U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
- ---- Act of 1934 (Fee required) for the quarterly period ended September
30, 1998.
- ---- Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required) For the transition period from to
Commission file number 1-11586
PTI HOLDING INC.
-----------------------------
(Name of small business issuer in its charter)
Delaware 13-3590980
----------- ----------------
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
c/o 15 East North Street, Dover, DE 19901
- --------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(302) 678-0855
--------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
- --------------------- Name of each exchange
on which registered
Common Stock, par value ---------------------
$.01 per share None
- ----------------------- ---------------------
Securities registered under Section 12(g) of the Act:
Title of each class
- -----------------------
Common Stock, par value
$.01 per share
- -----------------------
Check whether the issuer: (1) filed reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes X No
State the number of shares outstanding of each class of the issuer's
classes of common equity, as of the latest practicable date. As of November 11,
1998, 4,951,352 shares of the issuer's common equity were outstanding.
<PAGE>
ITEM 1. Financial Statements.
Page
------
Consolidated Balance Sheet as of September 30, 1998 F-1
Consolidated Statements of Operations for the three and nine months
ended September 30, 1998 and 1997 F-2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 F-3
Notes to Consolidated Financial Statements F-4-F-6
PART I
ITEM 2. Management's Discussion and Analysis
Statements in this Quarterly Report on Form 10-QSB concerning the
Company's business outlook or future economic performance; or other financial
items; and plans and objectives related thereto; and statements concerning
assumptions made or expectations as to any future events, conditions,
performance or other matters, are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors that could cause actual
results to differ materially from those stated in such statements.
PTI Holding Inc. (collectively with its wholly-owned subsidiaries
referred to herein as the "Company"), manufactures and markets protective
equipment, primarily bicycle helmets and safety ear plugs. In addition, the
Company markets and distributes bicycles and bicycle-related products, and other
safety and medical supplies.
On March 1, 1994, the Company acquired Foam-O-Rama, Inc. ("Foam") a New
York corporation which is principally engaged in the business of the design,
marketing and sale of bicycle helmets, by merging it with and into the company's
wholly-owed operating subsidiary, Protective Technologies International Inc., a
New York corporation ("PTI"). From and after March 2, 1994, Foam had no separate
or independent existence, having been merged into PTI. PTI has since expanded
its product line from bicycle helmets to include bicycles and bicycle
accessories.
On August 5, 1997, the Company expanded its line of protective products
by acquiring Flents Products Co., Inc., (`Flents"), which is principally engaged
in the business of manufacturing wax earplugs and the marketing and sale of
earplugs and other safety and medical supplies, such as an eye drop delivery
system, styptic devices, and air-filter masks. For purposes of financial
accounting and income tax, the Merger was deemed to have occurred as of the
opening of business on June 1, 1997.
On May 12, 1998, Flents acquired certain assets of the Comfees division
of Magnivision, a subsidiary of American Greetings Corporation, for a purchase
price of approximately $1,700,000. Comfees manufactures and distributes contact
lens cases, liquid dispensers, medicine dispensers, finger splints and ear
protectors, among other health and beauty care items. Comfees products are sold
through several mass merchandisers, including K-Mart and Target.
<PAGE>
Results of Operations:
- ----------------------
Three months ended September 30, 1998 Compared to Three months ended
September 30, 1997
The Company's net sales were $12,917,533 during the quarter ended
September 30, 1998, an increase of 52% from its net sales of $8,502,729 for the
same period in 1997. The sales increase from 1997 to 1998 resulted predominantly
from the following:
Increased sales to existing customers through the addition of new helmet models.
Increased market share at the expense of competitors.
Increased sales in existing models due to growth in the overall helmet market.
Increased sales of the Company's bicycle and bicycle accessory products.
The addition of new retail outlets for the Company's products.
Introduction of new accessory product lines.
The Company's license arrangements both with Hasbro, Inc., to manufacture and
market helmets, bicycles and bicycle accessories under the PlayskoolTM brand
name, and with Mattel, Inc. to manufacture and market helmets under the
Barbie(TM) name.
Net sales of its Flents subsidiary of $2,610,883, for the quarter ended
September 30, 1998 as compared to sales of $1,688,263 for the period in 1997.
The cost of sales for the quarter ended September 30, 1998 were
$8,164,560 for PTI and $1,371,424 for Flents (resulting in a consolidated gross
profit margin of 26%). The cost of sales for the quarter ended September 30,
1997 were $4,879,419 for PTI and $908,590 for Flents (resulting in a
consolidated gross profit margin of 32%). The decrease in the gross profit
margin was primarily due to a change in the mix of product sales. We experienced
an increase in sales of products that generally have lower gross profit margins.
Selling, general and administrative expenses for the quarter ended
September 30, 1998 were $2,784,640 compared to selling, general and
administrative expenses of $1,614,017 for the same period in 1997. SG&A as a
percentage of sales were 22% and 19% for the quarters ended September 30, 1998
and 1997, respectively. The increased selling, general and administrative costs
in 1998 was primarily due to the higher costs associated with the expansion of
the helmet, bicycle and bicycle accessory, the acquisition of Flents,
installation of new systems, and the higher costs for human resources.
The Company had a net income of $100,689 for the quarter ended
September 30, 1998 compared to the Company's net income of $624,663 for the same
period in 1997.
Nine months ended September 30, 1998 Compared to Nine months ended
September 30, 1997
The Company's net sales were $44,060,744 during the nine months ended
September 30, 1998, an increase of 79% from its net sales of $24,675,644 for the
same period in 1997. The sales increase from 1997 to 1998 resulted predominantly
from the following:
Increased sales to existing customers through the addition of new helmet models.
Increased market share at the expense of competitors.
Increased sales in existing models due to growth in the overall helmet market.
Increased sales of the Company's bicycle and bicycle accessory products.
The addition of new retail outlets for the Company's products.
Introduction of new accessory product lines.
The Company's license arrangements both with Hasbro, Inc., to manufacture and
market helmets, bicycles and bicycle accessories under the PlayskoolTM brand
name, and with Mattel, Inc. to manufacture and market helmets under the
Barbie(TM) name.
Net sales of its Flents subsidiary of $6,654,788,for the nine months ended
September 30,1998, as compared to sales of $2,226,952 for the period June
1, 1997 through September 30,1997. Flents was acquired on June 1, 1997.
The cost of sales for the nine months ended September 30, 1998 were
$27,381,990 for PTI and $3,519,406 for Flents (resulting in a consolidated gross
profit margin of 30%). The cost of sales for the nine months ended September 30,
1997 were $15,498,130 for PTI and $1,234,445 for Flents (resulting in a
consolidated gross profit margin of 32%). The decrease in the gross profit
margin was primarily due to a change in the mix of product sales. We experienced
an increase in sales of products that generally have lower gross profit margins.
Selling, general and administrative expenses for the nine months ended
September 30, 1998 were $8,402,243 compared to selling, general and
administrative expenses of $3,742,700 (not including the one-time non cash
accounting charge) for the same period in 1997. SG&A as a percentage of sales
were 19% and 15% for the nine months ended September 30, 1998 and 1997,
respectively. The increased selling, general and administrative costs in 1998
was primarily due to the higher costs associated with the expansion of the
helmet, bicycle and bicycle accessory business, the acquisition of Flents,
installation of new systems, and the higher costs for human resources.
The Company had a net income of $2,349,198 for the nine months ended
September 30, 1998 compared to the Company's net loss of $(1,427,882 ) for the
same period in 1997. The net loss for the nine months ended September 30, 1997
included a one-time non cash accounting charge of $3,844,531 for the conversion
of Series A Preferred Stock into Common Stock by the Directors of the Company.
Without the charge net income for the nine months ended September 30, 1997 would
have been $2,416,649.
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
$750,000, through the exercise of certain outstanding options held by employees
and consultants of the Company, which resulted in net proceeds of approximately
$400,000, through internal cash flow, through PTI's opening of a revolving line
of credit in May, 1996 and through the exercise of public warrants in 1997,
which resulted in gross proceeds of approximately $3,000,000.
On May 6, 1996, the Company opened a revolving line of credit at Key
Bank of New York. The line of credit is collateralized by inventory, receivables
and other assets. As of September 30, 1998, the Company had $17,916,338
outstanding pursuant to such line of credit ($20,000,000 available, including
$2,000,000 specifically for the future capital expenditures).
The Company's working capital at September 30, 1998 was $9,952,789 as
compared to $10,192,577 at September 30, 1997.
The cash flows of the Company have fluctuated due to capital spending,
working capital requirements, and bank loans. The Company expects that cash
flows in the near future will be primarily determined by the levels of net
income, working capital requirements, and financings, if any, undertaken by the
Company. Net cash increased by $112,100 and $368,227 in the nine-months ended
September 30, 1998 and 1997, respectively.
Net cash used in operating activities was $10,776,445 and $2,244,050 in
the nine-months ended September 30, 1998 and 1997, respectively. Net income
(loss) was $2,349,198 and $(1,427,882) for the same periods, respectively.
Net cash used in investing activities was $5,084,533 and $2,620,885 in
the nine-months ended September 30, 1998 and 1997, respectively. Net cash used
in investing activities pertains to capital expenditures in these periods,
primarily for computer systems and manufacturing equipment, and for the payment
as consideration for the purchase of the acquired product line.
Net cash provided by financing activities was $15,973,078 and $
5,233,162 in the nine-months ended September 30, 1998 and 1997, respectively.
Cash flows from financing activities were primarily affected by the net bank
loans of $15,848,077 and $2,131,501 in these periods, respectively.
The Company pays its employees and vendors on a weekly, monthly or
bimonthly basis, while its customers pay for products on an average of 75 days
after shipment, and therefore the Company has substantial needs for working
capital.
Based on the Company's current plans, management anticipates that
current cash balances, together with the Company's line of credit and cash flow
generated from operations, will be sufficient to continue to fund production,
purchase of equipment, increased marketing activities and continued research and
development, as well as the rest of the Company's cash requirements, for
approximately the next 18 months.
The Company's research and development efforts are directed toward
developing new products, improving existing products and refining its
manufacturing processes. Such research and development costs amounted to
approximately $130,000 for the nine months ended September 30, 1998 and
approximately $73,000 for the nine months ended September 30, 1997. It is
expected that the Company will spend approximately $150,000 on research and
development during the 1998 year.
Year 2000 Compliance
The Company has recently finalized its installation of the SAP R/3
accounting system, which is year 2000 compliant. The Company does not anticipate
any material additional costs with regard to its year 2000 compliance.
The year 2000 issue is expected to affect the systems of various
entities with which the Company interacts, including suppliers and vendors.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure by
another company's systems to be year 2000 compliant would not have a material
adverse effect on the Company.
ITEM 6. Exhibits; List and Reports on Form 8-K.
(a) Exhibits
3.1 Registrant's Articles of Incorporation, as amended, incorporated by
reference to the like numbered exhibit in the Registrant's Registration
Statement on Form SB-2 under the Securities Act of 1933, as amended, File
No. 33-53466
3.2 Registrant's by-laws, incorporated by reference to the like numbered
exhibit in the Registrant's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-53466
4.4 Form of Underwriters' Warrant, incorporated by reference to the like
numbered exhibit in the Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No. 33-53466
10.2 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 Agreement and Plan of Merger dated February 14, 1994 among Protective
Technologies International Inc., Foam-O-Rama, Inc., Ellen Schaeffer and
Lori Hillsberg, as amended, incorporated by reference to exhibit number 2
in the Registrant's Current Report on Form 8-K dated March 16, 1994 under
the Securities Exchange Act of 1934, as amended
10.4 Noncompetition Agreement dated March 1, 1994 between Protective
Technologies International Inc. and Ellen Schaeffer and Lori Hillsberg,
incorporated by reference to exhibit number 99.1 in the Registrant's
Current Report on Form 8-K dated March 16, 1994 under the Securities
Exchange Act of 1934, as amended
10.5 Noncompetition Agreement dated March 1, 1994 between Protective
Technologies International Inc. and Warren Schaeffer and Alan Hillsberg,
incorporated by reference to exhibit number 99.2 in the Registrant's
Current Report on Form 8-K dated March 16, 1994 under the Securities
Exchange Act of 1934, as amended
10.6 Form of Promissory Note memorializing loans from directors and officers as
authorized by the Board of Directors on March 13, 1996, incorporated by
reference to exhibit number 10.21 in the Registrant's Annual Report on Form
10-KSB for the period ended December 31, 1995, under the Securities
Exchange Act of 1934, as amended
10.7 Guarantee from Warren Schaeffer and Alan Hillsberg to Protective
Technologies International Inc., incorporated by reference to exhibit
number 10.21 in the Registrant's Quarterly Report on Form 10-QSB for the
period ended September 30, 1995, under the Securities Exchange Act of 1934,
as amended
10.8 Exclusive License and Purchase Guarantee Agreement, dated July 19, 1994
between Toy Biz, Inc. and the Registrant, incorporated by reference to
exhibit number 10.22 in the Registrant's Quarterly Report on Form 10-QSB
for the period ended September 30, 1995, under the Securities Exchange Act
of 1934, as amended
10.10Line of Credit Agreement (Asset Based), dated May 6, 1996, between Key
Bank of New York, Protective Technologies International Inc., PTI Holding
Inc. and Protective Technologies of America Inc., and collateral loan
documents thereto, incorporated by reference to exhibit number 10.25 in the
Registrant's Quarterly Report on Form 10-QSB dated March 31, 1996, under
the Securities Exchange Act of 1934, as amended
10.13Merger Agreement and plan of Reorganization dated July 25, 1997 among PTI
Holding Inc. and Flents Products Co., Inc., as amended, incorporated by
reference to exhibit numbers 1 and 2 in the Registrant's Current Report on
Form 8-K date August 20, 1997 under the Securities Exchange Act of 1934, as
amended.
(b) Reports on Form 8-K
No current report on form 8-K was filed by the Company during
the quarter ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated November 13, 1998
PTI HOLDING INC.
By /s/ Meredith Birrittella
Meredith W. Birrittella,
Chairman of the Board
Chief Executive Officer (authorized signatory)
By /s/ Anthony Costanzo
Anthony Costanzo
Chief Financial Officer
<PAGE>
<TABLE>
PTI HOLDING INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 1998
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 794,260
Accounts receivable, net of allowance for returns and doubtful collections of $457,574 12,005,194
Inventories 21,173,618
Deferred tax asset, net 284,340
Prepaid expenses and other current assets 3,232,752
-----------
Total current assets 37,490,164
Deferred tax asset, net 207,690
Equipment and improvements, net of accumulated depreciation of $2,022,068 3,312,531
Intangible assets, net of accumulated amortization of $828,361 5,321,013
--------------------
$ 46,331,398
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable, bank $ 17,916,338
Accounts payable and accrued expenses 8,810,150
Other current liabilities 810,887
--------------------
Total current liabilities 27,537,375
--------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; authorized 10,000,000 shares, issued and outstanding
4,951,352 shares 49,514
Note receivable from exercise of stock warrants (58,322)
Capital in excess of par 16,268,267
Retained earnings 2,534,564
--------------------
Total stockholders' equity 18,794,023
--------------------
$ 46,331,398
====================
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS OF OPERATIONS
(Unaudited)
THREE & NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<S> <C> <C> <C> <C>
For the Three Months ended For the Nine Months ended
September 30, September 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
Net sales $ 12,917,533 $ 8,502,729 $ 44,060,744 $ 24,675,644
Cost of sales 9,535,984 5,788,009 30,901,396 16,732,575
------------ ----------- ------------ ------------
Gross profit 3,381,549 2,714,720 13,159,348 7,943,069
Selling, general and administrative expenses:
SG&A - before stock based compensation 2,784,640 1,614,017 8,402,243 3,742,700
Stock-based compensation expense - - - 3,844,531
------------ ----------- ------------ ------------
2,784,640 1,614,017 8,402,243 7,587,231
------------ ----------- ------------ ------------
Income from operations 596,909 1,100,703 4,757,105 355,838
Interest expense, net of interest income 423,309 55,271 698,349 140,954
------------ ----------- ------------ ------------
Income before income taxes 173,600 1,045,432 4,058,756 214,884
Income taxes 72,911 420,769 1,709,558 1,642,766
------------ ----------- ------------ ------------
Net income (loss) $ 100,689 $ 624,663 $ 2,349,198 $ (1,427,882)
============ =========== ============ =============
Net income (loss) per share of common stock
Basic $ 0.02 $ 0.13 $ 0.49 $ (0.34)
Diluted $ 0.02 $ 0.13 $ 0.46 $ (0.34)
Weighted average shares outstanding
Basic 4,862,499 4,650,601 4,818,745 4,252,201
Diluted 5,118,380 4,869,539 5,140,356 4,252,201
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<S> <C> <C>
1998 1997
---------- ------------
Cash flows from operating activities:
Net income (loss) $ 2,349,198 $ (1,427,882)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Provision for returns and doubtful accounts 349,074 -
Depreciation and amortization 1,015,053 370,334
Amortization of intangible assets 173,974 109,604
Deferred income tax (benefit) (194,507) (92,277)
Stock-based compensation - 3,844,531
(Increase) decrease in operating assets:
Accounts receivable (7,127,097) (1,732,667)
Inventories (13,015,690) (4,377,532)
Prepaid expenses and other current assets (1,208,601) (205,846)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 6,128,263 2,244,598
Other current liabilities 753,888 (976,913)
------------- ------------
Net cash used in operating activities (10,776,445) (2,244,050)
------------- ------------
Cash flows from investing activities:
Cash payments as consideration for purchase of acquired product line (1,703,809) (1,855,289)
Loan to stockholders (923,048) (23,583)
Purchase of equipment and improvements (2,457,676) (742,013)
------------- ------------
Net cash (used in) investing activities (5,084,533) (2,620,885)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 125,001 3,101,661
Proceeds from bank loan, net 15,848,077 2,131,501
------------ -----------
Net cash provided by financing activities 15,973,078 5,233,162
------------ -----------
Net increase in cash and cash equivalents 112,100 368,227
Cash and cash equivalents, beginning of year 682,160 361,878
------------ -----------
Cash and cash equivalents, end of year $ 794,260 $ 730,105
============ ===========
Supplemental disclosures:
Interest paid $ 742,860 $ 209,977
Income taxes paid 1,784,500 2,740,004
Non-cash investing and financing activities:
Common stock issued as partial consideration for the purchase of
the acquired company - 2,701,650
Conversion of preferred stock - 2,500
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation:
The consolidated financial statements included herein have been prepared
by the Company, without an audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997 and filed with the Securities and Exchange
Commission.
In the opinion of the Company's management, these unaudited consolidated
financial statements include all adjustments, consisting solely of
normal recurring adjustments, necessary in order to present fairly the
Company's consolidated financial position as of September 30, 1998 and
the results of their operations and their cash flows for the three and
nine months ended September 30, 1998 and 1997. The results of operations
for an interim period are not necessarily indicative of the results to
be attained in any other fiscal period.
2. Summary of significant accounting policies:
Earnings per share:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share". This statement establishes new standards for
computing and presenting earnings per share (EPS), replacing the
presentation of formerly required primary EPS with a presentation of
basic EPS. For entities with complex capital structures, the statement
requires dual presentation of both basic EPS and diluted EPS on the face
of the statement of operations. Under this new standard, basic EPS is
computed based on weighted average shares outstanding and excludes any
potential dilution. Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other
contracts to issue common stock. The Company adopted SFAS 128 for its
financial statements issued for the year ended December 31, 1997.
A reconciliation between the numerators and denominators of the basic
and diluted EPS computation for net income (loss) is as follows:
<TABLE>
Nine months ended September 30, 1998 Nine months ended September 30, 1997
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share Per share
Net Income Shares amounts Net (loss) Shares amounts
---------- ------ --------- ---------- ------ ---------
Basic EPS $ 2,349,198 4,818,745 $ 0.49 $(1,427,882) 4,252,201 $ (0.34)
========= ==========
Dilutive stock options
& warrants 321,611 -
---------- ---------
Diluted EPS $ 2,349,198 5,140,356 $ 0.46 $(1,427,882) 4,252,201 $ (0.34)
============ ========== ========= ============= ========== ==========
</TABLE>
The potentially diluted shares that were not included in the computation of
diluted earnings per share because to do so would be antidultive consist of
stock options and warrants as follows:
Options/Warrants
-------------------------
Nine months ended September 30, 1998 -
Nine months ended September 30, 1997 467,906
Reclassification:
For the comparability, certain 1997 amounts have been reclassified where
appropriate to conform the financial statement presentation used in
1998.
Recently Issued Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. The Company adopted No. SFAS
130 in the first quarter 1998, which did not have a material impact on
its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes standards
for the way public business enterprises report information about
operating segments in interim and annual financial statements. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company will adopt
SFAS No. 131 for the year ending December 31, 1998.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes
accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning of
any fiscal quarter after issuance (that is, fiscal quarters beginning
June 16, 1998 and thereafter). Statement 133 cannot be applied
retroactively. Statement 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the company's election, before January 1,
1998).
The adoption of SFAS 133 will not have a material impact on the
financial statements.
3. Contingent liabilities:
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.
4. New product line:
On May 12, 1998, the Company acquired certain assets of the Comfees
division of Magnivision, a subsidiary of American Greetings Corporation,
for a purchase price of approximately $1,700,000. Comfees manufactures
and distributes contact lens cases, liquid dispensers, medicine
dispensers, finger splints and ear protectors, among other health and
beauty care items. Comfees products are sold through several mass
merchandisers, including K-Mart and Target. The fair market value of the
assets acquired was $481,842.
5. Related party transactions:
At September 30, 1998, officers/directors owed the Company approximately
$1,255,000. These loans bear interest at 6% per annum.
For the nine months ended September 30, 1998, the Company recognized
interest income of approximately $43,700 from loans to
officers/directors.
6. Line of credit:
On May 6, 1996, the Company established a revolving line of credit at
Key Bank of New York. The line of credit is collateralized by inventory,
receivables and other assets. During September 1998, the availability on
the line of credit increased from $7,000,000 to $20,000,000 (including
$2,000,000 specifically for the future capital expenditures). As of
September 30, 1998, the Company had $17,916,338 outstanding pursuant to
such line of credit.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
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0
0
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