U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly ---- period ended 6/30/97
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 Identification No.)
organization)
c/o 15 E. North Street, Dover, DE 19901
(Address of principal executive offices) (Zip Code)
(302) 678-0855
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 past 90 days.
Yes X No
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 August 8,
1997, 4,207,491 shares of the issuer's common equity were outstanding.
<PAGE>
PART I
ITEM 1. Consolidated Financial Statements.
Page
Consolidated Balance Sheet as of June 30, 1997 F-1
Consolidated Statement of Income for the three
and six months ended June 30, 1997 and 1996 F-2
Consolidated Statement of Cash Flows for the
six months ended June 30, 1997 and 1996 F-3
Notes to Consolidated Financial Statements F-4 - F-7
ITEM 2. Management's Discussion and Analysis
PTI Holding Inc. (collectively with its wholly-owned subsidiaries
referred to herein as the "Company"), manufactures and markets protective
equipment, primarily bicycle helmets and safety supplies. In addition, the
Company markets and distributes bicycles and bicycle-related products, and other
medical supplies.
Acquisition of Flents Products Co., Inc. By the Company
On August 5, 1997, the Company consummated the merger (the "Merger") of
Flents Products Co., Inc., a New York corporation ("Flents"), which is
principally engaged in the business of the manufacture of wax earplugs and the
marketing and sale of earplugs and other safety and medical supplies, such as an
eye drop delivery system, styptic devices, and air-filter masks (the
"Business"), with and into the Company's wholly owned subsidiary, Flents
Products Co., Inc., a Delaware corporation ("Merger Sub"), pursuant to an
Agreement and Plan of Merger among the Company, Merger Sub and Flents. From and
after August 5, 1997, Flents had no separate or independent existence, having
been merged into Merger Sub. For purposes of financial accounting and income
tax, the Merger was deemed to have occurred as of the opening of business on
June 1, 1997 (the "Effective Date").
The principal assets of Flents as of the Effective Date of the Merger
consisted of: approximately $1,024,364 of accounts receivable; approximately $
806,465 of inventory; certain proprietary information (including molds, vendor
contacts and customer information) and various registered trademarks used in the
Business.
Merger Sub delivered at the closing (the "Closing") of the Merger
$27.46 and 3.47 shares of the common stock, par value $.01 per share of the
Company (the "Company's Common Stock") (with associated convertible value rights
described below) to the shareholders of Flents in respect of each of the 77,756
issued and outstanding shares of the common stock of Flents, or total merger
consideration of $4,837,085. The merger consideration was paid $2,135,435 in
cash, and $2,701,650 in units consisting of 270,165 shares of the Company's
Common Stock and 270,165 Convertible Value Rights ("CVRs"). For purposes of the
Merger, the Units were valued at $10 per Unit. Each CVR entitles the original
holder to up to $4.00 of additional Common Stock of the Company to the extent
that the market value of the Company's Common Stock is less than $10.00 per
share on the one-year anniversary of the Closing.
In addition, at the Closing, Merger Sub entered into noncompetition agreements
with Stuart M. Low, Chairman of the Board of Directors of Flents ("Low"), W.
Thomas Davies, President of Flents ("Davies") and James E. Dunn, Vice President
of sales of Flents ("Dunn"), all of whom were also shareholders of Flents,
restricting them from, among other activities, competing with Merger Sub for a
period of five years (or four years, in the case of Davies) from the Closing.
At the Closing, Merger Sub also entered into a ten-year consulting
agreement with Low, commencing on the Closing whereby he will receive $12,000
annually for the term of the agreement and health insurance for the first four
years of the term. Merger Sub also entered into a four-year employment agreement
with Davies, commencing as of June 1, 1997, providing for an initial starting
salary of $180,000 per annum and options ("Options") for the purchase of 10,000
shares of the Company's Common Stock per year for the term of the employment
agreement. Davies' will also receive additional Options based on Merger Sub's
performance. In addition, Merger Sub entered into a five-year employment
agreement with Dunn, commencing as of June 1, 1997, providing for an initial
starting salary of $108,000 per annum and a bonus based on the increase in
Merger Sub's net revenues.
The amount of consideration paid by Merger Sub as set forth above was
determined by arms-length negotiations between the parties involved. Woodbridge
Group Inc. received a fee for its advice rendered to Company and for arranging
the Merger, however, no opinion was provided as to the fairness of the merger
consideration in the transaction. The Company's evaluation of the merger
consideration paid in the Merger was based upon the book value of Flents, its
revenues and profits during its 1996 fiscal year, and its sales prospects. The
Company incurred acquisition costs in connection with the merger totaling
approximately $412,000.
The three major shareholders of Flents prior to the Merger were all
members of the Low family. Four of the other five shareholders were all
employees of Flents at the time of the Closing who had received their shares as
stock bonuses from Flents and the fifth shareholder was Flents' attorney. No
relation existed prior to the Merger between any of such persons or Flents, on
the one hand, and the Company, any of its affiliates, any director or officer of
the Company, or any associates of any such director or officer, on the other
hand.
The source of funds used to capitalize Merger Sub and to effect the
Merger was the Company's cash reserves. Merger Sub intends to continue to use
the assets of Flents in the Business.
Results of Continuing Operations: Second Quarter 1997 Compared to Second
Quarter 1996
- -------------------------------------------------------------------------------
The Company's net sales were $9,943,409 during the quarter ended June
30, 1997, an increase of 45.8% from net sales of $6,820,979 during the
comparable quarter in 1996. The 45.8% sales increase from 1996 to 1997 resulted
from several factors: increased sales to existing customers through the addition
of new helmet models; increased market share at the expense of competitors;
increased sales of existing models due to growth in the overall helmet market;
increased sales of the Company's bicycle and bicycle accessory products; the
addition of new retail outlets for the Company's products; the introduction of
new accessory product lines; and sales of safety equipment and medical supplies
by Flents during the month of June, 1997.
Net loss was $2,811,506 for the quarter ended June 30, 1997, compared to a net
income of $884,122 during the same period in 1996. Included in the net loss was
a one time non cash accounting charge of $3,844,531 to expense the conversion
of preferred shares into common shares. Without this charge net income for the
quarter would have been $1,033,025, an increase of 16.8% over the same period
last year. Without the charge, the increase in net income was due to increased
sales by the Company and the inclusion of sales of Flents Products Co., Inc.
for the month of June 1997.
The cost of sales for the quarter ended June 30, 1997 was $7,007,163
(resulting in a gross profit margin of 29.5%) compared to the Company's cost of
sales of $4,763,977 (resulting in a gross profit margin of 30.16%) for the
quarter ended June 30, 1996.
Selling, general and administrative expenses for the quarter ended June
30, 1997 were $1,163,847 (not including the one time non cash accounting charge)
compared to the Company's selling, general and administrative expenses of
$594,038 for the quarter ended June 30, 1996. As a percentage of sales, these
expenses were 11.7% and 8.7% for the quarters ended June 30, 1997 and 1996,
respectively. The increased selling, general and administrative spending was
primarily due to the higher costs associated with the expansion of the helmet,
bicycle and bicycle accessory business, the higher costs for human resources,
and the selling, general and administrative expenses of Flents during the month
of June, 1997.
Six Months Ended 6/30/97 Compared to Six Months Ended 6/30/96
The Company's net sales were $16,172,915 during the six months ended
June 30, 1997, an increase of 71.2% from net sales of $9,444,839 during the
comparable six months in 1996. The increase in net sales resulted from:
increased sales to existing customers through the addition of new helmet models;
increased market share at the expense of competitors; increased sales of
existing models due to growth in the overall helmet market; increased sales of
the Company's bicycle and bicycle accessory products; the addition of new retail
outlets for the Company's products; the introduction of new accessory product
lines; and sales of safety equipment and medical supplies by Flents during the
month of June, 1997.
Net loss was $2,052,535 during the six months ended June 30, 1997,
compared to a net income of $1,127,369 during the same period in 1996. Included
in the net loss was a one time non cash accounting charge of $3,844,531 to
expense the conversion of preferred shares into common shares. Without this
charge net income during the six month period would have been $1,791,996, an
increase of 59%.
The cost of sales for the six months ended June 30, 1997 was
$10,944,556 (resulting in a gross profit margin of 32.3%) compared to cost of
sales of $6,575,536 (yielding a gross profit margin of 30.38%) for the six
months ended June 30, 1996. The Company's increased gross profit margin resulted
primarily from the fact that higher-margin products, such as bicycle
accessories, constituted a greater percentage of the Company's sales.
Selling, general and administrative expenses for the six months ended
June 30, 1997 were $2,128,683 (not including the one time non cash accounting
charge) compared to the Company's selling, general and administrative expenses
of $1,214,076 for the six months ended June 30, 1996. As a percentage of sales,
these expenses were 13.16% and 12.85% for the six months ended June 30, 1997 and
1996, respectively. The increased selling, general and administrative spending
was primarily due to the higher costs associated with the expansion of the
helmet, bicycle and bicycle accessory business, the higher costs for human
resources, and Flents' selling, general and administrative expenses during the
month of June, 1997.
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
$220,450; through internal cash flow; and through Protective Technology
International Inc.'s, the Company's wholly-owned operating subsidiary (the
"Operating Subsidiary"), opening of a revolving line of credit in May, 1996.
In addition, in February 1997, the Company registered shares of Common
Stock underlying various warrants and options of the Company, the exercise of
which resulted in gross proceeds of approximately $3,017,925, with expenses of
approximately $50,000. In large part, these gross proceeds were the result of
the Company, on June 4, 1997, announcing the redemption of its Redeemable Public
Warrants as of July 16, 1997 at the redemption price of $.01 per warrant. The
exercise by holders of the Company's Redeemable Public Warrants resulted in
approximately $3,017,925 of such gross proceeds. The Company paid approximately
$526 to redeem those Redeemable Public Warrants which remained unexercised as
of July 16, 1997. Currently, the Company does not have any Redeemable Public
Warrants outstanding. See Part II, Item 2.
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 is
guaranteed by the Company. As of June 30, 1997, the Company had $4,127,773
outstanding pursuant to such line of credit.
The Company pays its employees and vendors on a weekly, monthly or
bi-monthly basis, while its customers pay for products generally within 75 days
after shipment and, therefore, the Company has substantial needs for working
capital
The Company will also consider financing through additional public and
private securities offerings and solicitations.
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.
PART II
ITEM 1. Legal Proceedings.
Harbor at Hastings Associates, the alleged owner of the manufacturing
facilities occupied by the Operating Subsidiary, has commenced an action on or
about August 4, 1997 against the Operating Subsidiary in the Supreme Court of
the State of New York, Westchester County, to vacate the premises, and for use
and occupancy in the amount of approximately $66,000 per month beginning August
1, 1997. Since February 28, 1997, the Operating Subsidiary has occupied the
premises on a month-by-month basis while negotiating a renewal lease for
premises. The Company denies the material allegations in the Complaint, and
possesses a set-off against any claims in the amount of $234,377, which
represents the unamortized portion of the amount the Operating Subsidiary
advanced on behalf of the landlord of the premises for renovation costs, and
which has not been amortized yet through application as an offset to rent.
ITEM 2. Changes in Securities.
The Company's 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: (1) 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; (2) 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; (3) 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; or (4) 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.
Pursuant to the Warrant Agreement dated December 22, 1992 by and among
the Company, Corporate Stock Transfer, Inc. and Oak Ridge Investments, Inc., as
amended (the "Warrant Agreement"), the Company had 460,000 Redeemable Public
Warrants outstanding. Each Redeemable Public Warrant entitled the holder to
purchase one share of the Company's common stock at a purchase price of $7.50
per share. Pursuant to Section 8 of the Warrant Agreement, as of June 4, 1997,
the Company announced that it was redeeming its Redeemable Public Warrants as of
July 16, 1997, at the redemption price of $.01 per Redeemable Public Warrant. As
of July 16, 1997, holders of Redeemable Public Warrants exercised a total of
402,390 of such warrants for an aggregate exercise price of $3,017,925, and the
Company redeemed the remaining 57,610 warrants for an aggregate redemption price
of $525.50.
The Company currently does not have any Redeemable Public Warrants outstanding.
As of July 16, 1997, more than half of the Company's Redeemable Public
Warrants had been exercised, and holders of the Company's Series A Preferred
Stock were thereby entitled to an issuance of ten shares of the Registrant's
Common Stock for each share of Series A Preferred Stock. Further, based on the
Company's net revenues during the first two quarters of 1997, the Company
expects to receive in excess of $20,000,000 of net revenues during all of 1997,
thereby entitling the holders of Series A Preferred Stock to an additional
issuance of ten shares of the Company's Common Stock for each share of Series A
Preferred Stock. All of the Company's Series A Preferred Stock will have
thereby been converted into Common Stock, and no shares of Series A Preferred
Stock will remain outstanding. In total, of the 250,000 shares of Common Stock
thus issuable in respect of the Company's meeting each of the aforementioned
issuance requirements of the Series A Preferred Stock (for a total of 500,000
shares of Common Stock issuable), Meredith Birrittella, the Chairman and Chief
Executive Officer of the Company, is entitled to receive 176,640 shares, Martin
Birrittella, the former Chairman of the Company, is entitled to receive 176,640
shares, and Thomas Coleman, the former Co-Chief Executive officer and a former
director of the Company, is entitled to receive 117,760 shares. A one-time
charge in the aggregate amount of $3,844,531 will be taken by the Company in
respect to shares issued to employees and former employees of the Company.
ITEM 6. Exhibits 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 Omitted
10.9 Omitted
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
10.13Amendment #3, dated December 12, 1996 to Warrant Agreement,
incorporated by reference to exhibit number 3 in
Registrant's Current Report on Form 8-K dated December 12,
1996, under the Securities Exchange Act of 1934, as amended
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed by the Company during the
quarter ended June 30, 1997.
<PAGE>
SIGNATURE
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.
Dated: August 19, 1996
PTI HOLDING INC.
By/s/ Meredith W. Birrittella
Meredith W. Birrittella,
Chief Executive Officer (authorized signatory)
Chief Financial Officer
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
JUNE 30, 1997
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 951,236
Accounts receivable, net of allowance
for returns and doubtful collections of $195,906 6,517,473
Inventories 6,117,711
Deferred tax asset 204,671
Prepaid expenses and other current assets 1,366,086
----------------
Total current assets 15,157,177
Equipment and improvements, net of accumulated
depreciation of $1,123,995 862,663
Deferred tax asset 129,200
Goodwill, net of accumulated amortization of $146,959 4,283,363
Covenants not to compete, net of accumulated
amortization of $382,850 136,558
Patents & trademarks, net of accumulated
amortization of $1,135 6,404
----------------
$ 20,575,365
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable, bank $ 4,127,773
Accounts payable and accrued expenses 1,705,088
Due to former key employee and shareholders of
acquired companies 2,314,185
Acquisition costs payable 175,133
Income taxes payable 121,969
----------------
Total current liabilities 8,444,148
----------------
Commitments and contingent liabilities
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 4,297,601 shares 42,976
Capital in excess of par 13,014,115
Deficit (925,874)
----------------
Total stockholders' equity 12,131,217
----------------
$ 20,575,365
================
</TABLE>
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<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE & SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<S> <C> <C> <C> <C>
For the Three Months For the Six Months
ended June 30, ended June 30,
-------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
Net sales $ 9,943,409 $ 6,820,979 $ 16,172,915 $ 9,444,839
Cost of sales 7,007,163 4,763,977 10,944,556 6,575,536
------------ ------------ ------------ ------------
Gross profit 2,936,246 2,057,002 5,228,359 2,869,303
------------ ------------ ------------ ------------
Selling, general and
administrative expenses:
SG&A - before
stock-based
compensation 1,163,847 594,038 2,128,683 1,214,076
Stock-based
compensation
expense 3,844,531 - 3,844,531 -
------------ ---------- ----------- ------------
5,008,378 594,038 5,973,214 1,214,076
------------ ---------- ----------- ------------
Income (loss) from
operations (2,072,132) 1,462,964 (744,855) 1,655,227
Interest income, net
of interest
(expense) (71,303) (16,458) (85,683) (9,458)
------------ ---------- ----------- ------------
Income (loss) before
income taxes (2,143,435) 1,446,506 (830,538) 1,645,769
Income taxes (668,071) (562,384) (1,221,997) (518,400)
------------ ---------- ----------- ------------
Net income (loss) (2,811,506) 884,122 (2,052,535) 1,127,369
============ ========== =========== ============
Net income (loss) per
share of common stock:
Primary $ (.65) $ .23 $ (.48) $ .29
Fully diluted (.59) .23 (.43) .29
Weighted average
shares outstanding:
Primary 4,245,349 4,093,085 4,197,096 3,834,250
Fully diluted 4,717,349 4,093,085 4,673,063 3,834,250
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<S> <C> <C>
1997 1996
---------- -----------
Cash flows from operating activities:
Net income (loss) $ (2,052,535) $ 1,127,369
Adjustments to reconcile net income (loss)
to net cash (used in)operating activities:
Provision for returns and doubtful
collections - 4,252
Depreciation 294,121 136,471
Amortization of intangible assets 77,982 73,013
Deferred Income tax (benefit) (7,400) 41,600
Stock-compensation 3,844,531 -
(Increase) decrease in operating assets
exclusive of the effects of the business
combination:
Accounts receivable (2,311,445) (2,781,792)
Inventories (1,655,855) (997,886)
Prepaid expenses and other
current assets (313,231) (712,833)
(Decrease) increase in operating liabilities
exclusive of the effects of business
combination:
Accounts payable and accrued expenses 452,744 1,226,830
Income taxes payable (935,553) 476,800
---------- ------------
Net cash (used in) operating activities (2,606,641) (1,406,176)
---------- ------------
Cash flows from investing activities:
Cash acquired in business combination, net of
partial payments of acquisition costs 711,969 -
Purchase of equipment and improvements (490,886) (193,393)
Reduction in cash invested to secure
letters of credit - 208,750
---------- ------------
Net cash provided by investing activities 221,083 15,357
---------- ------------
Cash flows from financing activities:
Payments of amounts due to former key employee
of acquired company (21,832) (41,308)
Proceeds from issuance of common stock 65,174 198,438
Proceeds from bank loan, net 2,931,574 569,589
---------- ------------
Net cash provided by financing activities 2,974,916 726,719
---------- ------------
Net increase (decrease) in cash and
cash equivalents 589,358 (664,100)
Cash and cash equivalents, beginning of period 361,878 969,329
---------- ------------
Cash and cash equivalents, end of period $ 951,236 $ 305,229
========== ============
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation:
The consolidated financial statements included herein have been prepared
by the Company, without the benefit of an audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 and filed with the Securities and Exchange
Commission.
In the opinion of the Company's management, these unaudited consolidated
financial statements include all adjustments, consisting solely of
normal recurring adjustments, necessary in order to present fairly the
Company's consolidated financial position as of June 30, 1997 and the
results of operations and cash flows for the three and six months ended
June 30, 1997 and 1996. The results of operations for an interim period
are not necessarily indicative of the results to be attained in any
other fiscal period.
The acquisition discussed in note 2 is accounted for using the purchase
method of accounting, whereby assets and liabilities acquired are
recognized at fair value as of the date of acquisition and the excess of
purchase price over such fair value of net assets acquired is recognized
as goodwill. The results of the operations of the acquired company have
been included from the date of acquisition (June 1,1997).
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options and
warrants will be excluded. The impact is expected to result in an
increase in primary earnings per share of $.02 per share for the three
and six months ended June 30, 1997 and $.03 per share and $.04 per share
for the three and six months ended June 30, 1996, respectively.
2. Business combination:
On August 5, 1997, the Company acquired, Flents Products Co., Inc., a
New York corporation (Flents-New York) a business principally engaged in
the manufacture of wax earplugs and the marketing of earplugs and other
safety and medical supplies, such as an eye drop delivery system,
styptic devices, and air-filter masks, and concurrently merged
Flents-New York into the Company's newly-organized, wholly-owned
subsidiary, Flents Products Co., Inc., a Delaware corporation
("Flents-Delaware"). After August 5, 1997, Flents-New York had no
separate or independent existence, having been merged into
Flents-Delaware. For purposes of financial accounting and income tax,
the business combination was deemed to have occurred as of the opening
of business on June 1, 1997.
The principal assets of Flents-New York consisted of cash and cash
equivalents, accounts receivable, and inventory.
In exchange for all the outstanding shares of common stock of Flents-New
York, the Company paid $2, 135,435 to the shareholders of Flents-New
York, and issued them: 270,650 units consisting of 270,165 shares of
the Company's common stock and 270,165 convertible value rights
("CVRs"). For purposes of the business combination, the units were
valued at $10 per unit. Each CVR entitles the original holder to up to
$4.00 of additional common stock of the Company to the extent that the
market value of the Company's common stock is less than $10.00 per share
on the one-year anniversary of the closing.
3. Employment agreements:
Effective June 1, 1997, the Company also entered into a ten-year
consulting agreement, a four-year employment agreement and a five-year
employment agreement with three of the former employees of Flents-New
York. The consulting agreement provides for annual payments of $12,000.
The four-year employment agreement provides for an initial starting
salary of $180,000 per annum and options for the purchase of 10,000
shares of the Company's common stock per year for the term of the
employment agreement. The employee may also receive additional options
based on performance of Flents-Delaware. The five-year employment
agreement provides for an initial starting salary of $108,000 per annum
and a bonus based on an increase in net revenues of the acquired
business.
4. Contingent liabilities:
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 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 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.
5. 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 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 (the "public warrants") have been
exercised. The issuance of the final 10 of 30 shares of common stock in
respect of each share of preferred stock constitutes a conversion of
each share of the Series A Preferred Stock into 10 shares of common
stock, and the ceasing of all further rights of the holders of Series A
Preferred Stock.
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 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 the 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 March
31, 1997 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 stockholders in 1996.
During the six-month period ended June 30, 1997, the Company (1)
determined that the gross revenue for the year ending December 31, 1997
would exceed $20,000,000 and (2) notify holders of the Company's public
warrants that it was redeeming the public warrants effective July 16,
1997. During August 1997, the Company's gross revenues from January 1,
1997 to date exceeded the $20,000,000 threshold. In addition, on July
16, 1997, a cumulative total of 402,390 public warrants were exercised
resulting in total proceeds of $3,017,925. These accomplishments give
rise to 500,000 shares of the Company's common stock to be issued to the
preferred shareholders approximately 95% of which will be issued to
either presently or formerly served the Company as directors, officers,
employees and consultants of the Company. Accordingly, for the six
months ended June 30, 1997, the Company provided for stock-based
compensation of $3,844,531, resulting from meeting two additional
preferred stock conditions. The expected stock issuance for the
remaining 5% of the preferred stock, held by individuals not otherwise
involved with the Company, has no effect on results of operations.
The 500,000 shares of the Company's common stock to be issued to the
preferred shareholders pursuant to the conversion provision described in
the first paragraph of this Note 5, is reported in the Company's
consolidated balance sheet as having been completed by June 30, 1997.
6. Pro-forma data:
Pro-forma data for the three and six-month periods ended June 30, 1997
and 1996 as though the business combination had been completed on
January 1, 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months For the Six Months
ended June 30, ended June 30,
-------------------- ---------------------
1997 1996 1997 1996
--------- -------- -------- ---------
Revenue $ 11,106,000 $ 8,550,000 $ 18,826,000 $ 12,655,000
Income (loss) from
continuing operations (1,948,000) 1,619,000 (465,000) 2,009,000
Net income (loss) (2,689,000) 978,000 (1,825,000) 1,342,000
Net income (loss) per
share of common stock:
Primary $ (.59) $ .24 $ (.40) $ .40
Fully diluted (.54) .24 (.36) .40
</TABLE>
<PAGE>
7. Statement of cash flows:
<TABLE>
<S> <C> <C>
Supplemental disclosures:
1997 1996
----------- ------------
Interest paid $ 124,377 $ 24,074
Income taxes paid 2,165,000 -
Noncash investing and financing activities:
Common stock issued as partial consideration
for the purchase of the acquired company 2,701,650 -
Cash consideration and acquisition costs
payable for the purchase of the acquired
company 2,447,258 -
Conversion of preferred stock 2,500 -
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 951,236
<SECURITIES> 0
<RECEIVABLES> 6,713,379
<ALLOWANCES> 195,906
<INVENTORY> 6,117,711
<CURRENT-ASSETS> 15,157,177
<PP&E> 1,986,658
<DEPRECIATION> 1,123,995
<TOTAL-ASSETS> 20,575,365
<CURRENT-LIABILITIES> 8,444,148
<BONDS> 0
0
0
<COMMON> 42,976
<OTHER-SE> 12,088,241
<TOTAL-LIABILITY-AND-EQUITY> 20,575,365
<SALES> 16,172,915
<TOTAL-REVENUES> 16,172,915
<CGS> 10,944,556
<TOTAL-COSTS> 10,944,556
<OTHER-EXPENSES> 5,973,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,683
<INCOME-PRETAX> (830,538)
<INCOME-TAX> 1,221,997
<INCOME-CONTINUING> (744,855)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,052,535)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.43)
</TABLE>
