling that are owned by and for the exclusive use
of the Company in the manufacture of these sub-assembly components. Further, the
Company sources out the manufacturing of its bicycle and bicycle accessory
products to certain foreign manufacturers in East Asia. Management believes that
this outsourcing is the best long-term arrangement because it enables the
Company to reduce its need for capital expenditures on equipment, and its
manufacturing overhead.
However, access to the foreign manufacturers could be adversely
affected by economic or political instability in such foreign countries, and by
currency fluctuations. In addition, the bicycles and bicycle accessories
purchased by the Company for resale are subject to United States custom duties.
Under the fixed duty structure in effect since July 1981, duties range from 8.5%
to 37.5%, plus unit charges, depending on whether the principal component is
leather or some other material. Further, the adoption of bilateral trade
agreements between the United States and countries in which the Company's
suppliers are located, work stoppages or the impositions of unilateral
restrictions on trade, including quotas or additional duties, by either the
United States or any supplier company, could disrupt supplies and/or increase
the costs of obtaining products. The Company is unable to predict whether
additional customs duties, quotas or other restrictions may be imposed on the
importation of its products in the future. Any such action could result in
increases in the cost of bicycles or bicycle accessories and, accordingly, might
adversely affect the sales or profitability of the Company.
Although the Company's operations would be seriously disrupted until
alternative suppliers are found, with a significant adverse financial impact,
the Company believes that such contract manufacturing of raw helmets and tooling
and molds, as well as all of the raw materials required for such manufacturing,
is available from several alternate sources. In addition, the Company believes
that alternative suppliers for the Company's bicycle and bicycle accessory
products are available in the event of a disruption of supply.
Marketing and Distribution
The two largest segments in the bicycle helmet market are mass
merchants and independent bicycle dealers ("IBDs"). The Company historically has
focused its sales goals on servicing the large mass-merchant customers. A large
portion of the helmet sales to children in the United States are due to the
mandatory helmet legislation that has been adopted in many states. Mass
merchants have accounted for a large portion of the purchases motivated by such
legislation because of their low retail prices for helmets relative to the
bicycle dealers. In addition, mass merchants provide the largest order volume
and do not require the extensive distribution channels needed to provide
services to IBDs. The Company's helmets are sold chain-wide in Toys R Us (600
stores), Target stores (550 stores), Sam's Club (430 stores), Sports Authority
(150 stores), and other regional mass merchants.
During 1996, the Company's sales to its single largest customer
constituted approximately 65 percent of its gross revenues, compared to
approximately 63 percent during the 1995 calendar year. Sales to its second
largest customer during the 1996 accounted for 15 percent of gross revenues,
compared to 23 percent in 1995. The Company believes that its relationships with
these accounts are good.
The Company has entered into a license arrangement with Hasbro, Inc. to
manufacture and market helmets, bicycles and bicycle accessories under the
PlayskoolTM brand name. In addition, the Company has entered into an exclusive
license with Mattel, Inc. to manufacture helmets under the BarbieTM brand name,
as well as a license to sell BarbieTM bicycle accessory products.
Private label manufacturing of helmets and accessories for other
companies in the helmet market has historically constituted a small part of the
Company's business, and remains so to date. Although this segment generates a
lower profit margin than do sales to mass merchants, the Company plans to
attempt to increase private label sales as a percent of overall sales because
they will allow the Company to widen its customer base, gain economies of scale
in production and increase penetration into retail market space that might
otherwise be given to a competitor. The Company's private label purchasers
include Toys-R-Us and Target stores.
The Company is currently seeking arrangements with established IBD
distributors to expand its marketing to reach the IBDs. The Company believes
that its line of Elite(R) Series helmets will enable it to gain market share in
the high end of the helmet market.
Trademarks and Patents
The Company markets its bicycle helmets, bicycles and bicycle products
under the brand names Protective TechnologiesTM and PTITM. In addition, the
Company markets different helmet styles under the trademarks Cool CatTM, Kid
KatTM, Elite(R) Series, and the 9000 SeriesTM. Also, the Company licensed its
Aerial Assault trademark to a third party for use in connection with the sale of
footwear during 1996 for the sum of $50,597. The Company plans to use its Aerial
Assault trademark in connection with the sale of bicycle helmets, bicycles and
bicycle accessories in the near future. The Company believes that such
trademarks are helpful to the Company's ability to market its products. To the
extent it has not already done so, the Company plans to apply for registration
of such trademarks.
The Company does not currently use or employ any patents material to
its business or operations.
Competition
The bicycle helmet industry is dominated by Bell Sports Corporation
("Bell"), which has for several years maintained approximately a 45% market
share in the United States. In 1995, Bell and American Recreation, the second
largest manufacturer of bicycle helmets, merged their operations. The Company
estimates that Bell now controls approximately 65% of the market, based on units
sold in 1996. In addition to Bell, significant competitors include Troxol,
Specialized and Trek, as well as other small manufacturers, including several
new entrants in 1996. Most of the new entrants, however, have not succeeded in
capturing a significant market share because mass merchant buyers have generally
been reducing the number of helmet suppliers and dealing with only those
companies that can supply a wide variety of helmet designs and price points.
Bell and other competitors have significantly greater financial and
other resources than the Company; however, the Company's ability to compete with
Bell is highlighted by its success at Toys R Us and Target, where it has
replaced Bell as the largest vendor. Although the Company has gained market
share in the past by undercutting the prices of competitors, many competitors
have reduced their prices to meet the Company's prices. The Company's ability to
compete in the future will depend on its giving customers better and more varied
designs, better service and more value-added products.
Research and Development
The Company's research and development activities include development
of new products, the improvement of existing products and the refinement of its
manufacturing processes. During 1996, the Company spent approximately $109,000
on such research and development, up from approximately $54,000 in each of 1995
and 1994.
Employees
As of March 25, 1997, the Company had approximately 100 full-time
employees, including 10 individuals in management, administration and clerical
positions. The Company's employees are not represented by a labor union, and the
Company believes that its relations with employees are satisfactory.
ITEM 2. Description of Property.
The Company's principal facility is a 97,000 square foot combined
office, warehouse and assembly facility in Hastings on Hudson, New York. The
Company occupies 37,000 square feet of such facility pursuant to a lease, which
expires in 1997. The Company occupies the remaining 60,000 feet pursuant to an
amendment to the lease which is in draft form but not yet executed. The Company
believes that comparable alternate facilities are available.
The Company has advanced approximately $300,000 at December 31, 1996 on
behalf of the landlord to make builing impovements at the Company's facility.
Although there is no executed agreement to this effect, the Company has been and
intends to continue to offset these advances to rent charges in 1997.
ITEM 3. Legal Proceedings.
Although the Company is a party to certain pending trade litigation's
which have arisen in the usual course of its business, management deems such
litigation's immaterial to the Company's financial position, results of
operations and future cash flows.
ITEM 4. Submission of Matters to a Vote of Security-Holders.
No matter was submitted during the fourth quarter of the Company's 1996
fiscal year to a vote of security-holders.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.
The Principal market on which the Company's common stock trades is The
NASDAQ Small-Cap Stock Market under the symbol "PTII."
The following table sets forth the high and low sale prices according
to The NASDAQ Stock Market Research Department for the common stock of the
Company during the periods indicated:
NASDAQ Stock Market List Prices
<TABLE>
<S> <C> <C>
Quarter Ended High Low
- - ------------- -------- -----
March 31, 1995 $ 2-7/8 $ 1-1/4
June 30, 1995 $ 3-3/4 $ 1-1/4
September 30, 1995 $ 6 $ 3-5/8
December 31, 1995 $ 7 $ 4-3/4
March 31, 1996 $ 6-11/16 $ 4-3/8
June 30, 1996 $ 9-3/8 $ 5-3/4
September 30, 1996 $ 9-5/8 $ 7 1/16
December 31, 1996 $ 10-3/8 $ 7 3/4
</TABLE>
The above prices are over-the-counter market quotations and reflect
inter-dealer prices, without retail mark-up, mark-down, or commission, and may
not represent actual transactions. The source of such prices is The NASDAQ Stock
Market's monthly statistical summary reports.
As of February 28, 1997, the approximate number of holders of record of
the Company's common stock was 100, and the number of beneficial holders of the
Company's common stock was in excess of 1,300. The Company has not paid
dividends to its shareholders since its inception and does not plan to pay
dividends in the foreseeable future. The Company currently intends to retain any
earnings to finance the growth of the Company.
ITEM 6. Management's Discussion and Analysis
Results of Discontinued Operations
For the year ended December 31, 1996 the Company had net income of
$1,691,118. For the year ended December 31, 1995 the Company had net income of
$867,936, consisting of $787,936 from continuing operations, and $80,000 from
discontinued operations based on the write-off of an $80,000 account payable
pursuant to a resolution of a dispute with one of the Company's former
suppliers.
Results of Continuing Operations
The Company's net sales were $17,529,509 during the year ended December
31, 1996, an increase of 115% from its net sales of $8,166,788 in 1995.
The 115% sales increase from 1995 to 1996 resulted predominantly from
increased sales to existing customers through the addition of new helmet models,
from increased market share at the expense of competitors, from increased sales
in existing models due to growth in the overall helmet market, from increased
sales of the Company's bicycle and bicycle accessory products, from the addition
of new retail outlets for the Company's products, from introducing new accessory
product lines, and from the Company's license arrangements both with Hasbro,
Inc., to manufacture and market helmets, bicycles and bicycle accessories under
the PlayskoolTM brand name.
The Company's net income for the year ended December 31, 1996 was
$1,691,118, compared to the Company's net income for the year ended December 31,
1995 of $867,936, consisting of $787,936 of net income from operations and
$80,000 of net income from discontinued operations. The increase in net income
was due to several factors, including higher sales levels, higher gross margins,
and lower selling general and administrative expenses as a percentage of sales.
The cost of sales for the year ended December 31, 1996 was $12,140,542
(resulting in a gross profit margin of 31%), compared to the Company's cost of
sales for the year ended December 31, 1995 of $5,954,212 (resulting in a gross
profit margin of 27%).
Selling, general and administrative expenses for the year ended
December 31, 1996 were $2,717,851, compared to selling, general and
administrative expenses of $1,664,002 for the year ended December 31, 1995. As a
percentage of sales these expenses were 16% and 20% for the years ended December
31, 1996 and 1995, respectively.
The increased selling, general and administrative spending in 1996 was
primarily due to the higher costs associated with the expansion of the helmet,
bicycle and bicycle accessory business and the higher costs for human resources.
However, as a percentage of sales, selling, general and administrative spending
decreased from the 1995 fiscal year. As the Company's sales grow faster than its
increases in fixed overhead, the Company should continue to see its selling,
general and administrative expenses as a percentage of sales fall.
Capital Resources
The Company has satisfied its capital requirements through the proceeds
of its initial public offering of securities, which resulted in net proceeds of
approximately $3,800,000, through the proceeds of a Regulation 'S' private
placement in November 1994, which resulted in gross proceeds of approximately
$751,875, through the exercise of certain outstanding options held by employees
and consultants of the Company, which resulted in net proceeds of approximately
$175,075, through internal cash flow and through the Operating Subsidiary's
opening of a revolving line of credit in May, 1996.
The Company pays its employees and vendors on a weekly, monthly or
bimonthly basis, while its customers pay for products on an average of 75 days
after shipment, and therefore the Company has substantial needs for working
capital. As of December 31, 1996, the Company had $361,878 of cash available for
its cash needs, compared to cash of $969,329 as of December 31, 1995.
On May 6, 1996, the Operating Subsidiary opened a revolving line of
credit at Key Bank of New York. The line of credit is collateralized by the
Operating Subsidiary's inventory, receivables and other assets, and guaranteed
by the Company. As of December 31, 1996 the Company had $1,196,199 outstanding
pursuant to such line of credit.
The Company will also consider financing through additional public and
private securities offerings and solicitations. In addition, the Company has
recently registered shares of Common Stock underlying various warrants and
options of the Company, the exercise of which will result in gross proceeds of
approximately $4,635,535; however, no assurance can be given that any of the
aforementioned warrants or options will be exercised.
Based on the Company's current plans, management anticipates that
current cash balances, together with the Company's line of credit and cash flow
generated from operations, will be sufficient to continue to fund production,
purchase of equipment, increased marketing activities and continued research and
development, as well as the rest of the Company's cash requirements, for
approximately the next 18 months.
The Company's research and development efforts are directed toward
developing new products, improving existing products and refining its
manufacturing processes. Such research and development costs amounted to
approximately $109,000 for the year ended December 31, 1996, and approximately
$54,000 for each of the fiscal years ended December 31, 1995 and 1994. It is
expected that the Company will spend approximately $150,000 on research and
development during the 1997 year.
ITEM 7. Financial Statements.
Page
--------
Independent Auditor's Report for 1996 F-1
Consolidated Balance Sheet as of December 31, 1996 F-2
Consolidated Statement of Income for the years
ended December 31, 1996 and 1995 F-3
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1996 and 1995 F-4
Consolidated Statement of Cash Flows for the years F-5
ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements F-6 to
F-18
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
Executive
Officer or
Director
Name Age Position Since
- - ----------- --- ---------------- -------
Meredith W. Birrittella 30 Chairman, Director, Chief Executive 3/21/90
Officer, and Chief Financial Officer
Myles Birrittella 33 Director 10/22/96
Robert Fuhrman 68 Director 12/12/96
Warren Schaeffer 39 Director, Secretary and President 3/1/94
of Operating Subsidiary
Meredith W. Birrittella. Mr. Birrittella, age 30, a co-founder of the
Company, has served as an officer and director since the Company's inception,
and is currently Chairman, C.E.O. and C.F.O. of the Company.
Myles Birrittella. Mr. Myles Birrittella, age 33, became a director of
the Company in October, 1996. Mr. Birrittella is currently employed by Merrill
Lynch as a financial consultant. For the years 1995 and 1996, prior to his
employment with Merrill Lynch, Mr. Birrittella was a self-employed investor.
From 1992 through 1994, prior to becoming a self-employed investor, Mr.
Birrittella was the National Sales Manager for the Company.
Warren Schaeffer. Mr. Schaeffer, age 39, co-founded Foam, the company
acquired by the Company in March, 1994. Since the acquisition, he has served as
the president of the Operating Subsidiary, and in October, 1996, was elected as
a director of the Company. As of December, 1996, Mr. Schaeffer became the
Secretary of the Company. Prior to his employment by the Operating Subsidiary,
Mr. Schaeffer was the President and a director of Foam.
Robert Fuhrman. Mr. Fuhrman, age 68, has been Chairman of Fuhrman
Associates, Inc. since 1972, serving as a managing and marketing consultant for
a wide variety of consumer product companies. During this period, he has also
served from time to time as an executive of client companies, including
positions as President (CEO) of Eggland's Best, Inc., Marketing Vice President
of Beech-Nut Nutrition Inc. (Baby Food) and Senior Vice President of "Totes."
The Board of Directors is classified into three classes. Directors in
each class are elected for a period of three years at the Company's annual
meeting of shareholders, and each serves until his or her successor is duly
elected by the shareholders. Currently, with the exception of Meredith W.
Birrittella, whose term of directorship will expire in August 1997, each
director's term in office has expired and/or such director is serving an interim
term until the election of his successor. Officers are elected by and serve at
the will of the Board of Directors. No director receives any compensation for
services as a director. The only committee of the Board of Directors is the
Option Committee, consisting of Mr. Fuhrman and Mr. Myles Birrittella. The
Company has no executive, audit, nominating, compensation or other committees.
Meredith Birrittella and Myles Birrittella are brothers.
The following persons, each of whom was, at some time during the
Company's 1996 fiscal year, a director, officer or beneficial owner of more than
10 percent of any class of equity securities of the Company, failed to file on a
timely basis reports required by Section 16(a) of the Securities Exchange Act of
1934 during such year or prior years:
Name of Number of Number of Transactions
Reporting Person Late Reports Not Filed on Timely Basis
Martin P. Birrittella 1 4
Thomas J. Coleman 2 4
ITEM 10. Executive Compensation.
Summary Compensation Table
<TABLE>
<S> <C> <C> <C> <C> <C>
Securities
Name and Underlying Other Annual
Principal Position Year Salary Bonus Options Compensation(1)
- - ------------------------ ---- ---------- ----- ----------- ---------------
Meredith W. Birrittella 1996 $155,385 -0- 25,000 $ 2,424
Chief Executive Officer 1995 $131,192 -0- 25,000 $ 2,024
Chief Financial Officer 1994 $101,131 -0- 25,000 $17,420
Warren Schaeffer 1996 $130,769 -0- 27,000 $2,424
Secretary, and President 1995 $100,000(2) $50,000(3) -0- $ 0
of Operating Subsidiary 1994 $103,846(4) $50,000(3) -0- $ 0
</TABLE>
(1) Consists of dental and health insurance premiums and retirement
plan contributions.
(2) $10,000 of the stated amount has been repaid by Mr. Schaeffer to
the Company in retroactive salary adjustments under an employment agreement
between Mr. Schaeffer and the Company commencing January 1, 1994 (the
"Employment Agreement"). Although the Employment Agreement continues to govern
Mr. Schaeffer's employment with the Company, and remains in full force and
effect with respect to all other provisions, the Board of Directors of the
Company has increased the amount of compensation paid to Mr. Schaeffer pursuant
to the Employment Agreement, as is set forth in the above Summary Compensation
Table.
(3) Accrual of a deferred compensation payment of $100,000 paid by the
Company in March 1996, pursuant to the Employment Agreement, as a result of Mr.
Schaeffer's remaining with the Company throughout the fiscal years of 1994 and
1995.
(4) $20,000 of the stated amount has been repaid by Mr. Schaeffer to
the Company in retroactive salary adjustments pursuant to the Employment
Agreement.
Inside directors of the Company receive no compensation for serving as
a director; however, the Company's outside directors will receive compensation
in the amount of $7,500 per annum. In addition, the Company will grant 2,500
options to purchase the Company's common stock to each of the outside directors
at exercise prices equal to the closing market price of the Company's common
stock on the day of grant.
Option Grants In Last Fiscal Year
Percent of
Name and Principal Number of Securities Total Grants Exercise Expiration
Position Underlying Options to Employees(1) Price Date
- - --------------------- ------------------ --------------- -------- ----------
Meredith Birrittella 88,320(2) 46.4% 4.50 5/4/05
CEO, and CFO
Warren Schaeffer
Secretary, and President 2,000 1% 5.38 3/21/01
of Operating Subsidiary
(1) Does not include stock options granted to consultants of the
Company.
(2) In the 1995 fiscal year, the Company's net income exceeded
$750,000, thereby entitling Mr. Birrittella, as a holder of 8,832 Series A
Preferred Stock, to an issuance of ten shares of the Company's Common Stock for
each share of Series A Preferred Stock. On such basis, Mr. Birrittella was
entitled to 88,320 shares of Common Stock of the Company. However, Mr.
Birrittella relinquished all claim to said 88,320 shares of Common Stock and, in
consideration, the Company granted to him ten-year options to purchase 88,320
shares of the Company's Common Stock at the then-current market price of $4.50.
Indemnification
The Company's Certificate of Incorporation eliminates or limits the
personal financial liability of the Company's directors, except in situations
where there has been a breach of the duty of loyalty, failure to act in good
faith, intentional misconduct or knowing violation of the law. In addition, the
Company's By-laws include provisions to indemnify its officers and directors and
other persons against expenses, judgments, fines and amounts paid in settlement
in connection with threatened, pending or completed suits or proceedings against
such persons by reason of serving or having served as officers, directors or in
other capacities, except in relation to matters with respect to which such
persons shall be determined to have acted not in good faith, unlawfully or not
in the best interest of the Company.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 1, 1997, to the extent
known to the Company, the ownership of the Company's Common Stock by (i) each
person who is known by the Company to own of record or beneficially more than
five percent of the Company's Common Stock, (ii) each of the Company's directors
and executive officers and (iii) all directors and executive officers as a
group. Except as otherwise indicated, the shareholders listed in the table have
sole voting and investment powers with respect to the shares indicated.
<TABLE>
<S> <C> <C>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
- - -------------------- -------------------- -----------------
Martin P. Birrittella
One River Street
Hastings on Hudson, NY 10706 568,558(1) 15.8%
Meredith W. Birrittella
One River Street
Hastings on Hudson, NY 10706 673,559(2) 18.6%
Myles Birrittella
One River Street
Hastings on Hudson, NY 10706 470(3) 0%
Thomas J. Coleman
One River Street
Hastings on Hudson, NY 10706 403,705(4) 11.2%
Robert Fuhrman
One River Street
Hastings on Hudson, NY 10706 0 0
Warren Schaeffer
One River Street
Hastings on Hudson, NY 10706 157,000 (5) 4.2%
All directors and
officers as a group
(four persons) 821,028(2)(3)(5) 22.5%
</TABLE>
(1) Includes 25,000 shares of the Company's Common Stock which are
issuable in respect of stock options at an exercise price of $1.25 per share,
and 88,320 shares of the Company's Common Stock, which are issuable in respect
of stock options at an exercise price of $4.50. Does not include up to 176,640
shares of Common Stock issuable in respect of shares of Series A Preferred Stock
held by Martin Birrittella if the Company successfully achieves certain
specified performance goals set forth in the Designation of such Preferred
Stock, which are described below. See Item 12, "Certain Relationships and
Related Transactions."
(2) Includes 50,000 shares of the Company's Common Stock which are
issuable in respect of stock options issued under the Company's 1994 Joint
Incentive and Non-Qualified Stock Option Plan (See EXECUTIVE COMPENSATION -
Stock Options) at an exercise price of $1.25 per share, and 88,320 shares of the
Company's Common Stock, which are issuable in respect of stock options at an
exercise price of $4.50. Does not include up to 176,640 shares of Common Stock
issuable in respect of shares of Series A Preferred Stock held by Meredith
Birrittella if the Company successfully achieves certain specified performance
goals set forth in the Designation of such Preferred Stock, which are described
below. See Item 12, "Certain Relationships and Related Transactions."
(3) Does not include up to 940 shares of Common Stock issuable in
respect of shares of Series A Preferred Stock held by Myles Birrittella if the
Company successfully achieves certain specified performance goals set forth in
the Designation of such Preferred Stock, which are described below. See Item 12,
"Certain Relationships and Related Transactions."
(4) Includes 50,000 shares of the Company's Common Stock registered
hereunder which are issuable in respect of stock options at an exercise price of
$1.25 per share, and 58,880 shares of the Company's Common Stock which are
issuable in respect of stock options at an exercise price of $4.50. Does not
include up to 117,760 shares of Common Stock issuable in respect of the shares
of Series A Preferred Stock held by Mr. Coleman if the Company successfully
achieves certain specified performance goals set forth in the Designation of
such Preferred Stock, which are described below. See Item 12, "Certain
Relationships and Related Transactions."
(5) Includes 25,000 shares of the Company's Common Stock which are
issuable in respect of stock options at an exercise price of $1.25 per share.
Includes 2,000 shares of the Company's Common Stock which are issuable in
respect of stock options vesting as of December 31, 1996, at an exercise price
of $5.88 per share.
ITEM 12. Certain Relationships and Related Transactions.
Martin Birrittella (an officer and director of the Company until his
resignation on December 18, 1996), Meredith Birrittella, Myles Birrittella and
Thomas Coleman (an officer and director of the Company until his resignation on
November 22, 1996), collectively own 23,599 shares of the Company's Series A
Preferred Stock. The Series A Preferred Stock bears stock issuance rights
entitling the holder thereof to the issuance of a maximum aggregate amount of 30
shares of Common Stock for each share of Series A Preferred Stock in accordance
with the following schedule: if the Company has net income equal to $750,000
during any of the three complete fiscal years commencing January 1, 1993, then
10 shares of Common Stock will be issued in respect of each share of Series A
Preferred Stock; if the Company has gross revenues equal to or greater than
$20,000,000 during any of the five complete fiscal years commencing January 1,
1993, then 10 shares of Common Stock will be issued in respect of each share of
Series A Preferred Stock; if the Company has gross revenues equal to or greater
than $35,000,000 during any of the five complete fiscal years commencing January
1, 1993, then 10 shares of Common Stock will be issued in respect of each share
of Series A Preferred Stock; if a cumulative total of 50% or more of the
Redeemable Public Warrants issued in the Company's initial public offering shall
have been exercised, then 10 shares of Common Stock will be issued in respect of
each share of Series A Preferred Stock. All shares of Common Stock issuable in
respect of the Series A Preferred Stock and not previously issued will be issued
if the Company is acquired, provided that if the Common Stock is then publicly
traded, the average bid price during the prior 90 days shall equal or exceed the
initial public offering price of such Common Stock.
In the 1995 fiscal year, the Company's net income exceeded $750,000,
thereby entitling holders of Series A Preferred Stock to an issuance of ten
shares of the Company's Common Stock for each share of Series A Preferred Stock.
On such basis, Meredith Birrittella, Martin Birrittella and Thomas Coleman were
collectively entitled to a total of 235,520 shares of Common Stock of the
Company pursuant to their Series A Preferred Stock issuance rights. However,
those individuals relinquished all claim to said 235,520 shares of Common Stock
and, in consideration, the Company granted such individuals ten-year options to
purchase 235,520 shares of the Company's Common Stock at the then-current market
price of $4.50. Myles Birrittella did not relinquish his claim to the 470 shares
of Common Stock to which he was entitled, and the Company issued such shares of
Common Stock to him.
Of the original 707,970 shares of Common Stock issuable in respect of
the shares of Series A Preferred Stock held by the aforementioned current and
former officers and directors, 471,980 shares of Common Stock remain issuable.
In September 1994, the shareholders of the Company approved a stock
option plan, which provided that Mr. Coleman and Mr. Meredith Birrittella would
receive options to purchase 25,000 shares of Common Stock of the Company at
$4.00 per share for each year of service as an executive officer of the Company
from 1994 through and including 1999. However, in May 1995 both Mr. Coleman,
then a director and executive officer of the Company, and Mr. Birrittella waived
all rights to receive these options. In consideration for such waiver, the
Company granted to Mr. Coleman options (such options not pursuant to the Plan)
to purchase 50,000 shares of Common Stock of the Company at $1.25 per share
(such options exercisable for five years from the date of vesting), 25,000 of
which options vested on May 1, 1995, and 25,000 of which vested on March 31,
1996. In consideration for Mr. Meredith Birrittella's waiver, the Company
granted to him options (pursuant to the Plan) to purchase 100,000 shares of
Common Stock of the Company at $1.25 per share (such options exercisable for
five years from the date of vesting), of which 25,000 vested on May 1, 1995,
25,000 vested on March 31, 1996, 25,000 will vest on March 31, 1997, and the
remaining 25,000 will vest on March 31, 1998.
As the Company's sales increased in the first quarter of 1996 at a
greater rate than its receivables matured, the Company experienced a shortage of
working capital. To meet these working capital needs during the course of the
Company's negotiations with a commercial lender for a line of credit, the
Company obtained bridge financing in the total amount of $1,272,800 from Martin
P. Birrittella, Meredith W. Birrittella and Warren Schaeffer. On May 6, 1996 the
Company signed a line of credit agreement, and drew upon such facility to fully
satisfy its loans from Messrs. M.P. Birrittella, M.W. Birrittella and Schaeffer.
In connection with this bridge financing, the Company paid a total of $9,658 of
interest to the aforementioned lenders.
ITEM 13. Exhibits; List and Reports on Form 8-K.
(a) Exhibits
3.1 Registrant's Articles of Incorporation, as amended, incorporated by
reference to the like numbered exhibit in the Registrant's Registration
Statement on Form SB-2 under the Securities Act of 1933, as amended, File
No. 33-53466
3.2 Registrant's by-laws, incorporated by reference to the like numbered
exhibit in the Registrant's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-53466
4.1 Resolution of Designation, Powers, Preferences and Rights of Series A
Preferred Stock, incorporated by reference to the like numbered exhibit in
the Registrant's Registration Statement on Form SB-2 under the Securities
Act of 1933, as amended, File No. 33-53466
4.2 Form of Warrant of Bridge Loan lenders, incorporated by reference to the
like numbered exhibit in the Registrant's Registration Statement on Form
SB-2 under the Securities Act of 1933, as amended, File No. 33-53466
4.3 Form of Warrant included in Units, incorporated by reference to the like
numbered exhibit in the Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No. 33-53466
4.4 Form of Underwriters' Warrant, incorporated by reference to the like
numbered exhibit in the Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No. 33-53466
10.1 Warrant Agreement dated , 1992 between Corporate Stock Transfer, Inc. and
the Company, incorporated by reference to exhibit number 10.9 in the
Registrant's Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-53466
10.2 Form of Stock Option granted to employees, independent contractors and
consultants, incorporated by reference to exhibit number 10.14 in the
Registrant's Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-53466
10.3 Merger Agreement and Plan of Reorganization dated February 14, 1994 among
Protective Technologies International Inc., Foam-O-Rama, Inc., Ellen
Schaeffer and Lori Hillsberg, as amended, incorporated by reference to
exhibit number 2 in the Registrant's Current Report on Form 8-K dated March
16, 1994 under the Securities Exchange Act of 1934, as amended
10.4 Noncompetition Agreement dated March 1, 1994 between Protective
Technologies International Inc. and Ellen Schaeffer and Lori Hillsberg,
incorporated by reference to exhibit number 99.1 in the Registrant's
Current Report on Form 8-K dated March 16, 1994 under the Securities
Exchange Act of 1934, as amended
10.5 Noncompetition Agreement dated March 1, 1994 between Protective
Technologies International Inc. and Warren Schaeffer and Alan Hillsberg,
incorporated by reference to exhibit number 99.2 in the Registrant's
Current Report on Form 8-K dated March 16, 1994 under the Securities
Exchange Act of 1934, as amended
10.6 Form of Promissory Note memorializing loans from directors and officers as
authorized by the Board of Directors on March 13, 1996, incorporated by
reference to exhibit number 10.21 in the Registrant's Annual Report on Form
10-KSB for the period ended December 31, 1995, under the Securities
Exchange Act of 1934, as amended
10.7 Guarantee from Warren Schaeffer and Alan Hillsberg to Protective
Technologies International Inc., incorporated by reference to exhibit
number 10.21 in the Registrant's Quarterly Report on Form 10-QSB for the
period ended September 30, 1995, under the Securities Exchange Act of 1934,
as amended
10.8 Exclusive License and Purchase Guarantee Agreement, dated July 19, 1994
between Toy Biz, Inc. and the Registrant, incorporated by reference to
exhibit number 10.22 in the Registrant's Quarterly Report on Form 10-QSB
for the period ended September 30, 1995, under the Securities Exchange Act
of 1934, as amended
10.9 Amendment #1 dated October 18, 1995 to Warrant Agreement, incorporated by
reference to exhibit number 10.23 in the Registrant's Quarterly Report on
Form 10-QSB for the period ended September 30, 1995, under the Securities
Exchange Act of 1934, as amended
10.10Line of Credit Agreement (Asset Based), dated May 6, 1996, between Key
Bank of New York, Protective Technologies International Inc., PTI Holding
Inc. and Protective Technologies of America Inc., and collateral loan
documents thereto, incorporated by reference to exhibit number 10.25 in the
Registrant's Quarterly Report on Form 10-QSB dated March 31, 1996, under
the Securities Exchange Act of 1934, as amended
10.11Financial Advisory and Investment Banking Agreement, dated April 2, 1996,
between PTI Holding Inc. and GKN Securities Corp., incorporated by
reference to the like numbered exhibit in Registrant's Registration
Statement on Form SB-2 under the Securities Act of 1933, dated January 27,
1997, File No. 333-20607
10.12Amendment #2, dated June 6, 1996 to Warrant Agreement, incorporated by
reference to exhibit number 2 in Registrant's Current Report on Form 8-K
dated July 9, 1996, under the Securities Exchange Act of 1934, as amended
21 Subsidiaries of registrant, incorporated by reference to the like numbered
exhibit in the Registrant's Annual Report on Form 10-KSB dated April 14,
1995 under the Securities Exchange Act of 1934, as amended, File No.
1-11586
23.1 Consent of D'Arcangelo & Co. LLP.
(b) Reports on Form 8-K
During the fourth quarter, 1996 the Company filed one
Current Report on Form 8-K, which such Report stated that
pursuant to the Warrant Agreement dated December 22, 1992 by
and among the Company, Corporate Stock Transfer, Inc. and Oak
Ridge Investments, Inc., as previously amended (the "Warrant
Agreement"), the Company has amended the Warrant Agreement
providing for an extension of the expiration date of its
Redeemable Public Warrants (each Redeemable Public Warrant
entitling the holder to purchase one share of Common Stock for
a purchase price of $7.50 per share) from January 15, 1997 to
January 15, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PTI HOLDING INC.
By/s/ Meredith W. Birrittella
Meredith W. Birrittella,
Chairman of the Board
Chief Executive Officer (authorized signatory)
Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Meredith W. Birrittella
- - ---------------------------------- Chief Executive Officer, March 31, 1997
Meredith W. Birrittella Chief Financial Officer,
Chairman and Director
/s/ Myles Birrittella Director March 31, 1997
- - ---------------------------------
Myles Birrittella
/s/ Robert Fuhrman Director March 31, 1997
- - ---------------------------------
Robert Fuhrman
/s/ Warren Schaeffer Director and Secretary March 31, 1997
- - ---------------------------------
Warren Schaeffer
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
PTI Holding Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of PTI Holding Inc.
and subsidiaries as of December 31, 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PTI Holding Inc. and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for each of the two years in the period then ended, in
conformity with generally accepted accounting principles.
D'ARCANGELO & CO., LLP
Purchase, New York
March 4, 1997
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 361,878
Accounts receivable, net of allowance for
returns and doubtful collections of $175,906 3,232,166
Inventories 3,763,549
Prepaid expenses and other current assets 1,017,719
Deferred tax assets 121,000
-----------
Total current assets 8,496,312
Deferred tax assets 103,000
Equipment and improvements,
net of accumulated depreciation of $831,781 470,873
Goodwill, net of accumulated amortization of $125,965 1,343,631
Covenants not to compete, net of accumulated
amortization of $330,980 187,720
Trademarks, net of accumulated amortization of $929 6,050
-----------
$10,607,586
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable, bank $ 1,196,199
Accounts payable and accrued expenses 746,408
Current portion of due to former key employee
of acquired company 21,832
Income taxes payable 1,012,000
-----------
Total current liabilities 2,976,439
-----------
Due to former key employee of acquired company,
net of current portion 58,750
-----------
Commitments and contingent liabilities
Series A preferred stock, $.001 par value; issued
and outstanding 25,000 shares, redeemable at
liquidation value of $.10 per share (aggregating $2,500) 2,500
-----------
Stockholders' equity:
Preferred stock, $.001 par value; authorized 100,000
shares of which 25,000 shares have been designated
as Series A preferred --
Common stock, $.01 par value; authorized 10,000,000
shares, issued and outstanding 3,487,936 shares 34,879
Capital in excess of par 6,408,357
Retained earnings 1,126,661
-----------
Total stockholders' equity 7,569,897
-----------
$10,607,586
===========
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<S> <C> <C>
1996 1995
-------------- ---------------
Net sales $ 17,529,509 $ 8,166,788
Cost of sales 12,140,542 5,954,212
-------------- ---------------
Gross profit 5,388,967 2,212,576
Selling, general and
administrative expenses 2,717,851 1,664,002
-------------- ---------------
Income from operations 2,671,116 548,574
Interest income, net of interest
expense of $53,538 (1996)
and $118 (1995) 2 49,362
-------------- ---------------
Income from continuing operations
before income taxes (benefit) 2,671,118 597,936
-------------- ---------------
Income taxes (benefit):
Current 1,014,000 -
Deferred (34,000) (190,000)
-------------- ---------------
980,000 (190,000)
-------------- ---------------
Income from continuing operations 1,691,118 787,936
Income from discontinued operations - 80,000
-------------- ---------------
Net income $ 1,691,118 $ 867,936
============== ===============
Net income per share of common stock:
Continuing operations $ .43 $ .22
Discontinued operations - .02
-------------- ---------------
$ .43 $ .24
============== ===============
Weighted average shares outstanding 4,103,964 3,637,025
============== ===============
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common stock
-------------------
Receivable
from
Capital exercise
in excess of Retained Total
Shares Amount of par stock earnings stockholders'
options (Deficit) equity
--------- ------- --------- -------- ----------- ---------
Balance,
January 1,
1995 3,258,956 32,590 6,088,246 (15,000) (1,432,393) 4,673,443
Net income - - - - 867,936 867,936
Collection - - - 15,000 - 15,000
Issuance of
common stock 80,000 800 124,450 (4,688) - 120,562
--------- -------- --------- -------- ---------- ----------
Balance,
December 31,
1995 3,338,956 33,390 6,212,696 (4,688) (564,457) 5,676,941
Net income - - - - 1,691,118 1,691,118
Collection - - - 4,688 - 4,688
Issuance of
common stock 148,980 1,489 195,661 - - 197,150
--------- ------- ---------- --------- ----------- ----------
Balance,
December 31,
1996 3,487,936 $34,879 $6,408,357 $ - $1,126,661 $7,569,897
========= ======= ========== ========= =========== ==========
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<S> <C> <C>
1996 1995
----------- ------------
Cash flows from operating activities:
Net income $ 1,691,118 $ 867,936
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Provision for returns and
doubtful collections 78,906 (276,000)
Depreciation 371,761 276,110
Amortization of intangible assets 146,139 146,024
Deferred income tax benefit (34,000) (190,000)
Deferred compensation - 50,000
(Increase) decrease in operating
assets:
Accounts receivable (2,139,935) 1,029,720
Inventories (2,094,413) (1,014,587)
Prepaid expenses and other
current assets (737,365) (136,066)
Increase (decrease) in operating
liabilities:
Accounts payable and accrued expenses 13,999 (203,208)
Income taxes payable 1,012,000 -
----------- -----------
Net cash provided by (used in) operating
activities (1,691,790) 549,929
----------- -----------
Cash flows from investing activities:
Purchase of equipment and improvements (476,039) (385,219)
Purchase of trademarks (1,932) -
Reduction in cash invested to secure
letters of credit 208,750 208,750
----------- -----------
Net cash (used in) investing activities (269,221) (176,469)
----------- -----------
Cash flows from financing activities:
Payments of amounts due to former key
employees of acquired company (44,477) (244,341)
Proceeds from bank loan, net 1,196,199 -
Proceeds from exercise of common stock
options 201,838 135,562
----------- -----------
Net cash provided by (used in) financing
activities 1,353,560 (108,779)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (607,451) 264,681
Cash and cash equivalents, beginning of year 969,329 704,648
----------- -----------
Cash and cash equivalents, end of year $ 361,878 $ 969,329
=========== ===========
Supplemental disclosures:
Interest paid $ 53,538 $ 118
Income taxes paid 2,000 -
Receivable from exercise of stock options - 4,688
Non-cash financing activity:
Issuance of $14,480 shares of common stock for no consideration in
connection with the terms of the series A preferred stock.
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations and significant accounting policies:
Principles of consolidation:
The consolidated financial statements include the accounts of PTI
Holding Inc. and its two wholly-owned subsidiaries Protective
Technologies International Inc. ("PTI"), and Zacko Sports, Inc., a
subsidiary formed in 1996. Significant intercompany balances and
transactions are eliminated in consolidation.
Nature of operations:
The Company designs, manufactures and markets bicycle helmets and
bicycle accessories for sale principally to domestic retailers. For the
year ended December 31, 1996, sales of bicycle accessories represented
approximately 39% of net sales. A minor portion of sales in 1995 pertain
to bicycle accessories.
Use of estimates in the preparation of financial statements:
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.
Cash and cash equivalents:
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of these instruments.
At December 31, 1996, approximately $75,000 of the Company's cash and
cash equivalents was in excess of federal depository insurance coverage.
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Cost includes
material, labor and manufacturing overhead costs.
Revenue recognition:
Sales are recognized when products are shipped or, for certain private
label manufacturing contracts, when products are completed, ready for
future shipment and invoiced, with payment due in the normal course of
business.
Depreciation:
Equipment and improvements are stated at cost. Depreciation of
production equipment and office equipment is provided for using
accelerated methods over the estimated useful lives of the related
assets. Leasehold improvements are depreciated using the straight-line
method over the related lease term or the estimated useful lives of the
assets, if shorter.
Amortization:
Goodwill, covenants not to compete, and trademarks are amortized using
the straight-line method over 35 years, 5 years and 17 years,
respectively.
It is the Company's policy to review the carrying value of unamortized
goodwill, and when such review indicates impairment of value, goodwill
would be written-down.
Impairment of Long-Lived Assets:
During March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of." The Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
full recoverability is questionable. Management evaluates the
recoverability of its intangible assets and other long-lived assets and
several factors are used in the valuation including, but not limited to,
management's plans for future operations, recent operating results and
projected cash flows. The Company adopted SFAS No. 121 in 1996, the
adoption of which did not have a material adverse effect on the results
of operations or financial condition.
Research and development costs:
Research and development costs are charged to operations as incurred and
amounted to approximately $109,000 and $54,000 for the years ended
December 31, 1996 and 1995, respectively.
Earnings per share of common stock:
Earnings per share of common stock is computed using the weighted
average number of shares of common stock outstanding and common stock
equivalents (options and warrants). The amount of dilution reflected in
earnings per share data is computed by application of the treasury stock
method. Common shares contingently issuable are excluded from the
computation of weighted average shares outstanding since conditions for
issuance have not been met and/or their inclusion would have had an
antidilutive effect.
Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
Discontinued operations:
The Company discontinued its operations in the design, development and
marketing of athletic footwear effective as of December 31, 1993, and
wound up the business in 1994. At December 31, 1996, there are no
remaining assets or liabilities of the discontinued operations. The
Company disputed an account payable of $80,000 it recorded as being due
to one of its former athletic footwear manufacturers. The Company
claimed, among other matters, that the manufacturer failed to timely
manufacture goods resulting in the cancellation of a $145,000 sales
order. During November 1994, the manufacturer filed suit against the
Company for payment of the $80,000. The Company asserted a counterclaim
alleging the manufacturer breached the contract which resulted in lost
profits and customers. In January 1996, the manufacturer released the
Company without payment. Accordingly, the Company reversed the account
payable and recognized the resulting gain as income from discontinued
operations in the year ended December 31, 1995.
There were no income taxes or income tax benefits recognized with
respect to the discontinued operations for the year ended December 31,
1995. The Company applied $80,000 of its net operating loss carryforward
to the gain in 1995 thereby eliminating an income tax effect of $32,000.
<TABLE>
<S> <C>
2. Inventories:
Inventories are summarized as follows:
Raw materials $ 1,566,584
Finished goods 2,196,965
-----------
$ 3,763,549
===========
3. Equipment and improvements:
Equipment and improvements consist of the following:
Production equipment $ 961,884
Office equipment 237,480
Leasehold improvements 103,290
-----------
1,302,654
Less accumulated depreciation 831,781
-----------
$ 470,873
</TABLE>
===========
4. Covenants not to compete:
The Company has a noncompetition agreement with the former shareholders
of an acquired business restricting them from, among other activities,
competing with the Company for a period of five years through 1998. The
noncompetition agreement provided for payments aggregating $200,000,
which were paid at the closing.
The Company also has noncompetition agreements with the two key
employees of the acquired business restricting them from, among other
activities, competing with the Company for a period of five years
through 1998. These noncompetition agreements provide for payments
aggregating $417,500, of which $83,750 remains payable at December 31,
1996.
5. Loan payable, bank
On May 6, 1996, the Company entered into a line of credit agreement with
a bank. Under the terms of the agreement, the Company may borrow up to
$7,000,000 based on a percentage of certain accounts receivable and
inventories as defined in the agreement. All borrowings are due on
demand, and are collateralized by substantially all of the Company's
assets. At December 31, 1996, $1,196,199 was due pursuant to the
agreement.
The line of credit agreement requires the Company to comply with certain
affirmative covenants, including the maintenance of a minimum current
ratio, minimum quarterly interest ratios and a maximum leverage ratio,
all as defined in the agreement. The agreement also requires that the
Company comply with certain negative covenants. Among other matters,
these negative covenants (which are all defined in the agreement) call
for the Company to obtain the bank's consent prior to business
acquisitions, debt guarantees, sales or transfers of accounts
receivable, loans, total annual capital expenditures in excess of
$300,000, dividend declarations or payments, distributions of assets,
incurring certain debt, and permitting liens against assets.
The carrying amount of the bank loan payable approximates fair value due
to the debt instrument's market interest rate (9.5% per annum at
December 31, 1996).
6. Due to former key employee of acquired company:
At December 31, 1996 the following amounts were due to a former key
employee of the acquired company:
<TABLE>
<S> <C>
Covenants not to compete $ 83,750
Less advances (3,168)
-----------
80,582
Less current portion 21,832
-----------
Long-term portion $ 58,750
===========
</TABLE>
The scheduled maturities of the amounts due to a former key employee of
the acquired company are presented below:
1997 21,832
1998 58,750
----------
$ 80,582
==========
7. Employment contracts:
The Company has a five-year employment agreement commencing as of
January 1, 1994 with one of its key employees. The employment agreement
provides for a minimum compensation of $100,000 per annum plus certain
fringe benefits. The employment agreement also provides that the Company
pay a continuation bonus of $100,000 deemed earned throughout the two
year period ended December 31, 1995.
The Company also has an agreement with a consultant providing for the
payment of a $30,000 annual consulting fee for the years 1995 through
1998.
8. Leasing arrangements:
On January 11, 1995, the Company entered into a two-year lease for a
portion of its new production, warehouse, and office facility. The lease
which became effective upon occupancy in September 1995 calls for
additional rent in year two based on increases in the Consumer Price
Index. Total future minimum rental commitments as of December 31, 1996
are approximately $87,000 for 1997. The Company occupies additional
space in this facility pursuant to an amendment to such lease that is in
draft form and not executed.
The Company has advanced approximately $300,000 at December 31, 1996 on
behalf of the landlord to make builing impovements at the Company's
facility. Although there is no executed agreement to this effect, the
Company has been and intends to continue to offset these advances to
rent charges in 1997. The amount advanced is included in prepaid
expenses.
Rent expense for the years ended December 31, 1996 and 1995 totaled
approximately $370,000 and $140,000, respectively.
9. Commitments and contingent liabilities:
The Company has entered into various licensing agreements requiring
royalty payments based on specified percentages of product sales.
Pursuant to the various licensing agreements, the future minimum
guaranteed royalty payments are $234,000 in 1997, $239,000 in 1998, and
$189,000 in 1999. Royalty expenses under these licensing agreements
totaled $122,000 in 1996 and $0 in 1995.
Effective April 1, 1994, the Company entered into a two-year,
noncancellable lease for a production, warehouse, and office facility.
The lease called for the minimum annual rent of $76,000 plus escalation
charges for increases in real estate taxes. By notice in October 1994,
the Company ceased making rental payments and terminated such lease
because the lessor failed to obtain a certificate of occupancy. However,
the Company continued to occupy the space through September 1995 until
it relocated to a new facility. The landlord has commenced a suit
against the Company for unpaid rent and for funds to make repairs. The
resolution of this matter is presently uncertain. However, any possible
settlement is not expected to have a material effect on the financial
position and results of operations of the Company if concluded
unfavorably.
Certain other claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against the Company.
In the opinion of management, all such matters are without merit or of
such kind, or involve such amounts, as would not have a material effect
on the financial position and results of operations of the Company if
concluded unfavorably.
While the Company has not experienced any product liability claims, it
presently cannot be determined if its product liability insurance is
adequate to cover any losses that may arise.
10. Series A preferred stock:
The Series A preferred stock issued on July 31, 1992 bears stock
issuance rights entitling the holder thereof to the issuance of 10
shares of common stock, up to a maximum aggregate amount of 30 shares of
common stock, for each share of Series A preferred stock for each of the
following conditions that are met: The Company has net income of
$750,000 during any of the three complete fiscal years immediately after
the date of the public offering (December 1992); the Company has gross
revenue of $20,000,000 during any of the five complete fiscal years
after the date of the public offering; the Company has gross revenue of
$35,000,000 during any of the five complete fiscal years after the date
of the public offering; and a cumulative total of 50% of the warrants
issued in the public offering have been exercised.
If the period during which the shares of common stock are issuable
lapses and each Series A preferred stockholder has not been issued 30
shares of common stock, then each share of Series A preferred stock is
to be redeemed at the liquidation preference price of $.10 per share.
All shares of common stock issuable with respect to the Series A
preferred stock and not previously issued are to be issued if the
Company is acquired, provided that if the common stock continues to be
publicly traded, the average bid price during the prior 90 days is
greater than or equal to $5.00 per share (the initial public offering
price of the common stock).
For the year ended December 31, 1995, the Company had net income in
excess of $750,000. Accordingly, the Series A preferred shareholders
were entitled to 10 shares of common stock for each Series A preferred
share owned. However, three preferred shareholders holding an aggregate
of 23,552 preferred shares relinquished their right to receive an
issuance of an aggregate of 235,520 shares of the Company's common
stock. In consideration for relinquishing their rights to that common
stock, the Company granted the three preferred shareholders options to
acquire an aggregate of 235,520 shares of the common stock. The options
have an exercise price of $4.50 (the quoted market price on the
effective date of grant), are outstanding and exercisable as of December
31, 1996, and expire in January, 2006. The three preferred shareholders
are also major common stockholders of the Company. The remaining 14,480
common shares were issued to the other preferred shareholders in 1996.
11. Common stock and warrants:
In December 1992, the Company completed a public offering of 400,000
units at $10 per unit. Each unit consisted of two shares of common stock
and one warrant to purchase one share of common stock at an exercise
price of $7.50; the expiration date of the warrants has been extended to
January 15, 1998. In addition, in January 1993, the underwriters
exercised the overallotment provision of the underwriting agreement to
purchase an additional 60,000 units. As of December 31, 1996, an
aggregate of 460,000 warrants were outstanding and exercisable pursuant
to these two transactions.
In connection with the public offering, the underwriter received
warrants to purchase 40,000 units at an exercise price of $11 per unit
exercisable at any time during the four-year period commencing on
December 15, 1993. None of these warrants have been exercised as of
December 31, 1996.
During October 1992, the Company issued warrants to purchase 63,750
shares of common stock at $1.65 per share. The warrants were issued
pursuant to a borrowing that has since been repaid. At December 31,
1996, 54,750 warrants remain outstanding and exercisable until October
1997.
During November and December 1994, the Company completed a private
placement of a total of 318,956 shares of common stock. In connection
with the private placement, the underwriter received warrants to
purchase 62,500 shares of common stock at $3.75 per share and 14,765
shares of common stock at $3.95 per share at any time during the
three-year period commencing in November 1994. These warrants are
outstanding and are exercisable as of December 31, 1996.
12. Stock options:
The Company has granted stock options to employees, directors and
consultants pursuant to individual agreements or to its incentive and
non-qualified stock option plan. All options granted are for exercise
prices equal to the quoted market price at date of grant.
The total amount of shares of common stock which may be issued upon
exercise of options granted under the incentive and non-qualified stock
option plan is limited to 350,000 shares. Any options granted, may be
exercisable for a period determined in each case by the Board of
Directors. Except under certain circumstances, such period cannot exceed
ten years from the date of grant. Options may not be granted after the
plan terminates in 2004. However, unexpired options granted will
continue until they lapse or terminate by their own terms and
conditions. Any options granted to employees will expire if not
exercised within three months after termination of employment. Subject
to certain limitations, options may be granted to employees, directors,
consultants, and others who the Board of Directors believes have
contributed or will contribute to the Company. As of December 31, 1996,
there were 2,000 common shares available for future options under the
incentive and non-qualified stock option plan.
The table below summarizes plan and non-plan stock option activity for
the past two years:
<TABLE>
<S> <C> <C>
Number of Weighted average
shares exercise price
---------- -----------
Outstanding, January 1, 1995 54,800 $3.39
Granted 453,000 $1.39
Exercised (80,000) $1.57
----------
Outstanding, December 31, 1995 427,800 $1.61
Granted 440,520 $2.86
Exercised (134,500) $1.62
Canceled or expired (75,000) $5.875
----------
Outstanding, December 31, 1996 658,820 $3.57
==========
Exercisable, December 31, 1996 526,820 $3.75
==========
</TABLE>
Options outstanding and exercisable at December 31, 1996 and related
weighted average exercise price and life information follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options outstanding Options exercisable Remaining
------------------------ -------------------------
Grant date shares price shares price life (years)
- - ---------- ------------ --------- ----------- --------- -------------
1992-1994 54,800 $3.39 54,800 $3.39 3
1995 427,800 $1.61 189,300 $1.88 3
1996 658,820 $3.57 526,820 $3.75 3
</TABLE>
The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for
the stock options. Had compensation cost for the Company's stock options
been determined based on the fair value at the grant date for options
granted in 1996 and 1995 consistent with the provisions of SFAS No. 123,
the
Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<S> <C> <C>
1996 1995
-------------- ------------
Net income, as reported $ 1,691,118 $ 867,936
Net income, pro forma 888,476 666,119
Earnings per share, as reported .43 .24
Earnings per share, pro forma .23 .18
</TABLE>
The pro forma effect on net income for 1996 and 1995 does not take into
consideration pro forma compensation expense related to grants made
prior to 1995.
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<S> <C>
Expected life (years) 5
Interest rate 7.10%
Volatility 66.4%
Dividend yield 0%
</TABLE>
13. Significant customers:
For the years ended December 31, 1996 and 1995, two major retail chain
organizations accounted for approximately 65% and 15% of net sales in
1996 and 63% and 23% of net sales in 1995. As of December 31, 1996,
accounts receivable included approximately $1,892,000 and $981,000,
respectively, due from these two customers. Although additional major
retailers have recently become customers, a loss of one or both of the
established major customers would cause a significant loss of sales and
affect operating results adversely.
14. Income taxes:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented as follows:
<TABLE>
<S> <C>
Accounts receivable due to the allowance for returns and
doubtful collections $ 74,000
Inventories due to additional costs inventoried for tax
purposes and inventory reserves 40,000
Equipment and improvements due to depreciation 8,000
Intangible assets due to differences in amortization 95,000
Other 7,000
----------
Total deferred tax assets $ 224,000
==========
</TABLE>
The valuation allowance decreased by $130,000 for the year ended
December 31, 1996.
The significant components of the income tax provision attributable to
continuing operations for the years ended December 31, 1996 and 1995 are
presented below:
<TABLE>
<S> <C> <C>
1996 1995
----------- -------------
Current tax expense $ 1,256,000 $ 141,000
Deferred tax (exclusive of the effects
of the other components listed below) (34,000) (190,000)
Tax credits (71,000) -
Tax benefits of operating loss carryforwards (171,000) (141,000)
----------- -------------
Income taxes (benefit) $ 980,000 $ (190,000)
=========== =============
</TABLE>
The difference between the actual income tax provision and the income
tax provision (benefit) computed by applying the statutory federal
income tax rate to income from continuing operations before income taxes
years ended December 31, 1996 and 1995 is attributable to the following:
<TABLE>
<S> <C> <C>
1996 1995
---------- ------------
Income tax provision at 35% $ 987,000 $ 209,000
State income taxes net of federal income tax
(benefit) 103,000 (54,000)
Allowances for returns and doubtful collections 37,000 (122,000)
Inventory costs and reserves 11,000 (29,000)
Depreciation 9,000 -
Intangible assets and amortization 24,000 (16,000)
Deferred compensation - (18,000)
Net operating losses (142,000) (263,000)
Tax credits (55,000) (28,000)
Valuation allowance - 130,000
Other 6,000 1,000
---------- ------------
Actual income tax provision (benefit) $ 980,000 $ (190,000)
========== ============
</TABLE>
The income tax provision of $980,000 for the year ended December 31,
1996 is comprised of $821,000 of federal income taxes and $159,000 of
state income taxes. For the year ended December 31, 1996, the income tax
provision from continuing operations reflects the utilization of a
$400,000 federal net operating loss carryforward.
The deferred tax benefit of $190,000 for the year ended December 31,
1995, is comprised of a $155,000 federal tax benefit and $35,000 state
tax benefit. For the year ended December 31, 1995, the income tax
provision from continuing operations reflects the utilization of a
$352,000 federal net operating loss carryforward.
15. Fair value of financial instruments:
The fair value and carrying (balance sheet) amounts of selected assets
and (liabilities) as of December 31, 1996 are presented below:
<TABLE>
<S> <C> <C>
Fair value Carrying amount
---------- ---------------
Cash and cash equivalents $ 361,878 $ 361,878
Loan payable, bank (1,196,199) (1,196,199)
</TABLE>
