As filed with the Securities and Exchange Commission on January 27, 1997
Registration No. 33- _____
FORM SB-2
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PTI HOLDING INC.
------------------------------------------
(Name of small business issuer in its charter)
Delaware 3149 13-3590980
- ---------------------- --------------------- ------------------
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classifica- Identification No.)
or organization) tion Code Number)
c/o 15 East North Street, Dover, DE 19901
(Address and telephone number of principal executive offices)
15 East North Street, Dover, DE 19901
(Address or principal place of business or intended principal
place of business)
Mr. Meredith W. Birrittella
c/o Akabas & Cohen
488 Madison Avenue, 6th Floor
New York, New York 10022
(212) 308-8505
(Name, Address and telephone number of agent for service)
Approximate date of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
- ---------------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Title of each class Amount to be Proposed Proposed max. Amount of
of securities to be registered max.offering aggregate registration
registered price per offering price fee
share price
- ---------------------- ------------- ------------- --------------- -------------
- ---------------------- ------------- ------------- --------------- -------------
Common Stock (1) 460,000 $7.500 $ 3,450,000 $ 1,045
Common Stock (2) 120,000 $8.375(7) $ 1,005,000 $ 305
Common Stock (3) 54,750 $8.375(7) $ 458,531 $ 139
Common Stock (4) 77,265 $8.375(7) $ 647,094 $ 196
Common Stock (5) 50,000 $8.375(7) $ 418,750 $ 127
Redeemable 40,000 $2.125(8) $ 85,000 $ 26
Public Warrants(6)
- ---------------------- ------------- ------------- --------------- -------------
TOTAL FEE: $ 1,838
=========
</TABLE>
(1) Represents 460,000 shares of Common Stock issuable upon the
exercise of the currently outstanding Redeemable Public Warrants.
(2) Represents 40,000 shares of Common Stock issuable to Oak Ridge
Investments, Inc. ("Oak Ridge"), the underwriter of the Company's initial public
offering in December 1992, 20,000 shares of Common Stock issuable to Steven F.
Rosendahl ("Rosendahl"), a former employee of Oak Ridge, 20,000 shares of Common
Stock issuable to Robert G. McVicker ("McVicker"), a former employee of Oak
Ridge (Rosendahl, McVicker and Oak Ridge may be referred to herein collectively
as the "Underwriters"), upon such Underwriters exercise of the underwriter's
warrants issued to them as compensation for their services in connection with
such initial public offering (the "Underwriters Warrants"), each of such
Underwriter's Warrants consisting of the right to purchase, for $11.00, two
shares of the Company's Common Stock and one Redeemable Public Warrant to
purchase one share of the Company's Common Stock (a "Unit"), and 40,000 shares
of Common Stock issuable upon the exercise of the Redeemable Public Warrants
issuable upon such Underwriters exercise of the Underwriters Warrants, 20,000 of
which will be issued to Oak Ridge, 10,000 of which will be issued to Rosendahl
and 10,000 of which will be issued to McVicker.
(3) Represents 54,750 shares of Common Stock issuable upon the exercise
of the remaining outstanding, unregistered Bridge Warrants.
(4) Represents 77,265 shares of Common Stock issuable upon the exercise
of warrants issued by the Company.
(5) Represents 50,000 shares of Common Stock issuable upon the exercise
of employee options issued by the Company to a former officer and director of
the Company.
(6) Represents 40,000 Redeemable Public Warrants issuable to the
Underwriters upon the exercise of the Underwriters Warrants. See Note 2
hereunder.
(7) Last sale price of the Company's Common Stock on January 23, 1997.
(8) Last sale price of the Company's Redeemable Public Warrants on
January 23, 1997.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PTI HOLDING INC.
Cross-Reference Sheet
Item Caption Location
1. Front of Registration Outside Front Cover Page
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Inside Front and Outside
Back Cover Pages of Back Cover Pages
Prospectus
3. Summary Information and Prospectus Summary; Risk
Risk Factors Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Not Applicable
Price
6. Dilution Not Applicable
7. Selling Securityholders Selling Securityholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Directors, Executive
Officers, Promoters and Officers, Promoters and
Control Persons Control Persons
11. Security Ownership of Principal Stockholders
Certain Beneficial Owners
and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts Not Applicable
and Counsel
14. Disclosure of Commission Remuneration of Officers
position on and Directors
Indemnification
for Securities
15. Organization within Last Certain Relationships and
Five Years Related Transactions
<PAGE>
16. Description of Business Description of Business; Risk Factors;
Plan of Distribution; Financial Statements;
Summary Financial Data; Prospectus
Summary; Market Information
17. Management's Discussion Management's Discussion and
and Analysis or Plan of Analysis
Operation
18. Description of Property Description of Property
19. Certain Relationships and Certain Relationships and
Related Transactions Related Transactions
20. Market for Common Equity Market Information
and Related Stockholder
Matters
21. Executive Compensation Remuneration of Officers and Directors
22. Financial Statements Financial Statements
23. Changes In and Disagreements Not applicable
With Accountants on Accoun-
ting and Financial Disclosure
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 27, 1997
PTI HOLDING INC.
460,000 Shares of Common Stock
-----------------
302,015 Shares of Common Stock by Selling Securityholders
40,000 Redeemable Common Stock Purchase Warrants by Selling Securityholders
This Prospectus relates to the offering by the Company (the "Offering")
of 460,000 shares of common stock (the "Common Stock"), par value $.01 per
share, of PTI Holding Inc., a Delaware corporation (the "Company").
This Prospectus also relates to the offering (the "Offering") by
holders or prospective holders of securities of the Company (the "Selling
Securityholders") of 302,015 shares of Common Stock issuable upon the exercise
of outstanding warrants and options, and of 40,000 warrants (the "Redeemable
Public Warrants") for the purchase of Common Stock at an exercise price of $7.50
per share (the "Redeemable Public Warrant Exercise Price"), expiring January 15,
1998. Each Redeemable Public Warrant is redeemable at a price of $.01 per
warrant, provided that (i) notice is mailed to all holders of outstanding
Redeemable Public Warrants not less than 30 days prior to redemption; and (ii)
holders of Redeemable Public Warrants shall be entitled to exercise Redeemable
Public Warrants until the close of business on the day prior to the date fixed
for redemption.
Such securities may be sold by the Company or the Selling
Securityholders, from time to time, in transactions on the over-the-counter
market, in negotiated transactions, or through a combination of such methods of
sale, at fixed prices, which may be changed. The Company may effect such
transactions by selling the Common Stock or Redeemable Public Warrants to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Company and/or the
purchasers of the Common Stock or the Redeemable Public Warrants for whom such
broker-dealers may act as agent or to whom they may sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). See "PLAN OF DISTRIBUTION" and "SELLING
SECURITYHOLDERS."
The Company would receive $3,450,000 of gross proceeds from the sale of
shares of Common Stock issuable upon the exercise of the currently outstanding
Redeemable Public Warrants, although no assurance can be given that any of the
Redeemable Public Warrants will be exercised. None of the proceeds from the sale
of the shares of Common Stock or the Redeemable Public Warrants by the Selling
Securityholders will be received by the Company. However, such securities are
issuable upon the exercise of outstanding options and warrants upon the exercise
of which the Company will receive approximately $1,185,535 of gross proceeds.
The shares of Common Stock and the Redeemable Public Warrants are
traded on the NASDAQ SmallCap Stock Market under the symbols "PTII" and
"PTII-W," respectively.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE
OF RISK AND SHOULD BE PURCHASED ONLY BY INVESTORS ABLE TO SUSTAIN A
TOTAL LOSS OF THEIR INVESTMENT. PROSPECTIVE PURCHASERS SHOULD CAREFULLY
CONSIDER THE MATTERS DISCUSSED UNDER THE CAPTION "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
The Company is currently a reporting company under Securities Exchange
Act of 1934, as amended, and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). These reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024 of the Commission's office at 450 Fifth Street N.W.,
Washington, D.C. 20549, and at its regional offices located at 7 World Trade
Center, Suite 1300, New York, NY 10048; 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, CA 90036; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60604. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street N.W., Washington, D.C.
20549, at prescribed rates.
The securities of the Company are listed for trading on The Nasdaq
SmallCap Stock Market and copies of reports and other information concerning the
Company can be inspected at the offices of The Nasdaq Stock Market.
The Company will provide without charge to each person who receives a
prospectus, upon written or oral request of such person, a copy of any of the
information that is incorporated by reference in the prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are themselves specifically incorporated by reference). Such requests
should be addressed to the Company at c/o Protective Technologies International
Inc., One River Street, Hastings on Hudson, NY 10706, telephone (914) 478-8200.
<PAGE>
PROSPECTUS SUMMARY
The following summary is intended only to summarize certain material in
this Prospectus. This summary is qualified in its entirety by the detailed
information and financial statements that appear elsewhere herein.
The Company
PTI Holding Inc. (the "Company") was incorporated under the laws of
Delaware in March, 1990. The Company is engaged in the business of designing,
developing, manufacturing and marketing sports safety helmets for use in
bicycling, in-line skating, roller blading, roller skating and skate boarding.
The Company also markets and distributes bicycles and other bicycle-related
products.
Until February 28, 1994, the Company, then named Aerial Assault Inc.,
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. On March 1, 1994, the Company acquired
Foam-O-Rama, Inc., a New York corporation ("Foam"), which was principally
engaged in the business of the design, marketing and sale of bicycle helmets,
through merging Foam into the Company's wholly-owned subsidiary, Protective
Technologies International Inc., a New York corporation (the "Operating
Subsidiary"). From and after March 2, 1994, Foam had no separate or independent
existence, having been merged into the Operating Subsidiary. The Operating
Subsidiary maintains an executive office at One River Street, Hastings on
Hudson, NY 10706, telephone (914) 478-8200. Both the Company and the Operating
Subsidiary may be referred to herein collectively as the Company.
The Registration
Securities Outstanding:
Before the Offering... 3,487,936 shares of Common Stock(1)
460,000 Redeemable Public Warrants to
purchase Common Stock
25,000 shares of Series A Preferred Stock
After the Offering... 4,249,951 shares of Common Stock(2)
0 Redeemable Public Warrants to purchase
Common Stock(3)
25,000 shares of Series A Preferred Stock
Securities Offered: 762,015 shares of Common Stock(4)
40,000 Redeemable Public Warrants(5)
Use of Proceeds: The Company will receive $3,450,000 of
gross proceeds from the excersise of the
Redeemable Public Warrants currently
outstanding. The Company will not receive
any proceeds from the sales of securities
by the Selling Securityholders. However,
sales by Selling Securityholders assumes
the eventual exercise of various warrants
and options registered hereunder by the
Selling Securityholders, which will result
in additional gross proceeds to the
Company of approximately $1,185,535. The
Company will use the net proceeds of the
Registration to finance the acquisition
of inventory, for advertising and
promotion, for research and development,
and for general working capital. See "USE
OF PROCEEDS."
Risk Factors: A prospective purchaser of shares of
Common Stock of the Company should
carefully consider the factors discussed
under the caption "RISK FACTORS."
NASDAQ Symbol: PTII
<PAGE>
- --------
(1) Does not include the Underwriters Warrants granting the right to
purchase 40,000 Units at an exercise price of $11.00 per Unit, each Unit
consisting of two shares of Common Stock and one Redeemable Public Warrant, with
each Redeemable Public Warrant giving the Underwriters the right to purchase an
additional share of Common Stock at $7.50 per share. Does not include the Bridge
Warrants granting the right to purchase 54,750 shares of Common Stock at an
exercise price of $1.65 per share. Does not include the exercise of 62,500
warrants and 14,765 warrants granting the right to purchase common stock at
exercise prices of $3.75 and $3.95, respectively. Does not include the exercise
of 50,000 options, granted to a former officer and director of the Company,
granting the right to purchase Common Stock at an exercise price of $1.25 per
share. Does not include, in addition to the aforementioned shares registered
hereunder that are issuable upon the exercise of those options and warrants,
463,820 shares of Common Stock issuable upon the exercise of vested options
granted to consultants, independent contractors and employees of the Company at
exercise prices ranging from $1.25 per share to $9.00 per share. Does not
include up to 500,000 shares of Common Stock issuable upon the successful
achievement of certain performance targets pursuant to the terms of the
outstanding Preferred Stock. See "DESCRIPTION OF SECURITIES - Preferred Stock."
(2) Includes the 500,000 shares of Common Stock issuable upon the exercise of
Redeemable Public Warrants (460,000 of which are outstanding, and 40,000 of
which are issuable upon the Underwriters' exercise of the Underwriters Warrants)
at an exercise price of $7.50 per share. Includes the 80,000 shares of Common
Stock issuable to the Underwriters upon the exercise of the Underwriters
Warrants. Includes shares issuable upon the exercise of 54,750 Bridge Warrants
at $1.65 per share. Includes shares issuable upon the exercise of 62,500
warrants and 14,765 warrants at exercise prices of $3.75 and $3.95 per share,
respectively, which such warrants were issued by the Company. Includes shares
issuable upon the exercise of 50,000 options granted to a former officer and
director of the Company at an exercise price of $1.25 per share. Does not
include, in addition to the aforementioned shares registered hereunder that are
issuable upon the exercise of those options and warrants, 463,820 shares of
Common Stock issuable upon the exercise of vested options granted to
consultants, independent contractors and employees of the Company at exercise
prices ranging from $1.25 per share to $9.00 per share. Does not include up to
500,000 shares of Common Stock issuable upon the successful achievement of
certain performance targets pursuant to the terms of the outstanding Preferred
Stock. See "DESCRIPTION OF SECURITIES -- Preferred Stock."
(3) The Redeemable Public Warrants registered hereunder will be issued in
connection with the exercise of the Underwriters Warrants. For purposes of this
Registration Statement, both the 40,000 Redeemable Public Warrants registered
hereunder and the 460,000 Redeemable Public Warrants currently outstanding are
assumed to be immediately exercised upon the effective date of this Registration
Statement. See Note 2 hereunder. No assurance can be given, however, that any or
all of such Redeemable Public Warrants will be exercised.
(4) The Common Stock offered hereunder will be issued in connection with,
and hereby presumes: (1) the exercise of all 460,000 currently outstanding
Redeemable Public Warrants at $7.50 per share; (2) the exercise, at $7.50 per
share, of the 40,000 Redeemable Public Warrants issuable in connection with the
exercise of the Underwriters Warrants; (3) the issuance of the 80,000 shares of
Common Stock issuable upon the exercise of the Underwriters Warrants; (4) the
exercise of the remaining 54,750 outstanding Bridge Warrants; (5) the exercise
of warrants granting the right to purchase 77,265 shares of Common Stock ; and
(6) the exercise of options granting the right to purchase 50,000 shares of
Common Stock.
(5) The Company granted to Oak Ridge Investments, Inc. ("Oak Ridge"), the
underwriter of the Company's initial public offering, to Steven F. Rosendahl
("Rosendahl"), a former employee of Oak Ridge, and to Robert McVicker
("McVicker"), a former employee of Oak Ridge (Oak Ridge, Rosendahl and McVicker
may be referred to collectively herein as the "Underwriters"), warrants to
purchase (the "Underwriters Warrants"), respectively, 20,000, 10,000 and 10,000
Units (the "Units"), each Unit consisting of two shares of Common Stock of the
Company and one Redeemable Public Warrant to purchase one share of Common Stock
of the Company. The Redeemable Public Warrants registered hereunder are issuable
upon, and hereby presume, the exercise of the Underwriters Warrants.
(6) If the costs of the Company's product recall and destruction of defective
merchandise were excluded (such costs including not only writing- off sales and
expense costs, but also replacing the recalled helmets free of charge), the
gross profit margin for 1994 would be approximately 23%.
<PAGE>
Summary Financial Information
The following selected financial data with respect to the periods ended
December 31, 1995 and 1994 are derived from the Company's audited financial
statements included elsewhere in this Prospectus. The following selected
financial data with respect to the nine-month periods ended September 30, 1996
and 1995 are derived from the unaudited financial statements of the Company
included elsewhere in this Prospectus, but in the opinion of management include
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial position of the Company for the periods
presented. The results of operations for the interim periods are not necessarily
indicative of results attained or to be attained in any other fiscal period. The
information below should be read in conjunction with the Financial Statements
and related notes thereto included elsewhere in this Prospectus.
<TABLE>
Consolidated Statement of Operations Data
For the Year Ended For the Nine Months Ended
December 31, September 30,
<S> <C> <C> <C> <C>
1995 1994 1996(1) 1995(1)
-------- -------- -------- --------
Net Sales $8,166,788 $4,776,165 $13,532,363 $6,505,019
Net Income (loss) 867,936(2) (769,293)(3) 1,286,119 509,441
Per Share Data:
Income (loss) from: .24(4) (.25)(5) .33 .15
Weighted average
number ofcommon
shares outstanding 3,637,025 3,021,822 3,891,973 3,330,900
</TABLE>
(1) Unaudited.
(2) Includes $80,000 net income from discontinued operations.
(3) Includes $88,398 net loss from discontinued operations.
(4) Includes $.02 net income per share from discontinued operations.
(5) Includes $.03 net loss from discontinued operations.
<TABLE>
Consolidated Balance Sheet Data
For the Year Ended For the Nine Months Ended
December 31, September 30,
------------------------ -------------------------
<S> <C> <C> <C> <C>
1995 1994 1996(1) 1995(1)
-------- -------- -------- --------
Working Capital 3,593,238 2,590,825 5,102,066 3,293,076
Total Assets 6,536,909 5,930,960 9,505,022 6,554,086
Long-Term debt and
redeemable preferred
stock, excluding
current maturities 86,250 111,250 61,250 86,250
Stockholder's Equity 5,676,941 4,673,443 7,161,498 5,290,384
(Deficiency)
(1) Unaudited.
</TABLE>
<PAGE>
RISK FACTORS
An investment in the Common Stock or Redeemable Public Warrants offered
hereby involves a high degree of risk. Common Stock and Redeemable Public
Warrants should not be purchased by a person who cannot afford the loss of his
or her entire investment. The following risks, in addition to those discussed
elsewhere in this Prospectus, should be considered carefully in evaluating the
Company and its business prior to purchasing any of the Common Stock or
Redeemable Public Warrants offered hereby.
1. Limited Operating History; Limited Revenues; Prior Deficit in
Working Capital; and Start-up Business. The Company was organized in March 1990
and has had a limited operating history. No assurance can be given that the
Company will operate profitably in the future. In the future, the Company is
likely to experience undercapitalization, cash shortages, setbacks in product
development and other risks common to emerging businesses.
2. Competition. The safety sport helmet industry is dominated by Bell
Sports Corporation ("Bell"). In 1995 , Bell and American Recreation, the second
largest manufacturer of bicycle helmets, merged their operations. As a result of
this merger, the Company estimates that Bell will have approximately 65% of the
market, based on units sold in 1995. In addition to Bell, significant
competitors include Troxol, Specialized and Trek as well as other small
manufacturers, including several new entrants in 1995 and 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. See "DESCRIPTION OF
BUSINESS -- Competition."
3. Uncertain Market Acceptance and Dependence upon Major Customers. The
Company has sold its bicycle helmets and other products for less than four
years, and, as a result, the Company has limited experience in marketing its
products. Further market acceptance of the Company's products will depend, in
large part, upon the Company's ability to convince bicycle helmet retailers that
the Company's products will be attractive to potential purchasers. No assurance
can be given that the Company will be successful in its marketing efforts. In
addition, during the first three quarters of 1996, the Company's sales to its
single largest customer constituted approximately 66% of its gross revenues,
compared to 63% during the same period in 1995. Sales to its second largest
customer accounted for 14% of gross revenues in the first three quarters of
1996, compared to 23% during the same period in 1995. The loss of these
customers would have an adverse effect on the Company's business. See
"DESCRIPTION OF BUSINESS -- Marketing & Distribution."
4. Need for Additional Financing. The Company has recently opened a
revolving line of credit at Key Bank of New York in the amount of $7,000,000, of
which the Company is currently able to draw approximately $3,000,000. Although
the Company believes that its current funding, including such funds made
available through its line of credit, is sufficient to sustain the Company's
operation and enable it to maintain a positive cash flow from operations at its
current level of sales, for the Company to expand its sales to achieve
significant profits or to continue to develop new and/or improved products to
maintain its place in the market, or if the Company encounters more difficulty
than it anticipates in the acceptance of its products or in other areas, it may
require additional financing for inventory of its bicycle helmets, for research
and development and/or for general working capital. No assurance can be given
that such financing will be available to the Company, or, if it is available,
that it will be on terms favorable to the Company.
5. Dependence Upon Key Personnel and Executive Pay. The Company is
dependent upon the services of Meredith Birrittella, its Chief Executive Officer
and CFO, and Warren Schaeffer, its Secretary and president of the Operating
Subsidiary. The loss or interruption of the services of either of these
individuals would have a material adverse effect on the Company. The Company
maintains life insurance on each of these two executive officers.
6. Trademarks. The Company markets its bicycle helmets, bicycles and
bicycle-related products under the brand names Protective Technologies(TM) and
PTI(TM). In addition, the Company markets different helmet models under the
trademarks Cool Cat(TM), Kid Kat(TM), Elite(R), and 9000 Series(TM). The Company
believes that such trademarks are helpful to the Company's ability to market its
products. The Company, however, has obtained a federal registration for only the
Elite trademark. No assurance can be given that the Company will be granted
trademark protection for its unregistered trademarks. Even if such protection is
granted for all of its trademarks, no assurance can be given that the Company
will be able to successfully defend its trademarks if forced to litigate their
enforceability. If the Company were to lose the use of any of such trademarks,
its sales could be adversely affected.
7. Reliance on Foreign Manufacturers. The Company sources out the
manufacturing of all bicycle accessory products to certain manufacturers, a
number of which are foreign corporations. Access to the foreign manufacturers
could be adversely affected by economic or political instability in such foreign
countries and by currency fluctuations; however, the Company believes that
adequate alternate sources of supply exist. The Company has not entered into any
written agreement with any manufacturer, foreign or domestic. In the event of a
loss of a supplier, the Company's operations could be seriously disrupted until
other manufacturers are found.
8. Control by Current Management. The current management of the Company
currently owns, including various vested and unvested options to purchase Common
Stock of the Company, approximately 22.5% of the outstanding shares of Common
Stock of the Company. No cumulative voting is in effect for the election of
directors of the Company, and, therefore, although the underwriter of the
Company's initial public offering has the right to designate a director, current
management will be able to assert considerable influence over the direction of
the Company. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
9. No Dividends. 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.
10. Potential Future Sales pursuant to Rule 144 or Pursuant to Registration
Rights. As of January 1, 1997, 1,405,301 shares of Common Stock currently issued
and outstanding are "restricted securities" as that term is defined under the
Securities Act of 1933, as amended (the "Act"). The ownership of such restricted
shares is as follows: 535,238 owned by Meredith W. Birrittella; 455,238 owned by
Martin P. Birrittella; 294,825 owned by Thomas J. Coleman; and 120,000 owned by
Warren Schaeffer.
In addition, upon the Company's successful achievement of certain specified
performance targets, up to an additional 500,000 shares of Common Stock are
issuable pursuant to the terms of the outstanding Preferred Stock (see
"DESCRIPTION OF SECURITIES--Preferred Stock"), and such shares of Common Stock
would also be "restricted securities" to the extent issued to affiliates of the
Company.
In general, under Rule 144 promulgated under the Act, a person who has
satisfied a two-year holding period may, under certain circumstances, sell,
within any three-month period, a number of shares that does not exceed the
greater of one percent of the then outstanding shares of Common Stock or the
average weekly trading volume of such shares during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of shares of Common Stock by a person who is not an "affiliate" of the Company
(as defined in Rule 144) and who has satisfied a three-year holding period,
without any volume or other limitation.
Excluding the shares issuable upon the exercise of those options and
warrants registered hereunder, the Company has granted to consultants,
independent contractors and employees vested options to acquire a total of
463,820 shares of Common Stock. The shares issuable upon the exercise of these
options will be either freely transferrable as a result of their registration
under Form S-8 of the Securities Act of 1933, or will be subject to sale under
Rule 144.
The sale of restricted Common Stock in the future, or even the possibility
that it may be sold, may have an adverse affect on the market price for the
Common Stock.
11. Maintenance Criteria for NASDAQ Securities. The Company currently lists
its Common Stock and Redeemable Public Warrants in the NASDAQ trading system, on
which most public trades of the Company's Common Stock are effected. Inclusion
in NASDAQ does not necessarily create a meaningful, sustained market for the
Company's securities. Moreover, continued inclusion in NASDAQ is subject to
certain maintenance criteria such as maintenance of two market makers, total
assets of at least $2,000,000, capital and surplus of at least $1,000,000, per
share market price of at least $1.00 (or aggregate market value of publicly held
Common Stock at least $1,000,000 and at least $2,000,000 in capital and surplus)
and at least 300 shareholders. The failure to meet any of these maintenance
criteria in the future may result in a discontinuance of the inclusion of the
Company's securities in NASDAQ, which may have an adverse effect on the market
for the securities.
12. Limitation on Directors' Liabilities under Delaware Law. Pursuant to
the Company's Certificate of Incorporation and under Delaware law, directors of
the Company are not liable to the Company or its shareholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases illegal under Delaware law or for any transaction
in which a director has derived an improper personal benefit.
13. Rules Limiting Broker-Dealer Sales of Company Shares. It is possible
that the Company's Common Stock will be covered by a Securities and Exchange
Commission rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 jointly with their spouse). For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. In addition, it is possible that
an underwriter's participation in the trading market of the Common Stock and the
Public Redeemable Warrants will be covered by a Securities and Exchange
Commission rule that imposes additional disclosure requirements on
broker-dealers in "penny stock" transactions. Although the Common Stock is
currently outside the definition of a "penny stock" under the applicable rules,
in the event the Common Stock were subsequently to become characterized as a
"penny stock," as a result of being delisted from The NASDAQ Stock Market or
otherwise, broker/dealers effecting transactions for clients in the Common Stock
will be required to make extensive disclosures to such clients in certain
circumstances regarding the Common Stock, including bid, offer and other pricing
information relating to the Common Stock, such broker/dealer's compensation and
the compensation of associated persons in connection with the transaction, and
such client's specific account information. Such additional burdens imposed upon
broker/dealers may discourage broker/dealers from effecting transactions in the
Common Stock. Consequently, these rules may affect the ability of broker-dealers
to sell the Company's securities and also may affect the ability of purchasers
of Common Stock to sell their securities in the secondary market.
14. Exercise of Warrants. The Company is registering for sale up to 460,000
shares of Common Stock underlying the currently outstanding Redeemable Public
Warrants, 80,000 shares of Common Stock issuable upon the exercise of the
Underwriters' Warrants, 40,000 shares of Common Stock issuable upon the exercise
of Redeemable Public Warrants which are issuable upon exercise of the
Underwriters' Warrants, 54,570 shares issuable upon the exercise of the Bridge
Warrants to purchase Common Stock at $1.65 per share, 62,500 and 14,765 shares
of Common Stock issuable at $3.75 and $3.95 per share, respectively, upon the
exercise of warrants issued by the Company, and 50,000 shares of Common Stock
issuable at $1.25 per share upon the exercise of options issued to a former
officer and director of the Company. The exercise of such Redeemable Public
Warrants, Underwriters' Warrants, Bridge Warrants, and additional warrants and
options granted by the Company may occur at a time that the Company could
probably obtain financing on better terms. In addition, such exercises would
dilute the percentage ownership interests of holders of Common Stock. Further,
the offering for sale of some or all of such underlying Common Stock, or even
the possibility of such sale, may have an adverse affect on the market price for
the Common Stock. See "DESCRIPTION OF SECURITIES" and "PLAN OF DISTRIBUTION."
15. Management Discretion in Use of Proceeds. The proceeds of the Offering
will be allocated predominately for marketing and sales, and for general and
administrative and working capital purposes. However, management will have broad
discretion over the application and allocation of the use of the net proceeds.
See "USE OF PROCEEDS."
<PAGE>
MARKET INFORMATION
The Principal market on which the Company's Common Stock trades is The
Nasdaq SmallCap 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:
<TABLE>
NASDAQ Stock Market List Prices
-------------------------------
<S> <C> <C>
Quarter Ended High Low
September 30, 1994 $ 3-7/8 $ 2-7/8
December 31, 1994 $ 4-1/4 $ 2
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 November 30, 1996, the approximate number of holders of record of
the Company's common stock was 88. 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. See "RISK FACTORS -- No Dividends."
USE OF PROCEEDS
The Company will receive $3,450,000 of gross proceeds from the sale of
shares of Common Stock issuable upon the exercise of the currently outstanding
Redeemable Public Warrants, assuming the exercise of all such outstanding
Redeemable Public Warrants, less expenses of this Offering of approximately
$50,000, resulting in anticipated net proceeds to the Company of approximately
$3,400,000.
The sale of securities by the Selling Securityholders will not result
in any proceeds to the Company. See "SELLING SECURITYHOLDERS". However, it
presumes exercise of outstanding warrants and options, and therefore proceeds to
the issuer would be as follows:
<TABLE>
<S> <C> <C> <C>
--------------------------- ------------- -------------- ---------------
Price to Underwriting
Public(1) Discounts and Proceeds to
Commissions(2) Issuer
--------------------------- ------------- -------------- ---------------
--------------------------- ------------- -------------- ---------------
Price Per Unit
40,000 Units $ 11.00 $ 0 $ 440,000
Price Per Share
of Common Stock
40,000 Shares $ 7.50 $ 0 $ 300,000
54,750 Shares $ 1.65 $ 0 $ 90,338
62,500 Shares $ 3.75 $ 0 $ 234,375
14,765 Shares $ 3.95 $ 0 $ 58,322
50,000 Shares $ 1.25 $ 0 $ 62,500
--------------------------- ------------- --------------- --------------
Total $0 $ 1,185,535
--------------------------- ------------- --------------- --------------
</TABLE>
(1) The 40,000 Units are issuable upon the exercise of the Underwriters
Warrants. The 40,000 shares of Common Stock are issuable upon the
exercise of the Redeemable Public Warrants to be issued to the
Underwriters upon their exercise of the Underwriters Warrants. The
54,750 shares of Common Stock issuable at $1.65 per share consist of
the shares of Common Stock issuable upon the exercise of the
outstanding Bridge Warrants. The 62,500 shares of Common Stock issuable
at $3.75 per share consist of the shares of Common Stock issuable upon
the exercise of the warrants issued by the Company. The 14,765 shares
of Common Stock issuable at $3.95 per share consist of the shares of
Common Stock issuable upon the exercise of the warrants issued by the
Company. The 50,000 shares of Common Stock issuable at $1.25 per share
consist of the shares of Common Stock issuable upon the exercise of the
options granted by the Company to a former officer and director of the
Company.
(2) The securities registered hereunder will not be sold through an
underwriter. See "PLAN OF DISTRIBUTION."
The Company intends to use the net proceeds of the Offering, including
those funds the Company will receive upon the exercise of the options and
warrants registered hereunder for sale by the Selling Securityholders to finance
the acquisition of inventory, for advertising and promotion, for research and
development, and for general working capital purposes. Such funds will not be
kept separate from other funds of the Company and collectively will be used to
pay all obligations of the Company including compensation to the officers. No
proceeds are allocated specifically to any other payment, directly or
indirectly, to directors, officers or their affiliates. The officers of the
Company have broad discretion over the use of proceeds. See "RISK FACTORS --
Management Discretion in Use of Proceeds".
Pending application of the proceeds, the Company may make temporary
investments in interest-bearing savings accounts, certificates of deposit,
United States Government obligations, money market accounts, short-term
interest-bearing securities or other marketable securities.
MANAGEMENT'S DISCUSSION AND ANALYSIS
As discussed more fully in the DESCRIPTION OF BUSINESS section herein,
on March 1, 1994, the Company acquired Foam, a business principally engaged in
the design, manufacture and marketing of bicycle helmets, by merging Foam into
the Operating Subsidiary. For purposes of the transfer of the economic benefits
and risks, the acquisition was deemed to have occurred on January 1, 1994. The
Operating Subsidiary has been the Company's core operating entity since the date
of the acquisition. Both the Company and the Operating Subsidiary may be
referred to herein collectively as the Company.
Results of Discontinued Operations
The Company's inability in 1993 to effectively compete in the athletic
basketball footwear industry, and therefore its inability to maintain adequate
gross profit and net income levels, led to management's decision to discontinue
the Company's footwear operation. For the year ended December 31, 1994 the
Company had a net loss of $769,293. The net loss in 1994 comprised a $680,895
loss from operations and a $88,398 loss from discontinued operations.
For the year ended December 31, 1995 the Company had net income of
$867,936. The net income consists 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
Fiscal Year 1995 Compared to Fiscal Year 1994
The Company's net sales were $8,166,788 during the year ended December
31, 1995, an increase of 71% from its net sales of $4,776,165 in 1994.
The 71% sales increase from 1994 to 1995 resulted predominantly from
increased sales to existing customers through the addition of new helmet models,
increased sales in existing models due to growth in the overall helmet market
and the addition of new retail outlets for the Company's products.
The Company anticipates that its total sales for the 1996 fiscal year
will be more than twice the amount of its 1995 sales. This increase is expected
to result from the Company's increasing its market share at the expense of
competitors, 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 Playskool(TM) brand name,
and with Bohbot Entertainment, Inc. to market helmets with the Princess
Gwenevere and the Jewel Riders(TM) characters.
The Company's net income for the year ended December 31, 1995 was
$867,936, which consisted of $787,936 of net income from operations and $80,000
of net income from discontinued operations, compared to the Company's loss for
the year ended December 31, 1994 of $769,293, consisting of a $680,895 loss from
operations and a $88,398 loss 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.
Further, in 1994 the Company had several one-time expenses, including
one-time charges of $250,000 in connection with the voluntary recall of a
certain helmet, which, the Company determined, did not meet its standards,
one-time deferred compensation charges of $150,000, one-time charges of an
additional $99,000 in connection with the Company's buyout of a high level
manager's employment agreement, and amortization of noncompetition covenants and
goodwill in the aggregate amount of $166,000.
The cost of sales for the year ended December 31, 1995 was $5,954,212
(resulting in a gross profit margin of 27%) compared to the Company's cost of
sales of $3,918,362 (resulting in a gross profit margin of 18%6) for the year
ended December 31, 1994.
Selling, general and administrative expenses for the year ended
December 31, 1995 were $1,664,002, compared to selling, general and
administrative expenses of $1,567,070 for the year ended December 31, 1994. As a
percentage of sales these expenses were 20% and 33% for the years ended December
31, 1995 and 1994, respectively.
The increased selling, general and administrative spending in 1995 is
primarily due to the higher costs associated with the expansion of the helmet
business and the higher costs for human resources. However, as a percentage of
sales, selling, general and administrative spending decreased from the 1994
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. In 1996, management
believes, the Company can meet its projected sales increases without
significantly increasing its selling, general and administrative expenses.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995.
The Company's net sales were $13,532,363 during the nine months ended
September 30, 1996, an increase of 108% from net sales of $6,506,019 during the
comparable nine months in 1995. The 108% sales increase for these periods
resulted primarily from increased sales of existing models, from expansion of
the Company's bicycles accessories business and also from the addition of new
customers.
Net income was $1,286,119 during the nine months ended September 30,
1996, compared to a net income of $509,441 during the same period in 1995. The
increase in net income was due to higher sales levels and lower selling general
and administrative expenses as a percentage of sales.
The cost of sales for the nine months ended September 30, 1996 was
$9,717,716 (resulting in a gross profit margin of 28.19%) compared to cost of
sales of $4,374,531 (yielding a gross profit margin of 32.8%) for the nine
months ended September 30, 1995. The decrease in gross profit margin was due
primarily to the fact that the Company's bicycle accessory products increased as
a percentage of sales, such accessories having a lower gross profit margin than
helmets.
Selling, general and administrative expenses for the nine months ended
September 30, 1996 were $1,901,156 compared to the Company's selling, general
and administrative expenses of $1,656,956 for the nine months ended September
30, 1995. As a percentage of sales, these expenses were 14.05% and 25.47% for
the nine months ended September 30, 1996 and 1995, respectively. The decreased
ratio of selling, general and administrative spending to sales is in part due to
the fact that the Company's sales grew faster than its increases in fixed
overhead.
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, recently, through the Operating
Subsidiary's opening of a revolving line of credit.
The Company pays its employees and vendors on a weekly, monthly or
bimonthly basis, while its customers pay for products on an average of 70 days
after shipment, and therefore the Company has substantial needs for working
capital. As of September 30, 1996, the Company had $449,278 of cash available
for its cash needs, compared to cash of $385,850 as of September 30, 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 and Protective Technologies of America, Inc., a wholly-owned
subsidiary (nonoperating) of the Company. The Company does not currently have
any outstanding loans pursuant to such line of credit.
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.
DESCRIPTION OF BUSINESS
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, 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
Technologies(TM) to Foam.
The Company is a bicycle helmet manufacturer well positioned for
accelerated gains as a result of growing state legislation mandating bicycle
helmet use. In addition to helmets, the Company also markets and distributes
bicycles and bicycle-related products.
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 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 1994 and 1995, and did not change
significantly during the first three quarters of 1996.
The Company's principal models of helmets include:
Cool Cat(TM) and Kid Kat(TM): 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 Cat(TM) was the best
selling helmet at Toys R Us and Target stores in 1994 and 1995.
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 Series(TM): 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 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 certain manufacturers, a number of which are
foreign corporations in East Asia. Such independent manufacturers, both foreign
and domestic, use molds and tooling that are owned by and for the exclusive use
of the Company in the manufacture of these sub assembly components. 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 helmets, 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,
based on the number of factories in East Asian countries, the Company believes
that 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 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), Toys R Us Canada (50 stores), and other
regional mass merchants.
In the first three quarters of 1996, the Company's sales to its single
largest customer constituted approximately 66 percent of its gross revenues,
compared to approximately 63 percent during the same period in 1995 calendar
year. Sales to its second largest customer during the first three quarters of
1996 accounted for 14 percent of gross revenues, compared to 23 percent during
the same period in 1995. The Company believes that its relationships with these
accounts are good.
In July 1994, the Company entered into a supply agreement with Toy Biz,
Inc., a licensee of various Marvel Comic Book characters, to supply helmets
bearing such characters to Toy Biz, Inc. for certain stores and to obtain a
right to use such characters on the Company's helmets in sales to other stores.
The agreement contemplates granting Toy Biz options to purchase, at the market
price on the date of grant, a number of shares of its Common Stock depending on
the volume of the Company's helmets purchased by Toy Biz. To date, Toy Biz has
not purchased a sufficient amount of helmets to warrant the grant of any such
options.
In addition to Toy Biz, the Company has entered into license
arrangements with Hasbro, Inc. to manufacture and market helmets, bicycles and
bicycle accessories under the Playskool(TM) brand name, and with Bohbot
Entertainment, Inc. to market helmets with the Princess Gwenevere and the Jewel
Riders(TM) characters.
Private label manufacturing of helmets 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 basis, 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 Cannondale and Target
stores.
The Company is currently seeking arrangements with established IBD
distributors to expand its marketing by reaching 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 and helmet products under the
brand names Protective Technologies(TM) and PTI(TM). In addition, the Company
markets different helmet models under the trademarks Cool Cat(TM), Kid Kat(TM),
Elite (R) Series, and the 9000 Series(TM). 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 1995. 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 1995, the Company spent $54,000 on such research
and development, approximately the same amount the Company spent on research and
development in 1994. It is expected that the Company will spend approximately
$100,000 on research and development during the 1996 year.
Employees
As of January 1, 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.
LEGAL PROCEEDINGS
Although the Company is a party to certain pending trade litigations
which have arisen in the usual course of its business, management deems such
litigations immaterial to the Company's financial position, results of
operations and future cash flows.
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 50,000 square feet of such facility pursuant to a two-year
lease, expiring February 28, 1997, and occupies the remaining 47,000 square feet
of the facility on a month-to-month rental basis. The Company is currently
negotiating with the landlord to extend the lease on the entire 97,000 square
feet. The Company believes that comparable alternate facilities are available.
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company are as follows:
Executive
Officer or
Director
Name Age Position Since
- ---- --- -------- ----------
Meredith W. Birrittella 29 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 29, 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. The Company plans to pay its outside
directors (Mr. Robert Fuhrman and Mr. Myles Birrittella) compensation for their
services as directors. No inside director (Mr. Meredith Birrittella and Mr.
Warran Schaeffer) 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.
<TABLE>
REMUNERATION OF OFFICERS AND DIRECTORS
Summary Compensation Table
<S> <C> <C> <C> <C> <C>
Securities
Name and Principal Underlying Other Annual
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.
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.
Stock Options plans
The Shareholders of the Company have adopted the Company's 1994 Joint
Incentive and Non-Qualified Stock Option Plan (the "Plan"). The Company has no
other stock option plans.
Under the Plan, options to purchase up to 350,000 shares of Common
Stock may be granted to key employees of the Company and its subsidiaries, and
directors, consultants and other individuals providing services to the Company
through June 21, 2004. Such options may be intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or they may be intended not to qualify under such Section
("non-qualified stock options"). As of January 1, 1997, stock options to
purchase 188,000 shares of the Company's Common Stock have been granted under
the Plan. Of such 188,000 stock options, 100,000 are non-qualified stock
options, and the remaining 88,000 are incentive stock options. To date, 50,000
non-qualified stock options and 48,000 incentive stock options have vested, of
which 33,000 incentive stock options have since been exercised.
The Plan allows the Board of Directors to designate a committee of at
least two disinterested directors to administer the Plan for the purpose of
complying with Rule 16(b)(3) under the Securities Exchange Act of 1934, as
amended, with respect to future grants under the Plan. The Board of Directors
has established an Option Committee consisting of Messrs. Robert Fuhrman and
Myles Birrittella, which such committee administers the Plan and determines the
persons who are to receive options and the number of shares to be subject to
each option.
The Plan specifically provided for an annual grant, on the 90th day
following each fiscal year ending during the first five years of the term of the
Plan, to the individuals who were the Co-Chief Executive Officers at the time of
the adoption of the Plan (Messrs. Meredith W. Birrittella and Thomas J.
Coleman), so long as such person remained an executive officer or director of
the Company. The Plan annually granted to each of Messrs. M.W. Birrittella and
Coleman a five-year option to purchase 25,000 shares of Common Stock at $4.00
per share, but these grants have been waived by Messrs. M.W. Birrittella and
Coleman. This provision cannot be amended more than once every six months, other
than to comport with the Internal Revenue Code or the Employee Retirement Income
Security Act.
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.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 17, 1996, 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 Percent
Beneficial Owner Beneficial Ownership 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 .....................673,558(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 .....................147,000(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 "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 "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 "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 "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.
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. Meredith
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.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 10,000,000 shares of Common Stock,
par value $.01 per share. At the date of this Prospectus, the Company has
3,487,936 shares of Common Stock outstanding. After being issued, the shares of
Common Stock are not subject to further assessment or call. The following
summary description of the Common Stock is qualified in its entirety by
reference to the Company's Certificate of Incorporation, as amended.
The holders of the Common Stock are entitled to one vote for each share
held of record on each matter submitted to a vote of shareholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of Preferred Stock that may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor, and,
in the event of liquidation, dissolution or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities. The outstanding Common Stock is,
and the Common Stock to be outstanding upon the exercise of all warrants will
be, validly issued, fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue 100,000 shares of preferred stock,
par value $.01 per share (the "Preferred Stock"), of which 25,000 shares are
currently issued and outstanding as Series A Preferred Stock. The Board of
Directors of the Company is vested with authority to divide the 75,000 remaining
authorized shares of Preferred Stock into one or more series of such shares and
to fix and determine the relative rights and preferences of any such series. A
series of such shares may, among other matters, establish (a) the number of
shares of Preferred Stock to constitute such series and the designations
thereof; (b) the rate and preference of dividends, if any, the time of payment
of dividends, whether dividends are cumulative and the date from which any
dividend shall accrue; (c) whether Preferred Stock may be redeemed, and, if so,
the redemption price and the terms and conditions of redemption; (d) the
liquidation preferences payable on Preferred Stock in the event of liquidation;
(e) sinking fund or other provisions, if any, for redemption or purchase of such
shares; (f) the terms and conditions by which Preferred Stock may be converted
or in respect of which shares may be issued, if the series is issued with the
privilege of conversion or stock issuance rights; and (g) voting rights, if any.
The Board of Directors, without the approval of the Company's shareholders, has
the power to authorize the issuance of Preferred Stock with voting and
conversion rights that could adversely affect the voting power of the Common
Stock.
Series A Preferred Stock. The following brief description of the
Company's Series A Preferred Stock, of which 25,000 is currently issued and
outstanding, is a summary only, does not purport to be complete, and is subject
to and qualified in its entirety by reference to the Certificate of Designation,
Preferences, Rights and Limitations (the "Certificate"), a copy of which is
incorporated by reference as an exhibit to the Registration Statement of which
this Prospectus is a part. The shares of Series A Preferred Stock bear no
dividend, and they have a preference on the liquidation of the Company equal to
$.10 per share. The shares of Series A Preferred Stock generally do not entitle
the holder thereof to vote on matters submitted to shareholders except as
required by Delaware law or on matters affecting the rights, powers or
preferences of the Series A Preferred Stock or the creation of a series of
Preferred Stock senior to the existing 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 immediately after the date of the Company's
Initial Public Offering, 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 immediately after the date of the Company's Initial Public
Offering, 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
immediately after the date of the Company's Initial Public Offering, 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 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. As each share of Series A Preferred Stock is entitled to
the issuance of a maximum of 30 shares of Common Stock in three issuances of 10
shares each, the issuance of the final ten shares of Common Stock in respect of
each share of Series A Preferred Stock (which shall, together with all prior
issuances in respect of such share of Series A Preferred Stock, constitute a
total of 30 shares of Common Stock issued in respect of such share of Series A
Preferred Stock) shall be issued pursuant to a conversion of each share of such
Series A Preferred Stock into such 10 shares of Common Stock, and all further
rights of the holders of Series A Preferred Stock shall cease except for the
right to be issued such 10 shares of Common Stock in conversion of each share of
Series A Preferred Stock upon submission of a certificate representing Series A
Preferred Stock. The number of shares of Common Stock issuable in respect of the
Series A Preferred Stock is adjustable in the case of stock splits, reverse
stock splits, below market stock issuances and dividends and similar events.
If the period during which shares of Common Stock are issuable in
respect of the Series A Preferred Stock lapses and 30 shares of Common Stock
have not been issued in respect of each share of Series A Preferred Stock, then
each share of Series A Preferred Stock will be redeemed by the Company at a
redemption price equal to its liquidation preference ($.10 per share, or $2,500
in the aggregate), and all further rights of the holders of Series A Preferred
Stock will cease except for the right to receive the aggregate redemption price
upon submission of a certificate representing Series A Preferred Stock.
The Company earned net income in excess of $750,000 in 1995. As a
result of the Company's meeting such target, 10 shares of Common Stock were
issued in respect of each share of Series A Preferred Stock, except that certain
current and former officers and directors of the Company relinquished their
rights, in the aggregate, to 235,520 of such shares. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS". Therefore, at most, 20 additional shares of Common
Stock may be issued in respect of each of the issued and outstanding shares of
Series A Preferred Stock, based on the remaining threshold targets.
PLAN OF DISTRIBUTION
The Common Stock and Redeemable Public Warrants registered hereby for
sale by the Company will be issued by the Company to the holders of the
applicable convertible security upon the exercise thereof by such holders. The
Company has the right to redeem Redeemable Public Warrants at a price of $.01
per share, provided that Warrant holders will have 30 days to exercise the
Redeemable Public Warrants in the case of such redemption. In addition, the
Company may engage in solicitations through its officers and directors or
through placement agents to induce the holders of such securities to exercise
them.
The Common Stock issuable upon the exercise of the Redeemable Public
Warrants will be held by such holders and any further distribution will not be
in the Company's control.
SELLING SECURITYHOLDERS
All of the shares of Common Stock (collectively, the "Shares") and all of
the Redeemable Public Warrants offered herein for the accounts of the persons
identified in the following table (the "Selling Securityholders") may be sold
from time to time. The Selling Securityholders, the amount of Common Stock owned
by such persons on January 1, 1997, and the amount of securities that may be
acquired by each are set forth below.
All of the Shares, which will be offered by the Selling
Securityholders, may be acquired by them as follows: (i) 40,000 shares of Common
Stock and 20,000 Redeemable Public Warrants issuable to Oak Ridge may be
acquired at a price of $11.00 per Unit, each Unit consisting of two shares of
Common Stock and one Redeemable Public Warrant, (ii) 20,000 shares of Common
Stock and 10,000 Redeemable Public Warrants issuable to Rosendahl may be
acquired at a price of $11.00 per Unit, each Unit consisting of two shares of
Common Stock and one Redeemable Public Warrant, (iii) 20,000 shares of Common
Stock and 10,000 Redeemable Public Warrants issuable to McVicker may be acquired
at a price of $11.00 per Unit, each Unit consisting of two shares of Common
Stock and one Redeemable Public Warrant, (iv) 20,000 shares of Common Stock
issuable to Oak Ridge upon exercise of the Redeemable Public Warrants which are
issuable upon exercise of the Underwriter's Warrants, which shares of Common
Stock may be acquired at a price of $7.50 per share, (v) 10,000 shares of Common
Stock issuable to Rosendahl upon exercise of the Redeemable Public Warrants
which are issuable upon exercise of the Underwriter's Warrants, which shares of
Common Stock may be acquired at a price of $7.50 per share, (vi) 10,000 shares
of Common Stock issuable to McVicker upon exercise of the Redeemable Public
Warrants which are issuable upon exercise of the Underwriter's Warrants, which
shares of Common Stock may be acquired at a price of $7.50 per share, (vii)
54,750 shares of Common Stock at a price of $1.65 issuable on the exercise of
outstanding Bridge Warrants, (viii) 62,500 shares and 14,765 shares at exercise
prices of $3.75 and $3.95 per share, respectively, pursuant to the exercise of
warrants granted by the Company, and (vii) 50,000 shares at an exercise price of
$1.25 per share pursuant to the exercise of options granted to a former officer
and director of the Company. As of the date of this Prospectus, no Selling
Securityholder has exercised any of the warrants or options described above.
<TABLE>
<S> <C> <C> <C>
Selling Amount of Percentage of
Securityholder And Common Stock Amount of Common Stock
Relation (if any) Owned Before Common Stock Owned After
To Company Offering (1) Offered Offering(>1%)
(1)(2)
- -------------------------- -------------- --------------- -------------
Oak Ridge Investment, Inc.
Underwriter of Company's
initial public offering 60,000 60,000(3) 0
Steven F. Rosendahl 30,000 30,000(4) 0
Former employee of Oak Ridge
Robert McVicker 32,500 30,000(5) 0
Former employee of Oak Ridge
Thomas J. Coleman 403,705(6) 50,000 10%
Former Secretary and
Director of the Company
Fores J. Beaudry 40,800 22,500 0
Ruth B. Smith 7,500 7,500 0
George E. Looschen 7,500 7,500 0
Robert Meyer 11,250 11,250 0
John & Bonnie Vainder 5,500 4,500 0
Detello Family Trust 1,500 1,500 0
S&F Consulting Inc.(7) 77,265 77,265 0
</TABLE>
(1) Includes the Common Stock underlying the options and warrants owned
by the Selling Securityholders and registered hereunder.
(2) Assumes the sale of the shares of Common Stock registered hereunder
issuable upon the exercise of those options and warrants.
(3) Includes 20,000 shares of Common Stock issuable upon exercise of
the Redeemable Public Warrants that are issuable upon exercise of the
Underwriters Warrants.
(4) Includes 10,000 shares of Common Stock issuable upon exercise of
the Redeemable Public Warrants that are issuable upon exercise of the
Underwriters Warrants.
(5) Includes 10,000 shares of Common Stock issuable upon exercise of
the Redeemable Public Warrants that are issuable upon exercise of the
Underwriters Warrants.
(6) Includes the 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 Series A Preferred Stock. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
(7) Karl Faust, a principal in S&F Consulting, Inc., is also a
principal in KFLB Holding, Inc., a consultant to the Company. Does not include
Common Stock, or options or warrants to purchase Common Stock, held directly or
indirectly by KFLB Holding, Inc.
<TABLE>
<S> <C> <C> <C>
Selling Amount of Percentage of
Securityholder And Redeemable Public Amount of Redeemable Public
Relation (if any) Warrants Owned Redeemable Public Warrants Owned
To Company Before Offering(1) Warrants Offered Offering(>1%)(2)
- --------------------- ------------------ ---------------- -----------------
Oak Ridge Investment, Inc.
Underwriter of Company's
initial public offering 20,000 20,000 0
Steven F. Rosendahl 10,000 10,000 0
Former employee of Oak Ridge
Robert McVicker 10,000 10,000 0
Former employee of Oak Ridge
</TABLE>
(1) Assumes the exercise of the Underwriters Warrants.
(2) Assumes the exercise or sale of the Redeemable Public Warrants.
Plan of Distribution by Selling Securityholders
No underwriter is involved in the distribution of the securities that
may be owned by the Selling Securityholders. Rather, sales will be made by the
Selling Securityholders either directly or through one or more securities
brokers or dealers in over-the-counter transactions on The Nasdaq Stock Market,
or in privately negotiated transactions. At the time that a particular offer of
any of the Shares is made by or on behalf of a Selling Securityholder, to the
extent required, a Prospectus Supplement will be distributed that will set forth
the number of Shares being offered and the terms of the offering, including the
name or names of any underwriters, dealers or agents, the purchase price paid by
any underwriter for Shares purchased from the Selling Securityholder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers,
and the proposed selling price to the public.
Shares sold in over-the-counter transactions will be sold at the
current market prices at the time of sale, and any Shares sold in private
transactions will be sold at prices acceptable to the buyer and seller.
Broker-dealers through which the Selling Securityholders effect sales of the
Shares may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders and/or the purchasers of the Shares
for whom such broker-dealers may act as agent or to whom they sell as principal,
or both (which compensation as to a particular broker-dealer may be in excess of
customary compensation).
The Selling Securityholders and any broker-dealers who act in
connection with the sale of Shares hereunder may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act of 1933, as amended
(the "Securities Act"), and any commissions received by them and profit on any
resale of the Shares as principal might be deemed to be underwriting discounts
and commissions under the Securities Act.
Under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the regulations promulgated thereunder, any person engaged in a
distribution of Common Stock offered by this Prospectus may not simultaneously
engage in market-making activities with respect to the Common Stock during the
applicable "cooling off" period (9 days) prior to the commencement of such
distribution. In addition, and without limiting the foregoing restriction, the
Selling Securityholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations promulgated thereunder, including, without
limitation, Rules 10b-6 and 10b-7 in connection with transactions in the Shares,
which provisions may limit the timing of purchases and sales of shares of Common
Stock by the Selling Securityholders.
The Selling Securityholders will receive the entire proceeds from the
sale of their Shares, less any commissions paid to brokers or dealers for
executing such offers. Although the Company will not receive any funds from the
sale of the Selling Securityholders' shares, the Company will pay for all
expenses of the offering and will furnish current prospectuses to the Selling
Securityholders at their request.
LEGAL MATTERS
The validity of the shares of the Common Stock and Redeemable Public
Warrants only will be passed on for the Company by Akabas & Cohen, 488 Madison
Avenue, New York, NY 10022. Akabas & Cohen owns 1,010 shares of the Company's
Common Stock, and 101 shares of Series A Preferred Stock. Seth A. Akabas, a
partner in the firm of Akabas & Cohen, personally owns 6,549 shares of Common
Stock, and 94 shares of Series A Preferred Stock. Richard Cohen, a partner in
the firm of Akabas & Cohen, personally owns 280 shares of Common Stock and 28
shares of Series A Preferred Stock.
EXPERTS
The financial statements of the Company for the years ended December
31, 1995 and 1994, which are included in this Prospectus, have been included
herein in reliance on the report of D'Arcangelo & Co., LLP, Certified Public
Accountants, 3010 Westchester Avenue, Purchase, NY 10577, appearing elsewhere in
this Prospectus and upon the authority of such firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the office of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, its Registration
Statement on Form SB-2 (Registration No. 33-______) under the Securities Act of
1933, with respect to the securities offered hereby (the "Registration
Statement"). This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information, reference is hereby made to the Registration Statement.
Statements contained in the Prospectus as to the contents of any document are
not necessarily complete, and in each instance reference is made to the copy of
such document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement and such other reports filed by the Company may be
inspected without charge at the Public Reference Section of the Commission in
Washington, D.C. at the address set forth above, and at the Commission's
regional offices, and copies of all or any part thereof may be obtained from the
Commission at prescribed rates.
Any document or part thereof which is incorporated by reference within
this Prospectus and not delivered heretowith, will be provided, without charge,
to each person, including any beneficial owner, to whom a Prospectus is
delivered, upon written or oral request of such person; however, exhibits to
documents that are incorporated by reference shall not be furnished unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates. Such information may be obtained by writing the
Company at c/o Protective Technologies International Inc., One River Street,
Hastings on Hudson, NY 10706, telephone (914) 478-8200, Attn: Secretary.
<PAGE>
460,000 Shares
of Common Stock
302,015 Shares of
Common Stock by
Selling Securityholders
40,000 Redeemable
Common Stock
Purchase Warrants by
Selling Securityholders
PTI HOLDING INC.
PROSPECTUS
January 27, 1997
No Person is authorized to give any information or to
make any representation other than those contained in
this Prospectus, and if given or made, such information
or representation must not be relied upon as having been
authorized. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any
securities other than the securities offered by this
Prospectus or an offer to sell or a solicitation of an
offer to buy the securities in any jurisdiction to any
person to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
TABLE OF CONTENTS
Prospectus Summary
Risk Factors
Market Information
Use of Proceeds
Management's Discussion
and Analysis
Description of Business
Directors, Executive Officers,
Promoters and Control Persons
Remuneration of Officers
and Directors
Security Ownership of Certain Ben-
eficial Owners and Management
Certain Relationships and
Related Transactions
Description of Securities
Plan of Distribution
Selling Shareholders
Legal Proceedings
Description of Property
Legal Matters
Experts
Additional Information
Until the conclusion of the distribution of the securities offered hereby, there
is an obligation of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT
REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Officers and Directors
Article Ninth of the Corporation's Certificate of Incorporation
provides:
This corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
complete action, suit or proceeding, whether civil, criminal,
administrative or investigative, or by or in the right of this
corporation to procure judgment in its favor, by reason of the fact
that he is or was a director, officer, employee or agent of this
corporation, or is or was serving at the request of this corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of this corporation, in accordance with and to the full
extent permitted by statute. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by this corporation in
advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors in the specific case upon receipt
of an undertaking by or on behalf of the director, officer, employee or
agent to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by this corporation as authorized
in this section. The indemnification provided by this section shall not
be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under these Articles or any agreement
or vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another
capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such
a person.
ARTICLE X of the Company's By-Laws provides as follows:
Any person made a party to any action or proceeding (whether
or not by or in the right of the Corporation to procure a judgment in
its favor or by or in the right of any other corporation) by reason of
the fact that he, his testator or intestate, is or was a director,
officer or employee of the Corporation, or of any corporation which he
served as such at the request of the Corporation, shall be indemnified
by the Corporation against judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees, actually and
necessarily incurred by him in connection with the defense of or as a
result of such action or proceeding, or in connection with any appeal
therein, to the full extent permitted under the laws of the State of
Delaware from time to time in effect. The Corporation shall have the
power to purchase and maintain insurance for the indemnification of
such directors, officers and employees to the full extent permitted
under the laws of the State of Delaware from time to time in effect.
Such right of indemnification shall not be deemed exclusive of any
other rights of indemnification to which such director, officer or
employee may be entitled.
ITEM 25. Other Expenses of Issuance and Distribution
The expenses payable by Registrant in connection with the issuance and
distribution of the securities being registered are estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Fees $ 1,838
Accounting Fees and Expenses 15,000
Blue Sky Fees and Expenses 5,662
Printing Expenses 1,500
NASDAQ Stock Market Listing Fees 1,000
Legal Fees 25,000
-------
TOTAL..............................$ 50,000
=======
</TABLE>
ITEM 26. Recent Sales of Unregistered Securities
Within the past three years, the Company has granted to employees and
consultants options vesting on or before the date of this Registration Statement
(certain of which such options have already been exercised) to purchase a total
of 513,520 shares of Common Stock of the Company at prices ranging from $1.25 to
$9.00. All sales reported in this Item were exempt from the registration
requirements of the Securities Act of 1933, as amended, by reason of Section
4(2) thereof and/or the rules and regulations (including Regulation D)
promulgated thereunder as sales of securities not involving a public offering.
Also, in November, 1994 the Company sold in two transactions to foreign
investors, acting through its placement agent Berkshire International Finance,
Inc., 243,956 shares of Common Stock and 75,000 shares of Common Stock. The
Company received from these sales, respectively, $555,000 and $196,875. As
compensation for its services, the Company granted to Berkshire International
Finance, Inc. warrants to purchase 62,500 shares of Common Stock at a price of
$3.75 per share, and warrants to purchase 14,765 shares of Common Stock at a
price of $3.95 per share. A Regulation S offering was appropriate because
neither purchaser was a citizen of the United States. The total offering price
of the above Regulation S transactions was $751,875, with $82,947 in
underwriting discounts and commissions.
ITEM 27. Exhibits and Financial Statement Schedules
(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
5 Opinion of Akabas & Cohen, to be filed by Amendment.
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 year 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
10.10 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.
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
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 Akabas & Cohen (included in Exhibit 5)
23.2 Consent of D'Arcangelo & Co. LLP.
24 Power of attorney authorizing Meredith W. Birrittella to file one or
more amendments to this Registration Statement, dated January 27, 1997, included
on page II-6 of this Registration Statement on Form SB-2, filed January 27, 1997
under the Securities Act of 1933, as amended
ITEM 28. Undertakings
The undersigned Registrant hereby undertakes to:
(a) (1) File, during any period in which it offers or sells securities, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering;
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering; and
(e) If the Registrant requests acceleration of the effective date of the
Registration Statement under Rule 461 under the Securities Act, the Registrant
acknowledges that:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised 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.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(f) The small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
effective.
(2) For determining liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized its registration
statement to be signed on its behalf by the undersigned, in the City of Hastings
on Hudson, State of New York, on January 27, 1997.
PTI HOLDING INC.
By/s/ Meredith W. Birrittella
Meredith W. Birrittella,
Chief Executive Officer (authorized signatory)
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorized Meredith W.
Birrittella to file one or more amendments, including Post-Effective Amendments,
to this Registration Statement, which Amendments may make such changes as Mr.
Birrittella deems appropriate, and each person whose signature appears below,
individually in each capacity stated below, hereby appoints Mr. Birrittella with
full power of substitution, as Attorney-in-Fact, to execute his name and on his
behalf to file any such Amendments to this Registration Statement.
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, January 27, 1997
Meredith W. Birrittella Chief Financial Officer,
Chairman and Director
/s/ Myles Birrittella Director January 27, 1997
Myles Birrittella
/s/ Robert Fuhrman Director January 27, 1997
Robert Fuhrman
/s/ Warren Schaefer Director and Secretary January 27, 1997
Warren Schaeffer
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
PTI Holding Inc.
We consent to the incorporation by reference in this Registration Statement of
PTI Holding Inc. on Form SB-2 (pertaining to the registration of 762,015 shares
of the Registrant's common stock and 40,000 redeemable common stock purchase
warrants) of our report dated March 5, 1996, appearing in the Annual Report of
PTI Holding Inc. on Form 10-KSB for the year ended December 31, 1995.
D'ARCANGELO & CO.,LLP
Purchase, New York
January 23, 1997
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<S> <C> <C>
September 30, December 31,
ASSETS 1996 1995
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents ...................... $ 449,278 $ 969,329
Cash securing letters of credit, current portion -- 125,000
Accounts receivable, net of allowance for returns
and doubtful collections of $65,748 (September
30, 1996) and $70,000 (December 31, 1995) 2,755,212 1,171,137
Inventories ................................... 2,984,605 1,669,136
Advances toward inventory purchases ........... 326,170 --
Deferred tax asset, net ....................... 67,600 152,000
Prepaid expenses and other current assets ..... 801,475 280,354
---------- ----------
Total current assets 7,384,340 4,366,956
Cash securing letters of credit, noncurrent portion -- 83,750
Equipment and improvements, net of accumulated
depreciation of $696,759 (September 30, 1996)
and $460,020 (December 31, 1995) .............. 455,394 366,595
Deferred tax asset, net .......................... 93,200 38,000
Goodwill, net of accumulated amortization of $115,468
(September 30, 1996) and $83,976 (December 31,
1995) ........................... 1,354,128 1,385,620
Covenants not to compete, net of accumulated amort-
ization of $305,045 (September 30, 1996)and
$227,240 (December 31, 1995) .............. 213,655 291,460
Patents, net of accumulated amortization of $741
(September 30, 1996) and $519 (December 31, 1995) 4,305 4,528
---------- ----------
$ 9,505,022 $ 6,536,909
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ......... $1,646,394 $ 732,409
Current portion of due to former key employees
and shareholders of acquired company 25,000 41,309
Income taxes payable .......................... 610,880 --
---------- ----------
Total current liabilities ..................... 2,282,274 773,718
---------- ----------
Due to former key employees and shareholders of
acquired Company, net of current portion 58,750 83,750
---------- ----------
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 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
3,478,436 shares (September 30, 1996) and
3,338,956 (December 31, 1995) 34,784 33,390
Capital in excess of par ...................... 6,405,052 6,212,696
Receivable from exercise of stock options ..... -- (4,688)
Retained earnings (deficit) ................... 721,662 (564,457)
---------- ----------
Total stockholders' equity .................... 7,161,498 5,676,941
---------- ----------
$9,505,022 $6,536,909
========== ==========
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<S> <C> <C> <C> <C>
Nine Months ended September 30, Years ended December 31,
-------------------------------- ------------------------
1996 1995 1995 1994
-------- -------- -------- --------
(Unaudited) (Unaudited)
Net sales .................. $13,532,363 $6,506,019 $8,166,788 $4,776,165
Cost of sales .............. 9,717,716 4,374,531 5,954,212 3,918,362
---------- ---------- ---------- ----------
Gross profit ............... 3,814,647 2,131,488 2,212,576 857,803
Selling, general and
administrative expenses 1,901,156 1,656,956 1,664,002 1,567,070
---------- ---------- ---------- ----------
Income (loss) from operations 1,913,491 474,532 548,574 (709,267)
Interest income, net of
interest (expense) of
$24,074 (September 30,
1996), $118 (December
31, 1995), $1,912
(December 31, 1994) 12,708 34,909 49,362 28,372
--------- ---------- ---------- ----------
Income (loss) from continuing
operations before
income taxes (benefit) .. 1,926,199 509,441 597,936 (680,895)
--------- ---------- ---------- ----------
Income taxes (benefit):
Current ................. 610,880 -- -- --
Deferred ................ 29,200 -- (190,000) --
--------- ---------- ---------- ----------
640,080 -- (190,000) --
--------- ---------- ---------- ----------
Income (loss) from continuing
operations 1,286,119 509,441 787,936 (680,895)
Income (loss) from discontinued
operations -- -- 80,000 (88,398)
---------- ---------- ---------- -----------
Net income (loss) .......... $1,286,119 $ 509,441 $ 867,936 $ (769,293)
========== ========== ========== ==========
Net income (loss) per share
of common stock:
Continuing operations ... $ .33 $ .15 $ .22 $ (.22)
Discontinued operations -- -- .02 (.03)
---------- ---------- ---------- ----------
$ .33 $ .15 $ .24 $ (.25)
========== ========== ========== ==========
Weighted average shares
outstanding 3,891,973 3,330,900 3,637,025 3,021,822
========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Receivable
from Total
Common stock Capital exercise Retained stock-
----------------------- in excess of stock earnings holders'
Shares Amount of par options (Deficit) equity
----------- --------- --------- ---------- --------- ---------
Balance,
January
1, 1994 2,521,500 $ 25,215 $3,997,668 $ -- $ (663,100) $3,359,783
Net loss -- -- -- -- (769,293) (769,293)
Issuance
of common
stock and
warrants 737,456 7,375 2,090,578 (15,000) -- 2,082,953
--------- ---------- ---------- ---------- ---------- ----------
Balance,
December
31, 1994 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 and
warrants 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
Unaudited:
- ----------
Net income -- -- -- -- 1,286,119 1,286,119
Collection -- -- -- 4,688 -- 4,688
Issuance
of common
stock 139,480 1,394 192,356 -- -- 193,750
-------- ---------- ---------- ---------- ---------- ----------
Balance,
September
30, 1996 3,478,436 $ 34,784 $6,405,052 $ -- $ 721,662 $7,161,498
========= ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<S> <C> <C> <C> <C>
Nine Months ended Year's Ended
September 30, December 31,
------------------------ ----------------------
1996 1995 1995 1994
----------- ----------- --------- -----------
(Unaudited) (Unaudited)
Cash flows from operating
activities:
Net income (loss) ......... $1,286,119 $ 509,441 $ 867,936 $ (769,293)
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities:
Provision for returns
and doubtful collections 4,252 (216,000) (276,000) 339,500
Depreciation ........ 236,739 163,581 276,110 166,371
Amortization of intangible
assets 109,519 109,519 146,024 165,710
Deferred income taxes
(benfit) 29,200 -- (190,000) --
Deferred compensation
(continuation bonus) -- 37,500 50,000 150,000
Write-off of covenants
not to compete -- -- -- 98,800
(Increase) decrease in
operating assets exclusive
of the effects of the
business combination:
Accounts receivable (1,588,326) 22,714 1,029,720 (1,375,417)
Inventories ...... (1,315,469) (841,366) (1,014,587) (123,249)
Advances toward
inventory purchases (326,170) -- -- --
Prepaid expenses and
other current assets (521,121) (201,332) (136,066) (93,080)
Due from factor .. -- -- -- 51,310
Patents .......... -- -- -- (5,046)
Other assets ..... -- -- -- 3,025
(Decrease) increase in
operating liabilities
exclusive of the effects
of the business combination:
Accounts payable and
accrued expense 913,985 186,431 (203,208) 174,823
Income taxes payable 610,880 -- -- (203,118)
---------- --------- ---------- ----------
Net cash provided by (used in)
operating activities (560,392) (229,512) 549,929 (1,419,664)
---------- --------- ---------- ----------
Cash flows from investing
activities:
Purchase of equipment and
improvements (325,538) (187,789) (385,219) (295,955)
Cash invested to secure
letters of credit -- -- -- (417,500)
Reduction in cash invested to
secure letters of credit 208,750 208,750 208,750 --
credit
Cash payment as partial
consideration for purchase
of acquired company and
acquisition costs -- -- -- (353,418)
Repayment of loans from
stockholders -- -- -- 636
Portion of covenants not
to compete paid -- -- -- (400,000)
---------- --------- ---------- ----------
Net cash provided by (used
in) investing activities (116,788) 20,961 (176,469) (1,466,237)
---------- --------- ---------- ----------
Continued
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<S> <C> <C> <C> <C>
Nine months ended Years Ended
September 30, December 31,
------------------------ ----------------------
1996 1995 1995 1994
----------- ----------- --------- -----------
(Unaudited) (Unaudited)
Cash flows from financing
activities:
Payments of amounts due to
former key employees and
shareholders of acquired
company (41,309) (217,747) (244,341) (85,008)
Proceeds from issuance of
common stock and warrants 198,438 107,500 135,562 765,900
Payment of offering costs -- -- -- (82,947)
---------- --------- ---------- ----------
Net cash provided by (used
in) financing activities 157,129 (110,247) (108,779) 597,945
---------- --------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents $ (520,051) $ (318,798) $ 264,681 $(2,287,956)
Cash and cash equivalents,
beginning of period 969,329 704,648 704,648 2,992,604
---------- --------- --------- ----------
Cash and cash equivalents,
end of period $ 449,278 $ 385,850 $ 969,329 $ 704,648
========== ========= ========= ==========
Supplemental disclosures:
Interest paid $ 24,074 $ -- $ 118 $ 1,912
Income taxes paid 4,160 -- -- --
Noncash investing and
financing activities:
Common stock issued as
partial consideration
for the purchase of
the acquired company -- -- -- 1,400,000
Fair value of net assets
acquired -- -- -- 283,822
Covenants not to compete
payable -- -- -- 217,500
Account payable acquired
in the business combination
settled by the assumption of
the obligation by the former
key employees and shareholders
of the acquired company -- -- -- 36,908
Receivables from exercises of
stock options -- -- 4,688 15,000
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
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 Protective Technology
International Inc. ("PTII") (collectively referred to as the "Company").
PTII, as well as PTII's wholly-owned subsidiary Protective Technologies
of America, Inc. ("PTA"), are inactive. Significant intercompany
balances and transactions are eliminated in consolidation.
Nature of operations:
Pursuant to a business combination effective January 1, 1994, the
Company concentrated its resources on operating the acquired business in
the design, manufacture and marketing of bicycle helmets for sale
principally to domestic retailers. For the nine-month period ended
September 30, 1996, sales of bicycle accessories represented 40% of net
sales. A minor portion of sales in 1995 pertain to bicycle accessories
and a minor portion of sales in 1994 pertain to foam and other packaging
products. The Company has experienced seasonal variations in net sales
due to the nature of its product line.
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.
Business combination:
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 the acquisition and the
excess of purchase price over such fair value of net assets acquired is
recognized as goodwill. The results of operations of the acquired
company have been included from the date of acquisition (January 1,
1994).
Cash and cash equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of these instruments.
<PAGE>
1. Nature of operations and significant accounting policies (continued):
Cash and cash equivalents (continued):
At December 31, 1995, approximately $1,055,000 of the Company's cash and
cash equivalents and cash securing letters of credit 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 (other than certain private-label manufacturing contracts) are
recognized when products are shipped. Sales under these private label
manufacturing contracts are recognized when products are completed and
ready for shipment.
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 patents 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 goodwill 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.
<PAGE>
1. Nature of operations and significant accounting policies (continued):
Research and development costs:
Research and development costs are charged to operations as incurred and
amounted to approximately $44,000, $39,000, $54,000 and $54,000 for the
nine-months ended September 30, 1996 and 1995 and the years ended
December 31, 1995 and 1994, 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. 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.
In October 1995. The Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock - Based Compensation." The Company will
adopt the new disclosure requirements beginning with the year ending
December 31, 1996.
2. Business combination:
On March 1, 1994, PTI Holding Inc. acquired Foam-O-Rama, Inc. ("Foam"),
a business principally engaged in the design, manufacture and marketing
of bicycle helmets, and concurrently merged Foam into PTI, a
wholly-owned subsidiary organized for this purpose. After March 1, 1994,
Foam had no separate or independent existence, having been merged into
PTI. For purposes of the transfer of the economic benefits and risks,
the acquisition was deemed to have occurred on January 1, 1994.
The principal assets acquired consist of accounts receivable,
inventories, production equipment and all of the issued and outstanding
capital stock of PTA, a nonoperating wholly-owned subsidiary of Foam
that licensed the name "Protective Technologies" to Foam.
In exchange for all the outstanding shares of common stock of Foam, the
Company paid $168,000 to the shareholders of Foam and issued them
400,000 shares of common stock of the Company. For purposes of valuing
the net assets acquired, the quoted market price on March 1, 1994 of
$3.50 per share was used. The Company also incurred acquisition costs of
approximately $186,000. The acquisition resulted in the recognition of
goodwill in the amount of $1,469,596.
3. 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, 1995, 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
<PAGE>
3. Discontinued operations (continued):
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.
Net sales for the discontinued operations for the year ended December
31, 1994 were approximately $191,000. There were no income taxes or
income tax benefits recognized with respect to the discontinued
operations for the years ended December 31, 1995 and 1994. 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.
4. Inventories:
<TABLE>
<S> <C> <C>
Inventories are summarized as follows:
September 30, December 31,
1996 1995
---------- ----------
Raw materials .................................... $1,342,602 $ 838,059
Work-in-progress ................................. 32,559 316,168
Finished goods ................................... 1,609,444 514,909
---------- ----------
$2,984,605 $1,669,136
========== ==========
</TABLE>
5. Equipment and improvements:
<TABLE>
<S> <C> <C>
Equipment and improvements consist of the following:
September 30, December 31,
1996 1995
---------- ----------
Production equipment ............................. $ 832,614 $ 650,852
Office equipment ................................. 209,971 130,728
Leasehold improvements ........................... 109,568 45,035
---------- ----------
1,152,153 826,615
Less accumulated depreciation .................... 696,759 460,020
---------- ----------
$ 455,394 $ 366,595
========== ==========
</TABLE>
<PAGE>
6. Covenants not to compete:
At the closing of the acquisition, the Company entered into a
noncompetition agreement with the former shareholders of Foam
restricting them from, among other activities, competing with the
Company for a period of five years from the closing. The noncompetition
agreement provided for payments aggregating $200,000, which were paid at
the closing.
At the closing, the Company also entered into noncompetition agreements
with the two key employees of Foam restricting them from, among other
activities, competing with the Company for a period of five years from
the closing. These noncompetition agreements provided for payments
aggregating $200,000 at closing plus $217,500 in the aggregate on June
30, 1995. On December 30, 1994, one of these noncompetition agreements
was amended. The amendment permits the individual to engage in the
business of foam packaging other than in connection with the business of
bicycle helmets or bicycling accessories. Pursuant to this surrender of
a portion of the noncompetition agreement, $98,800 representing the
estimated portion of the unamortized covenants not to compete pertaining
to the foam packaging business was charged to operations in 1994. The
amendment also provides for the rescheduling of the remaining $108,750
payment to $25,000 on January 1, 1996, $25,000 plus accrued interest on
January 1, 1997, and $58,750 plus accrued interest on January 1, 1998.
7. Employment contracts:
At the closing of the acquisition, the Company entered into a five-year
employment agreement commencing as of January 1, 1994 with a key
employee of Foam. The employment agreement provides for an initial
starting salary of $100,000 per annum, certain fringe benefits, and
additional compensation equal to .7% of the amount of PTI's gross
profit, as defined, in excess of $3,812,255 per year during the term of
the agreement. This requirement for additional compensation was not met
in either year ended December 31, 1995 or 1994.
The employment agreement also provides that the base salary will be
reduced by $10,000 or $20,000 for any year in which PTI's gross profit
is less than $2,500,000 and $1,900,000, respectively. In addition, the
employment agreement provides that the Company pay a continuation bonus
of $100,000 deemed earned throughout the two year period ended December
31, 1995.
On December 30, 1994, a similar employment agreement with the other key
employee of Foam was amended. The amendment provides for (1) the
termination of employment effective on that date, (2) the continuation
bonus be deemed earned on that date and payable on June 30, 1995 and (3)
a $30,000 annual consulting fee for the years 1995 through 1998.
At December 31, 1995, irrevocable standby letters of credit aggregating
$208,750 were outstanding to secure the Company's obligations under the
employment agreements and the
<PAGE>
7. Employment contracts (continued):
noncompetition agreements. The Company has cash deposits totaling
$208,750 as collateral for the standby letters of credit.
8. Due to former key employees and shareholders of acquired company:
At September 30, 1996 and December 31, 1995 the following amounts were
due to the former key employees and shareholders of Foam.
<TABLE>
<S> <C> <C>
September 30, December 31,
1996 1995
---------- ----------
Covenants not to compete ......................... $ 83,750 $ 108,750
Continuation bonus ............................... -- 100,000
One-half of the account payable acquired in the
business combination settled by the
assumption of the obligation by the former
key employees and shareholders of Foam ........ -- 18,454
Less advances .................................... -- (102,145)
---------- ----------
83,750 125,059
Less current portion ............................. 25,000 41,309
---------- ----------
Long-term portion ................................ $ 58,750 $ 83,750
========== ==========
</TABLE>
The scheduled maturities of the amounts due to the former key employees
and shareholders of the acquired company are presented below:
<TABLE>
<S> <C> <C>
1996 $ -- $ 41,309
1997 25,000 25,000
1998 58,750 58,750
---------- ----------
$ 83,750 $ 125,059
========== ==========
</TABLE>
The former key employees and shareholders of Foam own an total of
400,000 shares of the Company's common stock at December 31, 1995
(300,000 shares at September 30, 1996). One of the former key employees
of Foam is an officer of PTI.
<PAGE>
9. Leasing arrangements:
Effective April 1, 1994, the Company entered into a two-year,
noncancellable lease for a production, warehouse, and office facility.
The lease calls for the minimum annual rent of $76,000 plus escalation
charges for increases in real estate taxes. The lease is renewable at
the Company's option for two additional years at the same terms. 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 January 11, 1995, the Company entered into a two-year lease for its
new production, warehouse, and office facility. The lease which became
effective upon occupancy in September 1995 calls for annual base rent of
approximately $119,000 in year one, and $130,000 in year two. In
addition to base rent, additional rent is applicable in year two based
on increases in the Consumer Price Index. The Company has the option to
renew this lease for an additional year. Total future minimum rental
commitments as of December 31, 1995 are approximately $122,000 for 1996
and $87,000 for 1997.
Rent expense for the year ended December 31, 1995 totaled approximately
$140,000. Rent expense for the year ended December 31, 1994 totaled
approximately $113,000, including approximately $7,000 charged to the
discontinued operations.
Total future minimum rental commitments as of September 30, 1996 are
approximately $61,000 for 1996 and $87,000 for 1997. Rent expense for
the nine-month periods ended September 30, 1996 and 1995 totaled
approximately $255,000 and $122,000, respectively.
10. Commitments and contingent liabilities:
Outstanding letters of credit, related to imports, amounted to $42,000
at December 31, 1995.
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.
11. 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
<PAGE>
11. Series A preferred stock (continued):
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 is 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 exercisable commencing in January, 1996
and expire in January, 2006. The three preferred shareholders are also
directors and major common stockholders of the Company. The remaining
14,480 common shares were issued to the other preferred stockholders in
1996.
12. 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 expiring July 15, 1996 (the expiration date of the
warrants was extended to January 15, 1998). The Company realized
$3,310,928 after deducting underwriting discounts and expenses of the
offering of $689,072. In January 1993, the underwriters exercised the
overallotment provision of the underwriting agreement to purchase an
additional 60,000 units. The Company realized $517,700 after deducting
underwriting discounts and expenses of $82,300. As of September 30, 1996
and December 31, 1995, 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
<PAGE>
12. Common stock and warrants (continued):
commencing on December 15, 1993. None of these warrants have been
exercised as of September 30, 1996 and December 31, 1995.
During October 1992, the Company received $425,000 in exchange for
interest bearing notes payable and warrants to purchase 63,750 shares of
common stock at $1.65 per share. The Company repaid the $425,000 during
1992 and 1993. During October 1993 and January 1994, warrants to
purchase 1,500 shares and 7,500 shares of common stock were exercised
resulting in proceeds of $2,475 and $12,375, respectively. The remaining
54,750 warrants are outstanding at September 30, 1996 and December 31,
1995 and are exercisable until October 1997.
During November and December 1994, the Company received an aggregate of
$668,928 (net of underwriting discounts and offering costs of $82,947)
from the 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. None of these
warrants have been exercised as of September 30, 1996 and December 31,
1995.
During the year ended December 31, 1994, the Company's number of
authorized common shares was increased from 5,000,000 shares to
10,000,000 shares.
13. Stock options:
During July 1992, the Company granted stock options to three
consultants. Two of the consultants have been granted stock options to
purchase up to a total of 2,300 shares of common stock at an exercise
price of $5.00 per share expiring in July 1997. These options are
outstanding and exercisable at September 30, 1996 and December 31, 1995.
In August 1994, the third consultant exercised his options and purchased
1,000 shares of common stock at $1.65 per share resulting in proceeds of
$1,650.
On December 23, 1992, the Company granted options to certain consultants
to purchase up to a total of 5,500 shares of common stock at an exercise
price of $4.75 per share. The term of the options is five years with
respect to options to purchase 3,000 shares of common stock and ten
years with respect to options to purchase 2,500 shares of common stock.
At September 30, 1996 and December 31, 1995, these options are
outstanding and are exercisable.
Also on December 23, 1992, the Company granted options to certain
employees and consultants to purchase up to a total of 39,000 shares of
common stock. During May 1993, the exercise price of $4.75 per share
with respect to 17,000 of these options was reduced to $2.50 per share.
These options were exercised during 1995 resulting in proceeds of
$42,500.
<PAGE>
13. Stock options (continued):
During December 1993, the exercise price of $4.75 per share with respect
to 22,000 of these options was reduced to $1.50 per share. Options to
purchase 1,000 shares of common stock were exercised in 1995 resulting
in proceeds of $1,500. Options to purchase 10,000 shares of common stock
were exercised in November 1994 resulting in proceeds of $15,000
received in February 1995. Options to purchase 10,000 shares of common
stock did not vest and have been surrendered. Options to purchase the
remaining 1,000 shares of common stock are currently outstanding and
exercisable until December 23, 1997.
On December 23, 1992, the Company agreed to issue options to purchase up
to 30,000 shares of common stock at an exercise price of $4.75 per share
in connection with a consulting agreement. During 1993, the option price
was reduced to $1.50 per share and options to purchase 3,500 shares of
common stock were granted. Options issued are exercisable over a
five-year period commencing December 23, 1992. Options to purchase 3,500
shares of common stock are currently outstanding and exercisable. The
remaining 26,500 options have been retired.
During March 1993, the Company issued options to purchase up to 2,500
shares of common stock to a consultant at an exercise price of $4.75 per
share. During April 1993, the Company issued options to purchase a total
of 2,000 shares of common stock to three consultants at an exercise
price of $5.25 per share. If not exercised, these options will expire
five years from the dates issued. These options to purchase an aggregate
of 4,500 shares are currently outstanding and exercisable.
During January 1994, the Company granted options to an employee to
purchase up to 5,000 shares of common stock at an exercise price of
$3.00 per share. These options were issued and became exercisable on
April 1, 1995. If not exercised, these options will expire five years
from the date issued. At September 30, 1996 and December 31, 1995, these
options are outstanding and are exercisable.
In July 1994, the Company agreed to grant to a customer and a consultant
options to purchase, at the market price on the date of grant, an
aggregate of 50,000 shares of its common stock (subject to increase
proportionally to the extent the exercise price is below a $4.00 share
per benchmark, and subject to decrease proportionally to the extent the
exercise price is above such $4.00 per share benchmark) for each
$1,000,000 of helmets purchased. If not exercised, options expire three
years from the date granted. The agreement expires in July 1997, and
automatically renews for successive annual periods unless cancelled by
the Company or the customer. At September 30, 1996 and December 31,
1995, no options were granted under this agreement.
During December 1994, the Company issued options to a consultant to
purchase up to 15,000 shares of common stock at an exercise price of
$4.00 per share. If not exercised, the options will expire five years
from the date issued. At September 30, 1996 and December 31, 1995, these
options are outstanding and are exercisable.
<PAGE>
13. Stock options (continued):
During 1994, the Company adopted an incentive and non-qualified stock
option plan. The total amount of shares of common stock which may be
issued upon exercise of options granted under the 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. The options granted
under the plan are described as below:
During May 1995, the Company issued to its chief executive
officer options to purchase up to 100,000 shares of common stock
at an exercise price of $1.25 per share. The options vest and
become exercisable 25% per year commencing 1995, and expire five
years from date of vesting. At September 30, 1996 and December
31, 1995, options to purchase 100,000 shares of common stock are
outstanding of which 50,000 are exercisable at September 30, 1996
and 25,000 exercisable at December 31, 1995.
Also during May 1995, the Company granted options to a consultant
to purchase up to a total of 160,000 shares of common stock at an
exercise price of $1.25 per share. Options to purchase a total
120,000 shares vested in 1995, and options to purchase 40,000
shares of common stock vested in 1996. If not exercised, the
options expire five years from the date of vesting. During 1996,
the consultant exercised options to purchase 100,000 shares of
common stock resulting in proceeds of $125,000. During 1995, the
consultant exercised options to purchase 60,000 shares of common
stock resulting in proceeds of $75,000. At December 31, 1995,
options to purchase 100,000 shares of common stock are
outstanding of which 60,000 are exercisable.
Also during May 1995, the Company granted options to certain
employees to purchase up to a total of 43,000 shares of common
stock at exercise prices ranging from $2.25 to $3.125 per share.
Options to purchase a total of 19,500 shares of common stock
vested in 1995, options to purchase 5,000 shares of common stock
vested in February 1996, and options to purchase 18,500 shares of
common stock vested in April, May and August 1996. If not
exercised, these options expire five years from the date of
vesting. During 1996, options to purchase 15,000 shares of common
stock at $2.50 per share and options to purchase 10,000 shares of
common stock at $3.125 per share were exercised resulting in
total proceeds of $68,750. During 1995, options to purchase 2,000
shares of common stock at $3.125 per share were exercised,
resulting in proceeds of $1,562 and a receivable of $4,688. At
September 30, 1996, options to purchase 16,000 shares of common
stock are outstanding and are exercisable. At December 31,
<PAGE>
13. Stock options (continued):
1995, options to purchase 41,000 shares of common stock are
outstanding of which 17,500 are exercisable.
On March 21, 1996, the Company granted options to certain
employees to purchase up to a total of 15,000 shares of common
stock at an exercise price of $5.375 per share. Options to
purchase a total of 8,000 shares of common stock vested in March
1996. Options to purchase the remaining 7,000 shares of common
stock vest in March 1998. If not exercised, these options expire
five years from the date of vesting. At September 30, 1996,
options to purchase 15,000 shares of common stock are outstanding
of which 8,000 are exercisable.
During April 1996, the Company granted options to an employee to
purchase up to 15,000 shares of common stock at an exercise price
of $5.875 per share. These options to purchase 15,000 shares of
common stock vest in April 1997. If not exercised, these options
expire five years from the date of vesting. At September 30,
1996, options to purchase 15,000 shares of common stock are
outstanding none of which are exercisable.
During August 1996, the Company granted options to an employee to
purchase 15,000 shares of common stock at an exercise price of
$8.00 per share. At September 30, 1996, options to purchase
15,000 shares are outstanding and are exercisable.
During May 1995, the Company granted non-plan options to certain
directors and an officer of PTI to purchase up to a total of 150,000
shares of common stock at an exercise price of $1.25 per share. Options
to purchase 50,000 shares of common stock vested in 1995, options to
purchase 50,000 shares of common stock vest in 1996, and options to
purchase 25,000 shares of common stock vest annually in 1997 and 1998.
If not exercised, the options expire five years from the date of
vesting. At September 30, 1996, options to purchase 150,000 shares of
common stock are outstanding of which 100,000 are exercisable. At
December 31, 1995, options to purchase 150,000 shares of common stock
are outstanding of which 50,000 are exercisable.
Pursuant to a consulting agreement effective April 1996, the Company
granted options to a consultant to purchase up to 150,000 shares of
common stock at an exercise price of $5.875 per share. At September 30,
1996, options to purchase 75,000 shares of common stock are outstanding
and are exercisable. However, the Company diputes the amount of options
exercisable based on non-performance by the consultant. The remaining
75,000 options to purchase common stock become exercisable in March 1997
unless the consulting agreement is terminated by either party giving 30
day advance notice to the other party.
During August 1996, the Company granted options to a consultant to
purchase up to 10,000 shares of common stock at an exercise price of
$9.00 per share. At September 30, 1996, options to purchase 10,000
shares of common stock are outstanding and are exercisable.
For the nine-month periods ended September 30, 1996 and 1995 and the
years ended December 31, 1995 and 1994, all options granted were for
exercise prices equal to or exceeding the quoted market price at date of
grant.
<PAGE>
14. Significant customers:
For the nine-month period ended September 30, 1996, two major retail
chain organizations accounted for approximately 66% and 14% of net
sales. As of September 30, 1996, accounts receivable included
approximately $1,185,000 and $815,000, respectively, due from these two
customers.
For the years ended December 31, 1995 and 1994, two major retail chain
organizations accounted for approximately 63% and 23% of net sales in
1995 and 58% and 29% of net sales in 1994. As of December 31, 1995,
accounts receivable included approximately $438,000 and $473,000,
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.
15. Income taxes:
As of December 31, 1995, the Company has approximately $400,000 of net
operating loss carryforwards available to reduce future taxable income
and approximately $42,000 of tax credit carryforwards to reduce future
income taxes. These carryforwards expire in years 2005 through 2010. The
deferred tax assets of $320,000 at December 31, 1995 resulting from the
carryforwards and other temporary differences have been reduced by a
valuation allowance of $130,000 to reflect management's estimate that it
is more likely than not that a portion of the deferred tax assets may
not be realized. Realization is dependent on generating sufficient
taxable income during the period that carryforwards and other temporary
differences are expected to be available to reduce taxable income. The
amount of the deferred tax asset considered realizable, however, could
differ in the near term if estimates of future taxable income change,
and that difference could be material. The valuation allowance decreased
by $130,000 for the nine-month period ended September 30, 1996 and by
$468,000 for the year ended December 31, 1995.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented as follows:
<PAGE>
15. Income taxes (continued):
<TABLE>
<S> <C> <C>
................................................ September 30, December 31,
1996 1995
---------- ----------
Accounts receivable due to the allowance for returns
and doubtful collections ..................... $ 26,000 28,000
Inventories due to additional costs inventoried for
tax purposes pursuant to the Tax Reform Act of
1986 and inventory reserves .................. 41,600 26,000
Equipment and improvements due to depreciation ... 9,200 1,000
Intangible assets due to differences in amortization 84,000 63,000
Net operating loss carryforwards ................. -- 160,000
Tax credit carryforwards ......................... -- 42,000
---------- ----------
Total deferred tax asset ......................... 160,800 320,000
Less valuation allowance ......................... -- 130,000
---------- ----------
Net deferred tax asset ........................... $ 160,800 $ 190,000
========== ==========
The significant components of the income tax provision attributable to
continuing operations for the nine-month period ended September 30, 1996
and for the year ended December 31, 1995 are presented below:
................................................ September 30, December 31,
1996 1995
---------- ----------
Current tax expense .............................. $ 830,880 $ 141,000
Deferred tax (exclusive of the effects of the other
components listed below) ...................... 29,200 145,000
Tax credits ...................................... (60,000) (8,000)
Tax benefits of operating loss carryforwards ..... (160,000) (141,000)
Adjustment of the beginning of the year balance of the
valuation allowance ........................... -- (327,000)
---------- ----------
Income taxes (benefit) ........................... $ 640,080 $ (190,000)
========== ==========
</TABLE>
<PAGE>
15. Income taxes (continued):
The difference between the actual income tax provision and the tax
provision computed by applying the statutory Federal income tax rate to
earnings from continuing operations before taxes for the nine-month
period ended September 30, 1996 and for the year ended December 31, 1995
is attributable to the following:
<TABLE>
<S> <C> <C>
................................................ September 30, December 31,
1996 1995
---------- ----------
Income tax provision at 35% ...................... $ 674,000 $ 209,000
State income taxes net of Federal income tax
(benefit) 76,000 (54,000)
Allowances for returns and doubtful collections .. (6,000) (122,000)
Additional inventory costs and reserves .......... 25,000 (29,000)
Depreciation ..................................... 14,000 --
Intangible assets and amortization ............... 42,000 (16,000)
Deferred compensation ............................ -- (18,000)
Net operating loss carryforwards ................. (140,000) (263,000)
Tax credit carryforwards ......................... (48,000) (28,000)
Valuation allowance .............................. -- 130,000
Other ............................................ 3,080 1,000
---------- ----------
Actual income tax (benefit) provision ............ $ 640,080 $ (190,000)
========== ==========
</TABLE>
The income tax provision of $640,080 for the nine-month period ended
September 30, 1996 is composed of $576,080 of federal income taxes and
$64,000 of state income taxes. For the nine-month period ended September
30, 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.
For the nine-month period ended September 30, 1995 and for the year
ended December 31, 1994, no income tax benefit was reported in the
consolidated financial statements to reflect management's estimate at
that time that it was more likely than not that the deferred tax asset
may not be realized.
<PAGE>
16. Line of credit agreement:
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 the a percentage of certain accounts receivable and
inventories as defined in the agreement. All borrowings are due on
demand, and are collateralized by the Company's account receivable,
inventories and other assets. At September 30, 1996, the Company had no
outstanding liability pursuant to the line of credit agreement.
