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 September 30, 1997
[ ] 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 November
14,1997, 4,708,991 shares of the issuer's common equity were outstanding.
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
Page
Consolidated Balance Sheet as of September 30, 1997 F- 1
Consolidated Statement of Operations for the three
and nine months ended September 30, 1997 and 1996 F- 2
Consolidated Statement of Cash Flows for the
nine months ended September 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 ear plugs. In addition, the Company markets
and distributes bicycles and bicycle-related products, and other safety and
medical supplies.
On August 5, 1997, the Company expanded its line of protective products by
acquiring 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, by merging
Flents with and into the Company's wholly owned subsidiary, Flents Products Co.,
Inc., a Delaware corporation ("Flents Merger Sub"), pursuant to an Agreement and
Plan of Merger among the foregoing entities. From and after August 5, 1997,
Flents had no separate or independent existence, having been merged into Flents
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").
RESULTS OF CONTINUING OPERATIONS
Third Quarter 1997 Compared to Third Quarter 1996
The Company's net sales were $8,502,729 during the quarter ended September
30, 1997, an increase of 108% from net sales of $4,087,524 during the comparable
quarter in 1996. The 108% 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, which the Company recently
introduced; the introduction of new accessory product lines; and sales of safety
equipment and medical supplies by Flents Merger Sub.
Net income was $624,663 for the quarter ended September 30, 1997, compared
to net income of $158,750 during the same period in 1996. The 293.5% increase in
net income was due to increased sales by the Company, and the inclusion of sales
of Flents Merger Sub.
The cost of sales for the quarter ended September 30, 1997 was $5,788,009
(resulting in a gross profit margin of 31.9%) compared to the Company's cost of
sales of $3,142,180 (resulting in a gross profit margin of 23.1%) for the
quarter ended September 30, 1996.
Selling, general and administrative expenses for the quarter ended
September 30, 1997 were $1,614,017, compared to the Company's selling, general
and administrative expenses of $687,080 for the quarter ended September 30,
1996. As a percentage of sales, these expenses were 19.0% and 16.8% for the
quarters ended September 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, the Company's opening of an
additional office in San Diego, California, and the selling, general and
administrative expenses of Flents Merger Sub.
Nine Months Ended September 30, 1997 Compared
To Nine Months Ended September 30, 1996
The Company's net sales were $24,675,644 during the nine months ended
September 30, 1997, an increase of 82.3% from net sales of $13,532,363 during
the comparable nine months in 1996. The 82.3% sales increase from 1996 to 1997
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, which the company
recently
introduced; 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 Merger Sub.
Net loss was $1,427,882 during the nine months ended September 30, 1997,
compared to a net income of $1,286,119 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 shares of the Company's series A Preferred Stock into
shares of the Company's common stock. After the conversion, no shares of Series
A Preferred Stock remain outstanding. See note 5 to the Consolidated Financial
statements. Without this charge reflecting the conversion, net income for the
none-month period would have been $2,416,649, an increase of 88.0% from the
nine-month period ended September 30, 1996.
The cost of sales for the nine months ended September 30, 1997 was
$16,732,575 (resulting in a gross profit margin of 32.2%) compared to cost of
sales of $9,717,716 (yielding a gross profit margin of 28.2%) for the nine
months ended September 30, 1996.
Selling, general and administrative expenses for the nine months ended
September 30, 1997 were $3,472,700 (not including the one-time non-cash
accounting charge described above), compared to the Company's selling, general
and administrative expenses of $1,901,156 for the nine months ended September
30, 1996. As a percentage of sales, these expenses were 15.2% and 14.0% for the
nine months ended September 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, the Company's opening of an
additional office in San Diego, California, and the selling, general and
administrative expenses of Flents Merger Sub.
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
$276,700; through internal cash flow; and through the Company opening 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 15, 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
$525 to redeem those Redeemable Public Warrants which remained unexercised as of
July 15, 1997. Currently, the Company does not have any Redeemable Public
Warrants outstanding.
On May 6, 1996, as described above, the Company opened a revolving line of
credit at Key Bank of New York. The line of credit is collateralized by the
Company's inventory, receivables and other assets. As of September 30, 1997, the
Company had $3,327,700 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 ("Harbor"), the alleged owner
of the manufacturing facilities occupied by the Operating Subsidiary 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 Operating Subsidiary denied 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. In or about October, 1997, the Operating Subsidiary and Harbor
entered into a lease with respect to the premises whereby Harbor agreed to
discontinue its lawsuit, and the Operating Subsidiary agreed to enter into a new
lease with respect to the premises. See Item 5.
GKN Securities Corp. ("GKN"), an entity which the Company retained as a
financial agent and consultant, has commenced an arbitration proceeding against
the Company pursuant to a Financial Advisory and Investment Banking Agreement
(the "Agreement") entered into between GKN and the Company effective as of April
2, 1996. GKN seeks damages of $12,500 allegedly due and owing under the
Agreement, and specific performance of the Agreement whereby the Company is
allegedly obligated to grant to GKN 75,000, four-year warrants to purchase the
common stock of the Company at an exercise price of $5.875 per share. The
Company denies the material allegations of the Demand for Arbitration, and has
asserted a counterclaim in the amount of $100,000, alleging that GKN's
non-performance of its obligations pursuant to the Agreement has damaged the
Company.
ITEM 5. OTHER INFORMATION.
On October 17, 1997, the Company entered into a new lease with Harbor at
Hastings Associates for expanded space consisting of approximately 175,000
square feet of usable space for a term ending on December 31, 2000 for a fixed
annual rent of approximately $614,000, plus certain payments for increases in
taxes imposed upon the demised premises. The Company is responsible for paying
for the costs of renovating the demised premises. The Company also obtained an
offset to its current rent in the full amount of the unamortized advances that
the Company made on behalf of the landlord for prior renovations. The Company
plans to consolidate the operations of Flents Merger Sub into its main facility.
The Company expects that the lawsuit commenced by Harbor at Hastings will be
dismissed in the near future without any liability for the Company. See Item 1.
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
10.10 Line 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
10.11 Financial 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
10.12 Amendment #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
10.13 Amendment #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
10.14 Agreement and Plan of Merger, dated July 25,
1997, among PTI Holding Inc., Flents Product
Co., Inc. (a Delaware corporation) and Flents
Product Co., Inc. (a New York corporation)
incorporated by reference to exhibit number 1
in Registrant's Current Report on Form 8-K
dated August 20, 1997, under the Securities
Exchange Act of 1934, as amended
10.15 Amendment to Agreement and Plan of Merger,
dated July 25, 1997, among PTI Holding Inc.,
Flents Product Co., Inc. (a Delaware
corporation), Flents Product Co., Inc. (a New
York corporation), W. Thomas Davies, James E.
Dunn, Stuart M. Low, Robert A. Low, Doris L.
Hirsch, Lester C. Migdal, Peter C. Kohn and
Mary Lou Secchi incorporated by reference to
exhibit number 2 in Registrant's Current
Report on Form 8-K dated August 20, 1997,
under the Securities Exchange Act of 1934, as
amended
10.16 Certificates of Merger for the State of New
York and the State of Delaware, each dated
August 5, 1997, of Flents Products Co., Inc.
(a New York corporation) into Flents Product
Co., Inc. (a Delaware
corporation)incorporated by reference to
exhibit number 3 in Registrant's Current
Report on Form 8-K dated August 20, 1997,
under the Securities Exchange Act of 1934, as
amended
10.17 Noncompetition Agreement, dated August 5,
1997, among PTI Holding Inc., Flents Products
Co., Inc. (a Delaware corporation) and Stuart
M. Low incorporated by reference to exhibit
number 4 in Registrant's Current Report on
Form 8-K dated August 20, 1997, under the
Securities Exchange Act of 1934, as amended
10.18 Noncompetition Agreement, dated August 5,
1997, among PTI Holding Inc., Flents Products
Co., Inc. (a Delaware corporation), W. Thomas
Davies, and James E. Dunn incorporated by
reference to exhibit number 5 in Registrant's
Current Report on Form 8-K dated August 20,
1997, under the Securities Exchange Act of
1934, as amended
10.19 Consulting Agreement, dated August 5, 1997,
between Flents Products Co., Inc. (a Delaware
corporation) and Stuart M. Low incorporated
by reference to exhibit number 6 in
Registrant's Current Report on Form 8-K dated
August 20, 1997, under the Securities
Exchange Act of 1934, as amended
10.20 Employment Agreement, dated August 5, 1997,
between Flents Products Co., Inc. (a Delaware
corporation) and W. Thomas Davies
incorporated by reference to exhibit number 7
in Registrant's Current Report on Form 8-K
dated August 20, 1997, under the Securities
Exchange Act of 1934, as amended
10.21 Employment Agreement, dated August 5, 1997,
between Flents Products Co., Inc. (a Delaware
corporation) and James E. Dunn incorporated
by reference to exhibit number 8 in
Registrant's Current Report on Form 8-K dated
August 20, 1997, under the Securities
Exchange Act of 1934, as amended
10.22 Convertible Value and Registration Rights
Agreement, dated August 5, 1997, among PTI
Holding Inc., W. Thomas Davies, James E.
Dunn, Stuart M. Low, Doris L. Hirsch, Peter
C. Kohn, Robert A. Low, Lester C. Migdal, and
Mary Lou Secchi incorporated by reference to
exhibit number 9 in Registrant's Current
Report on Form 8-K dated August 20, 1997,
under the Securities Exchange Act of 1934, as
amended
(b) Reports on Form 8-K
The Registrant filed two reports on Form 8-K during the quarter ended
September 30, 1997.
(i) On August 20, 1997 the Registrant filed a Current Report on Form
8-K with respect to Item 2: Acquisition or Disposition of Assets. The
Company amended this Form 8-K on October 20, 1997 to file the Financial
Statements and the Pro-Forma Financial Information required in connection
with the Registrant's acquisition of Flents Products Co., Inc.
(ii) On September 2, 1997 the Registrant filed a Current Report on
Form 8-K with respect to Item 4: Changes In Registrant's Certifying
Accountant.
<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: November 14, 1997
PTI HOLDING INC.
By: /s/ Meredith W. Birrittella
Meredith W. Birrittella,
Chief Executive Officer
By: /s/ Anthony Costanzo
Anthony Costanzo
Chief Financial Officer
Authorized Signatory
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
SEPTEMBER 30, 1997
ASSETS
<C> <S>
Current assets:
Cash and cash equivalents $ 730,105
Accounts receivable, net of allowance for returns and doubtful collections of $228,406 5,938,695
Inventories 8,859,454
Deferred tax asset 285,600
Prepaid expenses and other current assets 1,380,467
------------
Total current assets 17,194,321
Equipment and improvements, net of accumulated depreciation of $1,202,115
1,026,294
Deferred tax asset 125,200
Goodwill, net of accumulated amortization of $157,456 4,272,866
Covenants not to compete, net of accumulated amortization of $408,785 109,915
Patents & trademarks, net of accumulated amortization of $1,237 6,302
------------
$ 22,734,898
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable, bank $ 3,327,700
Accounts payable and accrued expenses 3,515,483
Due to former key employee of acquired company 56,999
Income taxes payable 101,562
------------
Total current liabilities 7,001,744
------------
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
4,707,491 shares 47,075
Capital in excess of par 16,040,317
Deficit (354,238
------------
Total stockholders' equity 15,733,154
------------
$ 22,734,898
============
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
THREE & NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For the Three Months ended For the Nine Months ended
September 30, September 30,
----------------------------------------- -----------------------------------
1997 1996 1997 1996
------------ ------------- ------------ -----------
<C> <S> <S> <S> <S>
Net sales $ 8,502,729 $ 4,087,524 $ 24,675,644 $ 13,532,363
Cost of sales 5,788,009 3,142,180 16,732,575 9,717,716
------------ ------------ ------------ -----------
Gross profit 2,714,720 945,344 7,943,069 3,814,647
------------ ------------ ------------ -----------
Selling, general and administrative expenses:
SG&A - before stock-based compensation 1,614,017 687,080 3,742,700 1,901,156
Non recurring stock-based compensation
expense - - 3,844,531 -
------------ ------------ ------------ -----------
1,614,017 687,080 7,587,231 1,901,156
------------ ------------ ------------ -----------
Income from operations 1,100,703 258,264 355,838 1,913,491
Interest income, net of interest (expense) (55,271) 22,166 (140,954) 12,708
------------ ------------ ------------ -----------
Income before income taxes 1,045,432 280,430 214,884 1,926,199
Income taxes 420,769 121,680 1,642,766 640,080
------------ ------------- ------------ -----------
Net income (loss) 624,663 158,750 (1,427,882) 1,286,119
============ ============= ============ ===========
Net income (loss) per share of common stock:
Primary $ .13 $ .04 $ (.34 ) $ .33
Fully diluted .13 .04 (.30 ) .33
Weighted average shares outstanding:
Primary 4,650,601 4,216,889 4,252,201 3,891,973
Fully diluted 4,869,539 4,216,889 4,720,107 3,891,973
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
------------ ----------
<C> <S> <S>
Cash flows from operating activities:
Net income (loss) $ (1,427,882) $ 1,286,119
Adjustments to reconcile net income (loss) to net cash (used in)
operating activities:
Depreciation 370,334 236,739
Amortization of intangible assets 109,604 109,519
Deferred income tax (benefit) (92,277) 29,200
Stock- based compensation 3,844,531 -
(Increase) in operating assets exclusive of the effects of the business
combination:
Accounts receivable (1,732,667) (1,584,074)
Inventories (4,377,532) (1,641,639)
Prepaid expenses and other current assets (205,846) (521,121)
(Decrease) increase in operating liabilities exclusive of the effects
of business combination:
Accounts payable and accrued expenses 2,244,598 913,985
Income taxes payable (976,913) 610,880
------------ -----------
Net cash (used in) operating activities (2,244,050) (560,392)
------------ -----------
Cash flows from investing activities:
Cash payment as partial consideration for purchase of acquired
company and acquisition costs, net of cash acquired in the
business combination. (1,855,289) -
Purchase of equipment and improvements (742,013) (325,538)
Reduction in cash invested to secure letters of credit - 208,750
----------- ----------
Net cash (used in) investing activities (2,597,302) (116,788)
----------- -----------
Cash flows from financing activities:
Payments of amounts due to former key employee of acquired company
(23,583) (41,309)
Proceeds from issuance of common stock 3,101,661 198,438
Proceeds from bank loan, net 2,131,501 -
----------- ----------
Net cash provided by financing activities 5,209,579 157,129
----------- ----------
Net increase (decrease) in cash and cash equivalents 368,227 (520,051)
Cash and cash equivalents, beginning of period 361,878 969,329
----------- ----------
Cash and cash equivalents, end of period $ 730,105 $ 449,278
=========== ==========
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<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 September 30, 1997 and
the results of operations and cash flows for the three and nine months
ended September 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 of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share". This statement establishes new standards for
computing and presenting earnings per share (EPS), replacing the
presentation of currently required primary EPS with a presentation of
basic EPS. For entities with complex capital structures, the statement
requires dual presentation of both basic EPS and diluted EPS on the face
of the statement of operations. Under this new standard, basic EPS is
computed based on weighted average shares outstanding and excludes any
potential dilution. Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other
contracts to issue common stock. SFAS 128 is effective for financial
statements issued for years ending after December 15, 1997, and earlier
application is not permitted. When adopted, the Company will be required
to restate its EPS data for all prior periods presented. The Company
does not expect the impact of the adoption of this statement to be
material to previously reported EPS amounts.
2. Business combination:
On August 5, 1997, the Company acquired, Flents Products Co., Inc., a
New York corporation ("Flents-New York") 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: 270,165 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. Commitments and 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.
On October 17, 1997, the Company entered into a new lease with Harbor at
Hastings Associates for expanded space at its primary facility. The
lease has a term ending on December 31, 2000 for a fixed annual rent of
approximately $614,000 plus certain payments for increases in real
estate taxes. The Company is responsible for paying for the cost of
renovating the premises . The Company also obtained an offset to its
current rent in the full amount of the unamortized advances that the
Company made on behalf of the landlord for prior renovations.
An entity which the Company retained as a financial agent and
consultant, has commenced an arbitration against the Company pursuant to
a Financial Advisory and Investment Banking Agreement entered into
between the consultant and the Company effective as of April 2, 1997.
The consultant seeks damages of $12,500 alledgedly due and owing under
the agreement, and specific performance of the agreement, whereby the
Company is alledgedly obligated to grant to the consultant, 75,000,
four-year warrants to purchase the common stock of the Company at an
exercise price of $5.875 per share. The Company denies the material
allegations of the Demand for Arbitration, and has asserted a
counterclaim in the amount of $100,000, alleging that the consultant's
non-performance of its obligations pursuant to the agreement has damaged
the Company.
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 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 (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.
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
September 30, 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) notified 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. As a result of the Company's
meeting these two conditions, an aggregate of 500,000 shares of common
stock are issuable to holders of the Company's Series A preferred stock.
Approximately 95% of the shares of common stock issuable will be issued
to either present or former 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 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.
6. Pro-forma data:
Pro-forma data for the three and nine-month periods ended September 30,
1997 and 1996 as though the business combination had been completed on
January 1, 1996 are as follows:
<TABLE>
For the Three Months ended Sept. 30, For the Nine Months ended Sept. 30,
----------------------------------------- ----------------------------------------
1997 1996 1997 1996
------------------ ------------------- ------------------ ------------------
<C> <S> <S> <S> <S>
Revenue $ 8,524,000 $ 5,501,000 $ 27,355,000 $ 18,348,000
Income from continuing operations 1,054,000 432,000 399,000 2,397,000
Net income (loss) 630,000 235,000 (1,458,000) 1,614,000
Net income (loss) per share of common stock:
Primary $ .14 $ .06 $ (.33) $ .39
Fully diluted .13 .06 (.30) .39
</TABLE>
<PAGE>
7. Statement of cash flows:
Supplemental disclosures:
<TABLE>
Nine Months ended September 30,
-------------------------------------------
1997 1996
------------- ----------
<C> <S> <S>
Interest paid $ 209,977 $ 24,074
Income taxes paid 2,740,004 4,160
Noncash investing and financing activities:
Common stock issued as partial consideration for the purchase of
the acquired company 2,701,650 -
Conversion of preferred stock 2,500 -
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 730,105
<SECURITIES> 0
<RECEIVABLES> 6,167,101
<ALLOWANCES> 228,406
<INVENTORY> 8,859,454
<CURRENT-ASSETS> 17,194,321
<PP&E> 2,228,409
<DEPRECIATION> 1,202,115
<TOTAL-ASSETS> 22,734,898
<CURRENT-LIABILITIES> 7,001,744
<BONDS> 0
0
0
<COMMON> 47,075
<OTHER-SE> 15,686,079
<TOTAL-LIABILITY-AND-EQUITY> 22,734,898
<SALES> 24,675,644
<TOTAL-REVENUES> 24,675,644
<CGS> 16,732,575
<TOTAL-COSTS> 16,732,575
<OTHER-EXPENSES> 7,587,231
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,954
<INCOME-PRETAX> 214,884
<INCOME-TAX> 1,642,766
<INCOME-CONTINUING> 355,838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,427,882)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.30)
</TABLE>
