U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
X Annual report under Section 13 or 15(d) of the Securities Exchange Act
- ---- of 1934 (Fee required) For the fiscal year ended December 31, 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.
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(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
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(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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. __
State issuer's revenues for its most recent fiscal year: $60,522,011
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days. As of March 30, 1999, based upon the last sale price on such
date, such aggregate market value was $15,488,600.
State the number of shares outstanding of each class of the issuer's
classes of common equity, as of the latest practicable date. As of March 31,
1999, 4,956,352 shares of the issuer's common equity were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
PART I
ITEM 1. Description of Business.
History
PTI Holding Inc. (the "Company"), formerly known as Aerial Assault
Inc., was incorporated under the laws of Delaware in March 1990. Until February
28, 1994, the Company was engaged in the business of designing, developing and
marketing distinctive, high-performance men's athletic footwear for basketball,
and related apparel bearing the Company's name and logo. The Company commenced
sales in February 1992.
On March 1, 1994, the Company acquired Foam-O-Rama, Inc. ("Foam"), a
New York corporation which was 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 ("PTI") pursuant to a Merger
Agreement and Plan of Reorganization dated February 14, 1994 among PTI, Foam and
Foam's shareholders. From and after March 2, 1994, Foam had no separate or
independent existence, having been merged into PTI. 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.
On August 5, 1997, the Company consummated the merger (the "Merger") of
Flents Products Co., Inc., a New York corporation ("Flents"), which was
principally engaged in the business of the manufacture of wax earplugs and the
marketing and sale of earplugs and other safety and medical supplies, such as an
eye drop delivery system, styptic devices, and air-filter masks, with and into
the Company's wholly owned subsidiary, Flents Products Co., Inc., a Delaware
corporation ("Merger Sub"), pursuant to an Agreement and Plan of Merger among
the Company, Merger Sub and Flents. For purpose of accounting, the acquisition
was effective as of the opening of business on June 1, 1997, and has been
accounted for as a purchase.
Merger Sub delivered at the closing (the "Closing") of the Merger
$27.46 and 3.47 shares of the common stock, par value $.01 per share of the
Company (the "Company's Common Stock") (with associated convertible value rights
described below) to the shareholders of Flents in respect of each of the 77,756
issued and outstanding shares of the common stock of Flents, or total merger
consideration of $4,837,085. The merger consideration was paid $2,135,435 in
cash, and $2,701,650 in units consisting of 270,165 shares of the Company's
Common Stock and 270,165 Convertible Value Rights ("CVRs"). For purposes of the
Merger, the Units were valued at $10 per Unit. Each CVR entitled the original
holder to up to $4.00 of additional Company's Common Stock of the Company to the
extent that the market value of the Company's Common Stock was less than $10.00
per share on the one-year anniversary of the Closing. On August 5, 1998, the
average value (for the preceding 20 trading days) of the Company's common stock
was $8.3125. Accordingly, an additional 54,846 shares of the Company's common
stock were issued to the original shareholders of Flents.
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. The Comfees division manufactures and
distributes contact lens cases, liquid dispensers, medicine droppers, 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.
Karlen
On January 8, 1999, Flents entered into an Asset Purchase Agreement
with Karlen Manufacturing, Inc. ("Karlen") and certain shareholders providing
for Flents to acquire substantially all of the net assets of Karlen for
approximately $17,750,000 in cash. Karlen which is based in Michigan, is in the
business of manufacturing, marketing and selling, personal health and beauty
care items, including some products similar to those sold by Flents. It operates
from a rented facility in Michigan. In 1998, Karlen had revenues of
approximately $12,000,000.
Flents plans to finance its acquisition of Karlen and its working
capital needs through a variety of sources.
Flents plans to enter into a Revolving Credit, Term Loan and Security
Agreement with PNC Bank providing for a three-year term loan of $4,000,000 at
the bank's base rate plus .75% interest and a line of credit of $6,000,000 at
the bank's base rate plus .25% interest.
Flents also plans to borrow from The 1818 Mezzanine Fund (the "Fund"),
an affiliate of Brown Brothers Harriman and Co., a six year $8,000,000 loan at
12% interest. Such loan from the Fund entitles the Fund, through a warrant, to
acquire shares of common stock (for a nominal amount) that will constitute after
issuance 22% of the outstanding shares of common stock of Flents.
Flents also plans to sell, for $1,800,000, shares of its common stock
that will constitute (after exercise of the Fund's warrant) 18% of Flents'
common stock. The purchasers are two directors and officers of the Company. A
fairness opinion will be obtained to support the purchase price of these two
directors.
In addition, the Company plans to contribute $1,000,000 in cash to
Flents' capital, lend an additional $1,000,000 to Flents' and assume a
three-year promissory note representing part of the purchase price to Karlen in
the amount of $1,000,000 with interest of 12%. The Company would also guarantee
repayment of Flents' loans from PNC Bank.
After the sale of shares to the two officers and exercise of the Fund's
warrant, the Company would hold 60% of the outstanding shares of common stock of
Flents.
In order to finance the Company's contributions to Flents' acquisition
of Karlen and PTI's working capital needs, PTI plans to enter into a Revolving
Credit, Term Loan and Security Agreement with PNC Bank providing for a
three-year term loan of $3,000,000 at the bank's base rate plus .75% interest
and a line of credit of $22,000,000 at the bank's base rate plus .25% interest.
Upon the closing of such financing, the Company would repay its current
outstanding bank financing in full.
In connection with the Karlen Agreement, the Company has paid $225,000
in non-refundable deposits toward the purchase price. The closing is expected to
occur during the Company's second quarter 1999.
Products
The Company competes in the bicycle helmet, bicycle and bicycle
accessories industry through its PTI subsidiary, and in the personal care
industry through its Flents subsidiary.
PTI competes in the mass market channel by offering a complete line of
sports safety helmets in toddler through adult sizes. PTI also supplies bicycle
accessory products such as locks, tubes and tires, general accessories,
protective wear and children's bicycles.
Flents competes in the ear and eye care portion of the personal care
market. Products include earplugs, eyeglass cleaners, eye patches, eyewash, ear
wax removal, as well as other ear and eye care products. Flents also supplies
general accessories for the eyeglass market.
Manufacturing
The Company assembles and distributes helmets, and distributes
bicycles, bicycle accessory products, ear and eye care products from its
manufacturing facility in New York State. The Company sources out the
manufacturing of all the raw components of its helmets, including the plastic
foam liners that constitute the main part of the helmets, to various
manufacturers in the United States. Such independent manufacturers use molds and
tooling that are owned by and for the exclusive use of the Company in the
manufacture of these sub-assembly components. Further, the Company sources out
the manufacturing of its bicycle and bicycle accessory products and ear and eye
care products to certain foreign manufacturers in East Asia and Europe.
Management believes that this outsourcing is the best long-term arrangement
because it enables the Company to reduce its need for capital expenditures on
equipment, and its manufacturing overhead.
However, access to the foreign manufacturers could be adversely
affected by economic or political instability in such foreign countries, and by
currency fluctuations. In addition, the bicycles and bicycle accessories
purchased by the Company for resale are subject to United States custom duties.
Under the fixed duty structure in effect since July 1981, duties range from 8.5%
to 37.5%, plus unit charges, depending on whether the principal component is
leather or some other material. Further, the adoption of bilateral trade
agreements between the United States and countries in which the Company's
suppliers are located, work stoppages or the impositions of unilateral
restrictions on trade, including quotas or additional duties, by either the
United States or any supplier company, could disrupt supplies and/or increase
the costs of obtaining products. The Company is unable to predict whether
additional customs duties, quotas or other restrictions may be imposed on the
importation of its products in the future. Any such action could result in
increases in the cost of bicycles or bicycle accessories and, accordingly, might
adversely affect the sales or profitability of the Company.
Although the Company's operations would be seriously disrupted until
alternative suppliers are found, with a significant adverse financial impact,
the Company believes that such contract manufacturing of raw helmets and tooling
and molds, as well as all of the raw materials required for such manufacturing,
is available from several alternate sources. In addition, the Company believes
that alternative suppliers for the Company's bicycle and bicycle accessory
products and ear and eye care 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 for 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 (650
stores), Target stores (800 stores), Sam's Club (430 stores), Sports Authority
(150 stores), and other regional mass merchants.
During 1998, the Company's sales to its single largest customer
constituted approximately 58 percent of its gross revenues, compared to
approximately 71 percent during the 1997 calendar year. Sales to its second
largest customer during the 1998 and 1997 accounted for 28 and 15 percent of
gross revenues, respectively. The Company believes that its relationships with
these customers are good.
The Company has entered into a license agreement with Spice Girls
Limited to manufacture and market helmets, bicycles and bicycle accessories
under the Spice GirlsTM brand name. The Company has also entered into a license
arrangement with Hasbro, Inc. to manufacture and market helmets, bicycles and
bicycle accessories under the PlayskoolTM and TonkaTM brand names. In addition,
the Company has entered into an exclusive license with Mattel, Inc. to
manufacture helmets under the BarbieTM brand name, as well as a license to sell
BarbieTM bicycle accessory products.
Private label manufacturing of helmets and accessories for other
companies in the helmet market has historically constituted a small part of the
Company's business, and remains so to date. The Company's private label
purchasers include Toys-R-Us and Target stores.
Flents sells its merchandise to mass market merchandisers, drug stores,
and the food trade. The majority of such sales are made through independent
sales representatives who work exclusively on a commission basis. Flents ships
its products directly to retail customers through common freight carriers.
Flents products are sold in over 30,000 retail locations.
Trademarks and Patents
The Company markets its bicycle helmets, bicycles and bicycle products
under the brand names Protective TechnologiesTM PTITM Hydrogen(R) and Aerial
Assault(R). The Company markets its ear care products under the brand name Quiet
Please!(R). 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 the company estimates has a 65% market share in the United
States. In addition to Bell, significant competitors include Troxel, Specialized
and Trek, as well as other small manufacturers.
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. PTI believes it has become the second
largest manufacturer of bicycle helmet and accessories selling through the mass
merchant channel.
Flents' competitors include many large and small companies, many of
which have an advantage over the company in terms of greater financial resources
and ability to advertise their products to the general public.
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 1998, the Company spent approximately $169,000
on such research and development, up from approximately $117,000 in 1997. Of the
$169,000 spent on research and development during 1998, PTI spent approximately
$153,000 and Flents spent approximately $16,000.
Employees
As of March 26, 1999, the Company had approximately 250 full-time
employees, including 30 individuals in management, administration and clerical
positions. The Company's employees are not represented by a labor union, and the
Company believes that its relations with employees are satisfactory.
ITEM 2. Description of Property.
The Company's principal facility is a 200,000 square foot warehouse and
assembly facility in Hastings on Hudson, New York. The Company occupies the
facility pursuant to a lease, which expires in 2001. The Company also occupies
approximately 12,500 square feet of office space in Yonkers, New York pursuant
to a lease expiring in 2004. The Company also uses public warehouse in space in
Texas and California and leases a small office in California.
ITEM 3. Legal Proceedings.
In 1998, certain product liability claims were asserted against the
Company. While the outcome of such claims can not be determined, it appears the
Company's product liability insurance is adequate to cover any losses that may
arise from such claims.
ITEM 4. Submission of Matters to a Vote of Security-Holders.
No matter was submitted during the fourth quarter of the Company's 1998
fiscal year to a vote of security-holders.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.
The Principal market on which the Company's common stock trades is The
NASDAQ Small-Cap Stock Market under the symbol "PTII."
The following table sets forth the high and low sale prices according
to The NASDAQ Stock Market Research Department for the common stock of the
Company during the periods indicated:
NASDAQ Stock Market List Prices
Quarter Ended High Low
- ------------------ ------- -------
March 31, 1997 $ 9.250 $ 7.875
June 30, 1997 $ 8.813 $ 7.688
September 30, 1997 $ 9.563 $ 6.875
December 31, 1997 $ 9.625 $ 7.375
March 31, 1998 $10.000 $ 7.500
June 30, 1998 $ 8.313 $ 6.438
September 30, 1998 $ 8.750 $ 5.875
December 31, 1998 $ 6.500 $ 3.375
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 March 26, 1999, the approximate number of holders of record of
the Company's common stock was 120, and the number of beneficial holders of the
Company's common stock was in excess of 1,300. The Company has not paid
dividends to its shareholders since its inception and does not plan to pay
dividends in the foreseeable future. The Company currently intends to retain any
earnings to finance the growth of the Company.
ITEM 6. Management's Discussion and Analysis
Statements in this Annual Report on Form 10-K 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.
The Company's net sales were $60,522,011 during the year ended December
31, 1998, an increase of 75% from its net sales of $34,566,135 in 1997. The 75%
sales increase from 1997 to 1998 resulted predominantly from increased sales to
existing customers through the addition of new helmet models, from increased
market share at the expense of competitors, from increased sales in existing
models due to growth in the overall helmet market, from increased sales of the
Company's bicycle and bicycle accessory products, from the addition of new
retail outlets for the Company's products, from introducing new accessory
product lines, and from the Company's license arrangements with Hasbro, Inc. and
Spice Girls Limited, Inc. to manufacture and market helmets, bicycles and
bicycle accessories under the PlayskoolTM , TonkaTM and Spice GirlsTM brand
names, and with Mattel, Inc. to manufacture and market helmets under the
Barbie(TM) name. The results for 1997 also include 7 months of sales from Flents
in the amount of $3,715,425. Sales for 1998 from Flents were $8,688,151. The
increase primarily results from sales for the entire 12 months and the
acquisition of Comfees in May 1998.
The Company had a net income of $2,492,229 for the year ended December
31, 1998 compared to the Company's net loss for the year ended December 31, 1997
of $941,295. The net loss for 1997 included a non-recurring charge for stock
based compensation of $3,636,838. This charge was the result of the Company's
preferred shares held by management and former directors being converted into
common shares pursuant to the terms of the Company's Series A preferred stock.
The cost of sales for the year ended December 31, 1998 was $43,283,112
(resulting in a gross profit margin of 28%), compared to the Company's cost of
sales for the year ended December 31, 1997 of $23,751,353 (resulting in a gross
profit margin of 31%). Although Flents' gross profit margin contribution
approximated 48% in 1998 and 40% in 1997, the 3% decrease in the consolidated
gross profit margin is primarily related to an increase in bicycle sales in
1998, a lower margin product line.
Selling, general and administrative expenses for the year ended
December 31, 1998 were $11,872,695 compared to selling, general and
administrative expenses of $9,710,647 for the year ended December 31, 1997.
Selling, general and administrative expenses were $6,073,809 for 1997 without
the charge for conversion of the preferred shares. Without the charge, SG&A
expenses, as a percentage of sales were 20% and 18% for the years ended December
31, 1998 and 1997, respectively. The increased selling, general and
administrative spending in 1998 was primarily due to the higher costs associated
with the expansion of the helmet, bicycle and bicycle accessory business, the
acquisition of Comfees, installation of new systems and the higher costs for
human resources.
Liquidity and 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
$406,247, 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 $3,002,000.
The Company's working capital at December 31, 1998 was $10,320,370 as
compared to $10,209,168 at December 31, 1997.
The cash flows of the Company have fluctuated due to the impact of net
income and losses, capital spending, working capital requirements, the issuance
of common stock and other financing activities. 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 $155,458 and $320,282 in the years ended December
31, 1998 and 1997, respectively.
Net cash used in operating activities was $8,273,476 and $497,780 in
the years ended December 31, 1998 and 1997, respectively. Net income (loss) was
$2,492,229 and $(941,295) for the same periods, respectively.
Net cash used in investing activities was $4,860,356 and $3,380,651 in
the years ended December 31, 1998 and 1997, respectively. Net cash used in
investing activities included capital expenditures of $2,798,039 and $1,559,344
in these periods, respectively, primarily for computer and manufacturing
equipment.
Net cash provided by financing activities was $13,289,290 and
$4,198,713 in the years ended December 31, 1998 and 1997, respectively. Cash
flows from financing activities were primarily affected by the net proceeds from
issuance of common stock of $140,001 and $3,350,234 in these periods,
respectively resulting from option and warrant exercises during 1998 and 1997.
During the years ended December 31, 1998 and 1997 proceeds from the bank loan
were $13,149,289 and $872,062, 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. As of December 31, 1998, the Company had $837,618 of cash available for
its cash needs, compared to cash of $682,160 as of December 31, 1997.
On May 6, 1996, PTI opened a revolving line of credit at Key Bank of
New York. The line of credit is collateralized by the Company's inventory,
receivables and other assets, and guaranteed by the Company. As of December 31,
1998, the Company had $15,217,550 outstanding pursuant to such line of credit.
During 1998, the Company increased the availability on its line of credit from
$7,000,000 to $20,000,000.
Based on the Company's business, management anticipates that current
cash balances, together with the Company's line of credit and cash flow
generated from operations, would be sufficient to continue to fund existing
production, equipment requirements, marketing activities and research and
development, as well as the remainder of the Company's cash requirements, for
approximately the next 18 months.
The Company, has, however, entered into an agreement to acquire
substantially all of the net assets of Karlen Manufacturing Inc. for
approximately $17,750,000 in cash. This acquisition is expected to close during
the Company's second quarter and which will require refinancing of the Company's
current bank debt as well as new sources of debt and equity financing. See
"Description of Business -History."
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 $169,000 for the year ended December 31, 1998 and approximately
$119,000 for the year ended December 31, 1997. It is expected that the Company
will spend approximately $200,000 on research and development during the 1999
year.
Introduction of the Euro
On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies and a new currency called the "Euro". These countries
agreed to adopt the Euro as their common legal currency on that date. The Euro
trades on currency exchanges and is available for non-cash transactions. Until
January 2, 2002, the existing sovereign currencies will remain under legal
tender in these countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries. The company will evaluate the
impact the implementation of the Euro will have on its business operations and
no assurance can be given that the implementation of the Euro will not have
material affect on the Company's business, financial condition and results of
competitive position. In addition, the Company cannot accurately predict the
impact the Euro will have on currency exchange rates or the Company's currency
exchange risk.
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.
During 1998, the Company 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.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains, and losses)
in a full set of general purpose financial statements. At December 31, 1998,
adoption of SFAS No. 130 did not have a material effect on the Company's
financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and other Post-retirement Benefits", which standardizes the
disclosure requirements for pensions and other post-retirement benefits. SFAS
was adopted in 1998 and did not have a material effect on the Company's
financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The statement requires that an
entity recognize all derivatives as either assets or liabilities on the
statement of financial position and measure those instruments at fair value.
ITEM 7. Financial Statements.
Page
-------
Independent Public Accountants' Report 19
Consolidated Balance Sheet as of December 31, 1998 20
Consolidated Statements of Operations for the years
ended December 31, 1998 and 1997 21
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998 and 1997 22
Consolidated Statements of Cash Flows for the years 23
ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements 24-35
<PAGE>
<TABLE>
PART III
ITEM 8. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
<S> <C> <C> <C>
Executive
Officer or
Director
Name Age Position Since
----------------------- ---- ------------------------------------- ---------
Meredith W. Birrittella 32 Chairman, Director and Chief Executive 3/21/90
Officer
Anthony Costanzo 29 Chief Financial Officer 10/1/97
Myles Birrittella 35 Director 10/22/96
Robert Fuhrman 70 Director 12/12/96
Warren Schaeffer 41 Director, Secretary and President 3/1/94
of PTI
Gary J. Kocher 35 Director 10/21/97
</TABLE>
Meredith W. Birrittella. Mr. Birrittella, age 32, a co-founder of the
Company, has served as an officer and director since the Company's inception,
and is currently Chairman and C.E.O. of the Company.
Anthony Costanzo. Mr. Costanzo, age 29, became Chief Financial Officer
of the Company in October, 1997. Prior to becoming the CFO, he served as
Treasurer of the Company since February, 1995. Mr. Costanzo has been a Certified
Public Accountant since August 1993. Prior to joining PTI, Mr. Costanzo worked
in Public Accounting from 1991 to 1995.
Myles Birrittella. Mr. Myles Birrittella, age 35, 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 41, 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 PTI, Mr. Schaeffer was the
President and a director of Foam.
Robert Fuhrman. Mr. Fuhrman, age 70, 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."
Gary J. Kocher. Mr. Kocher, age 35, became a director of the Company in
1997. Mr. Kocher is a partner in the law firm of Preston, Gates & Ellis, LLP.
Mr. Kocher's practice includes a broad range of corporate finance and
security-related transactions with an emphasis on public and private offerings
of equity and debt and cross-border transactions.
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, each director's term in office has
expired and/or such director is serving an interim term until the election of
his successor. Officers are elected by and serve at the will of the Board of
Directors. No inside director receives any compensation for services as a
director. The only two committees of the Board of Directors are the Option
Committee and the Audit Committee, both consisting of Mr. Fuhrman and Mr. Myles
Birrittella. The Company has no executive, nominating, compensation or other
committees.
Meredith Birrittella and Myles Birrittella are brothers.
Beneficial Reporting Compliance
The following persons, each of whom was, at some time during the
Company's 1998 fiscal year, a director, officer or beneficial owner of more than
10 percent of any class of equity securities of the Company, failed to file on a
timely basis reports required by Section 16(a) of the Securities Exchange Act of
1934 during such year or prior years:
<TABLE>
<S> <C> <C>
Name of Number of Number of Transactions
Reporting Person Late Reports Not Filed on Timely Basis
------------------- ------------- -------------------------
Myles Birrittella 1 1
Robert Fuhrman 1 1
Warren Schaeffer 1 1
Martin Birrittella 2 3
Anthony Costanzo 1 1
Thomas Coleman 2 8
Gary J. Kocher 1 1
</TABLE>
ITEM 9. Executive Compensation - 1998 Stock Option Plan
<TABLE>
Summary Compensation Table
<S> <C> <C> <C> <C> <C>
Securities
Name and Underlying Other
Annual
Principal Position Year Salary Bonus Options Compensation
(1)
------------ ------------- ------------ ------------- ------------
Meredith W. Birritella 1998 $ 226,923 0 0 $ 2,580
Chief Executive Officer 1997 $ 161,539 0 25,000 $ 2,580
1996 $ 155,385 0 25,000 $ 2,424
Warren Schaeffer 1998 $ 216,923 0 0 $ 2,580
Secretary, and President 1997 $ 161,539 0 25,000 $ 2,580
of Operating Subsidiary 1996 $ 130,923 0 27,000 $ 2,424
Anthony Costanzo 1998 $ 106,174 $ 8,000 $ 2,580
50,000
Chief Financial Officer 1997 $ 73,154 $ 8,000 $ 2,580
15,000
1996 $ 60,462 $ 5,000 $ 2,424
10,000
</TABLE>
(1) Consists of dental and health insurance premiums and retirement plan
contributions.
Inside directors of the company receive no compensation for serving as
a director; however, the Company's outside directors will receive compensation
in the amount of $7,500 per annum. In addition, on the anniversary of each
outside director's appointment to the Board of Directors, the Company will grant
$2,500 options to purchase the Company's common stock to such direstors at
exercise prices equal to the closing market price of the Company's common stock
on such date.
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, Gary Kocher is serving a term that
expires in 1999, Warren Schaeffer and Robert Fuhrman are serving terms that
expire in 2000, and Myles Birrittella and Meredith Birrittella are serving terms
that expire in 2001. Officers are elected by and serve at the will of the Board
of Directors. No inside director receives any compensation for services as a
director. The only two committees of the Board of Directors are the Option
Committee and the Audit Committee, both consisting of Mr. Fuhrman and Mr. Myles
Birrittella. The Company has no executive, nominating, compensation or other
committees. Meredith Birrittella and Myles Birrittella are brothers.
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.
Stock Option Plans
The Shareholders of the Company have adopted the Company's 1998 Joint
Incentive and Non-Qualified Option Plan (the "1998 Plan") providing for the
grant of options to purchase up to 5000,000 shares of the Company's common
stock. The Company has a 1994 Joint Incentive and Non-Qualified Stock Option
Plan (the "1994 Plan"), but substantially all options available to be granted
under the 1994 Plan have been granted.
Under the Plans, options to purchase 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 2004, under the 1994
Plan and through 2008 under the 1998 Plan. 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").
The Plans allow 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. Myles Birrittella and
Robert Fuhrman, 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.
ITEM 10. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 1, 1999, 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.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
- ----------------------- -------------------- -------------------
Martin P. Birrittella
One Executive Boulevard
Yonkers, NY 10701 552,698 (1) 11.3%
Meredith W. Birrittella
One Executive Boulevard
Yonkers, NY 10701 900,198 (2) 18.1%
Myles Birrittella
One Executive Boulevard
Yonkers, NY 10701 3,910 (3) .1%
Robert Fuhrman
One Executive Boulevard
Yonkers, NY 10701 2,500 (3) .1%
Gary Kocher
One Executive Boulevard
Yonkers, NY 10701 2,500 (7) .1%
Thomas Coleman
One Executive Boulevard
Yonkers, NY 10701 451,125 (4) 9.2%
Warren Schaeffer
One Executive Boulevard
Yonkers, NY 10701 207,000 (5) 4.3%
Anthony Costanzo
One Executive Boulevard
Yonkers, NY 10701 32,000 (6) .5%
All directors and
officers as a group
(six persons) 1,142,608 (2)(3)(5)(6)(7) 22.4%
(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.
(2) Includes 88,320 shares of the Company's Common Stock, which are issuable in
respect of stock options at an exercise price of $4.50.
(3) Includes 2,500 shares of the Company's Common Stock which are issuable in
respect of stock options at an exercise price of $8.00 per share.
(4) Includes 50,000 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 58,880 shares of the Company's Common Stock which are issuable in respect of
stock options at an exercise price of $4.50 per share
(5) Includes 75,000 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, at an exercise price of $5.38 per share.
(6) Includes 10,000 shares of the Company's Common Stock which are
issuable in respect of stock options at an exercise price of $2.25 per share.
Includes 5,000 shares of the Company's Common Stock which are issuable in
respect of stock options at an exercise price of $5.375 per share. Includes
8,000 shares of the Company's Common Stock which are issuable in respect of
stock options at an exercise price of $8.00 per share. Includes 8,000 shares of
the Company's Common Stock which are issuable in respect of stock options at an
exercise price of $8.50 per share.
(7) Includes 2,500 shares of the Company's Common Stock which are
issuable in respect of stock options at an exercise price of $8.875.
ITEM 11. Certain Relationships and Related Transactions.
In September 1994, the shareholders of the Company approved a stock
option plan, which provided that Mr. Coleman and Mr. Meredith Birrittella would
receive options to purchase 25,000 shares of Common Stock of the Company at
$4.00 per share for each year of service as an executive officer of the Company
from 1994 through and including 1999. However, in May 1995 both Mr. Coleman,
then a director and executive officer of the Company, and Mr. Birrittella waived
all rights to receive these options. In consideration for such waiver, the
Company granted to Mr. Coleman options (such options not pursuant to the Plan)
to purchase 50,000 shares of Common Stock of the Company at $1.25 per share
(such options exercisable for five years from the date of vesting), 25,000 of
which options vested on May 1, 1995, and 25,000 of which vested on March 31,
1996. In consideration for Mr. Meredith Birrittella's waiver, the Company
granted to him options (pursuant to the Plan) to purchase 100,000 shares of
Common Stock of the Company at $1.25 per share (such options exercisable for
five years from the date of vesting), of which 25,000 vested on May 1, 1995,
25,000 vested on March 31, 1996, 25,000 vested on March 31, 1997, and the
remaining 25,000 vested on March 31, 1998. During 1998 Mr. Meredith W.
Birrittella exercised 100,000 stock options at $1.25 per share.
At December 31, 1998, Mr. Meredith Birrittella and Mr. Warren Schaeffer
owed the company approximately $507,000 and $535,000, respectively. Subsequent
to December 31, 1998, the loan to Mr. Schaeffer was fully prepaid. These loans
bear interest at 6% per annum. Repayment of these loans is expected during the
First Quarter 1999.
For the year ended December 31, 1998, the company recognized interest
income of approximately $56,000 from loans to Officers/Directors.
ITEM 12. 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
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 Non-competition 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
10.10 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
10.13 Merger 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.
21 Subsidiaries of registrant
(b) Reports on Form 8-K
During the fourth quarter of 1998 the Company did not file any Current Report on
Form 8-K.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PTI HOLDING INC.
By
Meredith W. Birrittella,
Chairman of the Board
Chief Executive Officer (authorized signatory)
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.
Meredith W. Birrittella Chief Executive Officer, March 31, 1999
Chairman and Director
Anthony Costanzo Chief Financial Officer March 31, 1999
Chief Accounting Officer
Myles Birrittella Director March 31, 1999
Robert Fuhrman Director March 31, 1999
Warren Schaeffer Director and Secretary March 31, 1999
Gary J. Kocher Director March 31, 1999
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PTI HOLDING INC.
By/s/ Meredith W. Birrittella
Meredith W. Birrittella,
Chairman of the Board
Chief Executive Officer (authorized signatory)
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Meredith W. Birrittella Chief Executive Officer, March 31, 1999
Meredith W. Birrittella Chairman and Director
/s/ Anthony Costanzo Chief Financial Officer March 31, 1999
Anthony Costanzo Chief Accounting Officer
/s/ Myles Birrittella Director March 31, 1999
Myles Birrittella
/s/ Robert Fuhrman Director March 31, 1999
Robert Fuhrman
/s/ Warren Schaeffer Director and Secretary March 31, 1999
Warren Schaeffer
/s/ Gary J. Kocher Director March 31, 1999
Gary J. Kocher
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
PTI Holding Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of PTI Holding Inc.
(a Delaware Corporation) and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PTI Holding Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for each of the two years in the period then ended in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
New York, New York
February 26, 1999
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 837,618
Accounts receivable, net of allowance for returns and doubtful collections of $500,000 11,169,056
Inventories 15,811,781
Deferred tax asset 266,000
Prepaid expenses and other current assets 1,670,826
------------
Total current assets 29,755,281
Deferred tax asset 218,400
Equipment and improvements, net 3,066,426
Intangible assets, net of accumulated amortization of $888,407 5,346,858
-------------
$ 38,386,965
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable, bank $ 15,217,550
Accounts payable and accrued expenses 4,217,361
-------------
Total current liabilities 19,434,911
-------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; authorized 10,000,000 shares, issued and outstanding
4,956,352 shares 49,564
Note receivable (58,322)
Capital in excess of par 16,283,217
Retained earnings 2,677,595
-------------
Total stockholders' equity 18,952,054
-------------
$ 38,386,965
=============
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<S> <C> <C>
1998 1997
---------- -----------
Net sales $60,522,011 $34,566,135
Cost of sales 43,283,112 23,751,353
---------- ----------
Gross profit 17,238,899 10,814,782
---------- ----------
Selling, general and administrative expenses:
SG&A - before stock-based compensation 11,872,695 6,073,809
Non-recurring stock-based compensation expense - 3,636,838
---------- ---------
11,872,695 9,710,647
---------- ---------
Income from operations 5,366,204 1,104,135
Interest expense, net of interest income of $102,386 (1998) and $98,579 (1997) 1,015,503 217,430
---------- ---------
Income before income taxes 4,350,701 886,705
---------- ---------
Income taxes(benefit):
Current 2,044,872 1,807,000
Deferred (186,400) 21,000
---------- ---------
1,858,472 1,828,000
---------- ---------
Net income (loss) $ 2,492,229 $ (941,295)
=========== ==========
Net income (loss) per share of common stock :
Basic $ 0.51 $ (0.23)
Diluted $ 0.49 $ (0.23)
Weighted average shares outstanding :
Basic 4,852,389 4,083,209
Diluted 5,087,387 4,083,209
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<S> <C> <C> <C> <C> <C> <C>
Note receivable
from exercise Total
Common stock Capital in of stock Retained stockholders'
Shares Amount excess of par options and earnings equity
warrants
----------- --------- ------------ ------------ ---------- -------------
Balance,
January 1, 1997 3,487,936 $ 34,879 $ 6,408,357 $ - $ 1,126,661 $ 7,569,897
Net (loss) - - - - (941,295) (941,295)
Issuance of common stock 1,308,570 13,086 9,736,458 (58,322) - 9,691,222
--------- --------- ----------- -------- --------- ------------
Balance,
December 31, 1997 4,796,506 47,965 16,144,815 (58,322) 185,366 16,319,824
Net income - - - - 2,492,229 2,492,229
Issuance of common stock 159,846 1,599 138,402 - - 140,001
--------- -------- ----------- --------- --------- -----------
Balance,
December 31, 1998 4,956,352 $ 49,564 $ 16,283,217 $ (58,322) $ 2,677,595 $ 18,952,054
========== ========= =========== ========= ========== ==========
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<S> <C> <C>
1998 1997
---------- -----------
Cash flows from operating activities:
Net income (loss) $ 2,492,229 $ (941,295)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Provision for returns and doubtful accounts 391,500 (87,406)
Depreciation and amortization 1,405,250 539,764
Amortization of intangible assets 234,020 196,513
Deferred income (benefit) tax (186,400) 21,000
Stock-based compensation - 3,636,838
(Increase) decrease in operating assets:
Accounts receivable (6,333,385) (933,737)
Inventories (7,939,424) (3,424,417)
Prepaid expenses and other current assets 182,258 88,846
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 1,537,475 1,411,002
Other current liabilities (56,999) (1,004,888)
----------- -----------
Net cash used in operating activities (8,273,476) (497,780)
=========== ===========
Cash flows from investing activities:
Cash payments as consideration for purchase of acquired product line (1,307,859) (1,855,289)
Loans to stockholders, net of repayments (754,458) 33,982
Purchase of equipment and improvements (2,798,039) (1,559,344)
----------- -----------
Net cash (used in) investing activities (4,860,356) (3,380,651)
=========== ===========
Cash flows from financing activities:
Payments of other current liabilities - (23,583)
Proceeds from issuance of common stock 140,001 3,350,234
Proceeds from bank loan, net 13,149,289 872,062
---------- ----------
Net cash provided by financing activities 13,289,290 4,198,713
========== ==========
Net increase in cash and cash equivalents 155,458 320,282
Cash and cash equivalents, beginning of year 682,160 361,878
---------- ----------
Cash and cash equivalents, end of year $ 837,618 $ 682,160
========== ==========
Supplemental disclosures:
Interest paid $ 1,026,712 $ 317,452
Income taxes paid 2,558,874 3,415,144
Non-cash investing and financing activities:
Acquisition of business:
Fair value of net assets acquired - 2,198,604
Resultant goodwill - 2,931,572
Common stock issued as partial consideration - 2,701,650
Conversion of preferred stock - 2,500
Receivable from exercise of common stock warrants - 58,322
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
Principles of consolidation:
The consolidated financial statements include PTI Holding Inc.,
(a Delaware Corporation) and its five wholly-owned subsidiaries:
Protective Technologies International Inc. ("PTI"), Flents Products Co.,
Inc. ("Flents") a subsidiary acquired in 1997, Zacko Sports, Inc.
("Zacko"), Fu-Chung Manufacturing Inc. ("FCM"), Alpine Financial Inc.
("Alpine"). PTI Holding Inc. and its subsidiaries are collectively
referred to as the Company. Significant intercompany balances and
transactions are eliminated in consolidation.
Nature of operations:
PTI and Zacko design, manufacture and market bicycle helmets, bicycles
and bicycle accessories for sale principally to domestic retailers.
Flents designs, manufactures and markets earplugs and other safety and
medical supplies such as an eye drop delivery system, styptic devices,
and air filter masks. FCM and Alpine were formed in 1998, and are
presently inactive.
Revenue recognition:
Sales are recognized when products are shipped with payment due
in the normal course of business.
Cash and cash equivalents:
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The carrying
amount of cash and cash equivalents approximates fair value.
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.
Depreciation:
Equipment and leasehold 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 amortized using the straight-line
method over the related lease term or the estimated useful lives of the
assets, whichever is shorter.
Intangible assets:
Goodwill, covenants not to compete, and trademarks are amortized
using the straight-line method over 35 years, 5 years and 17 years,
respectively.
It is the Company's policy to review the carrying value of unamortized
goodwill, and when such review indicates impairment of value, goodwill
would be written-down.
Impairment of long-lived assets:
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
full recoverability is questionable. Management evaluates the
recoverability of its intangible assets and other long-lived assets and
several factors are used in the valuation including, but not limited to,
management's plans for future operations, recent operating results and
projected cash flows.
Income taxes:
Income taxes are determined under the asset and liability method.
Deferred tax assets and liabilities are determined based upon
differences between the financial reporting and the tax basis of assets
and liabilities.
Research and development costs:
Research and development costs included in selling, general and
administrative expenses are charged to operations as incurred and
amounted to approximately $169,000 and $119,000 for the years ended
December 31, 1998 and 1997, respectively.
Earnings per share of common stock:
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." In
accordance with SFAS No. 128, net earnings per common share amounts
("basic EPS") are computed by dividing net income or loss by the
weighted average number of common shares outstanding excluding any
potential dilution. Net earnings per common share amounts assuming
dilution ("diluted EPS") are computed by reflecting potential dilution
from the exercise of stock options and warrants.
A reconciliation between the numerators and denominators of the basic
and diluted EPS computations for net income (loss) is as follows:
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1998 Year Ended December 31, 1997
Per share Per share
Net income Shares amounts Net loss Shares amounts
--------------- ------------- ------------ ------------- ------------ -------------
Basic EPS $2,492,229 4,852,389 $0.51 ($941,295) 4,083,209 ($0.23)
Dilutive stock
options and warrants 234,998 -
Diluted EPS $2,492,229 5,087,387 $0.49 ($941,295) 4,083,209 ($0.23)
</TABLE>
The potentially dilutive shares that were not included in the
computation of diluted earnings per share because to do so would be
antidilutive consist of stock options and warrants as follows:
Options/Warrants
Year ended December 31, 1998 174,000
Year ended December 31, 1997 837,283
Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation
expense for stock options issued to employees is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.
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.
Reclassification:
For comparability, certain 1997 amounts have been reclassified where
appropriate to conform to the financial statement presentation used in
1998.
2. Business combination:
On August 5, 1997, the Company acquired Flents Products Co., Inc., a New
York corporation ("Flents-New York") and concurrently merged Flents-New
York into Flents, the Company's wholly-owned subsidiary organized for
this purpose. After August 5, 1997, Flents-New York had no separate or
independent existence, having merged into Flents. For purposes of
accounting, the acquisition was effective as of the opening of business
on June 1, 1997, and has been accounted for as a purchase.
In exchange for all the outstanding shares of common stock of Flents-New
York, the Company paid $2,135,435 to the shareholders of Flents-New
York, and issued to them: 270,165 units consisting of 270,165 shares of
the Company's common stock and 270,165 convertible value rights
("CVRs"). For purposes of the business combination, the units were
valued at $10 per unit. Each CVR entitled the original holder to up to
$4.00 of additional common stock of the Company to the extent that the
market value of the Company's common stock was less than $10.00 per
share on the one-year anniversary of the closing (August 5, 1998). On
August 5, 1998 the average value (for the preceding 20 trading days) of
the Company's common stock was $8.3125. Accordingly, an additional
54,846 shares of the Company's common stock were issued to the original
shareholders of Flents-New York.
The pro-forma unaudited consolidated results of operations of the
Company for the year ended December 31, 1997 as if the business
combination had been completed on January 1, 1997 are as follows:
Net sales $37,351,000
Income from operations 1,105,000
Net (loss) (938,000)
Net (loss) income per share of common stock:
Basic (0.23)
Diluted (0.23)
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. The
fair market value of the assets acquired was $481,842.
3. Inventories:
Inventories are summarized as follows:
Raw materials and work-in-progress $ 3,973,179
Finished goods 11,838,602
-----------------
$ 15,811,781
=================
4. Equipment and improvements:
Equipment and improvements consist of the following:
Production equipment $ 2,236,303
Office equipment 2,713,067
Leasehold improvements 529,321
-----------------
5,478,691
Less accumulated depreciation 2,412,265
-----------------
-----------------
$ 3,066,426
=================
During the year ended December 31, 1998, the Company capitalized
$1,628,543 with respect to the implementation of the SAP R/3 accounting system.
This amount was primarily composed of software and configuration costs.
5. Loan payable, bank
Under the terms of a line of credit agreement with a bank, the Company
may borrow up to $20,000,000 based on a percentage of certain accounts
receivable, inventories and equipment as defined in the agreement. All
borrowings are due on demand, and are collateralized by substantially
all of the Company's assets.
The line of credit agreement requires the Company to comply with certain
affirmative covenants, including the maintenance of a minimum current
ratio, minimum quarterly interest ratios and a maximum leverage ratio,
all as defined in the agreement. In addition, certain negative covenants
(which are all defined in the agreement) call for the Company to obtain
the bank's consent prior to business acquisitions, debt guarantees,
sales or transfers of accounts receivable, loans, total annual capital
expenditures in excess of $300,000 (which was waived for 1998), dividend
declarations or payments, distributions of assets, incurring certain
debt, and permitting liens against assets.
The carrying amount of the bank loan payable ($15,217,550 at December
31, 1998) approximates fair value due to the debt instrument's market
interest rate (7.75% per annum at December 31, 1998).
6. Commitments:
Employment contracts:
The Company has a long-term employment agreement with a key employee and
two consulting agreements with consultants. The employment agreement
provides for a minimum annual compensation plus certain fringe benefits.
The table below shows the aggregate minimum compensation required under
the employment and consulting agreements:
1999 $172,000
2000 172,000
2001 142,000
2002 57,000
2003 12,000
Thereafter 41,000
Leasing arrangements:
The Company leases office space, manufacturing and warehouse facilities
under operating leases which expire at various dates through the year
2004. In addition to minimum rent, most of the leases require escalation
payments based on operating expenses and/or real estate taxes. One lease
provides the Company with the option to lease additional space.
Minimum payments for operating leases having initial or remaining
non-cancelable terms in excess of one year are as follows:
1999 $899,000
2000 887,000
2001 330,000
2002 299,000
2003 304,000
Thereafter 354,000
---------------
$3,073,000
===============
Rent expense for the years ended December 31, 1998 and 1997 totaled
approximately $1,123,000 and $575,000, respectively.
Retirement plan:
Effective January 1, 1998, the Company began sponsoring a defined
contribution plan. The plan covers all eligible employees and provides
for contributions of up to 3% of salary plus an additional discretionary
percentage to be determined annually by resolution of the Board of
Directors. Employer contribution for 1998 totaled $33,339.
7. License agreements:
The Company has entered into various licensing agreements requiring
royalty payments based on specified percentages of product sales. The
future minimum guaranteed royalty payments are $339,000 in 1999 and
$75,000 in 2000. Royalty expenses under these licensing agreements
totaled $1,319,000 in 1998 and $468,000 in 1997.
8. 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 such matters are without merit or of such
kind, or involve such amounts, as would not have a material effect on
the financial position and results of operations of the Company if
concluded unfavorably.
In 1998, certain product liability claims were asserted against the
Company. While the outcome of such claims cannot be determined, it
appears the Company's product liability insurance is adequate to cover
any losses that may arise from such claims.
9. Series A preferred stock:
The Company's Series A preferred stock which was issued on July 31, 1992
was converted to common stock during 1997. The Series A preferred stock
bore stock issuance rights entitling the holder thereof to the issuance
of 10 shares of common stock, up to a maximum aggregate amount of 30
shares of common stock, for each share of Series A preferred stock for
each of the following conditions that are met: The Company has net
income of $750,000 during any of the three complete fiscal years
immediately after the date of the public offering (December 1992); the
Company has gross revenue of $20,000,000 during any of the five complete
fiscal years after the date of the public offering; the Company has
gross revenue of $35,000,000 during any of the five complete fiscal
years after the date of the public offering; and a cumulative total of
50% of the warrants issued in the public offering have been exercised.
For the year ended December 31, 1995, the Company had net income in
excess of $750,000. Accordingly, the Series A preferred stockholders
were entitled to 10 shares of common stock for each Series A preferred
share owned. However, three preferred stockholders 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 stockholders 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), were outstanding and exercisable as of
December 31, 1998, and expire in January, 2006. The three preferred
stockholders are also major common stockholders of the Company. The
remaining 14,480 common shares were issued to the other preferred
stockholders in 1996.
During the year ended December 31, 1997, the Company's gross revenues
exceeded the $20,000,000 threshold and a cumulative total of 402,390
public warrants (87% of the public warrants) were exercised. As a result
of the Company's meeting these two conditions, an aggregate of 500,000
shares of common stock were issued to holders of the Company's Series A
preferred stock. Approximately 95% of the shares of common stock issued
were issued to either present or former directors, officers, employees
and consultants of the Company. Accordingly, for the year ended December
31, 1997, the Company provided for stock-based compensation of
$3,636,838, resulting from meeting those two additional preferred stock
conditions. The stock issuance for the remaining 5% of the preferred
stock, held by individuals not otherwise involved with the Company, has
no effect on results of operations. The accounting for the $3,636,838
stock-based compensation charge has no effect on the Company's
consolidated net worth or cash flows.
10. 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. In addition, in January 1993, the underwriters exercised
the overallotment provision of the underwriting agreement to purchase an
additional 60,000 units. During the year ended December 31, 1997, an
aggregate of 402,390 warrants were exercised resulting in gross proceeds
of $3,017,925. The remaining 57,610 warrants were cancelled.
During October 1992, the Company issued warrants to purchase 63,750
shares of common stock at $1.65 per share of which 9,000 warrants were
exercised prior to January 1, 1996. The warrants were issued pursuant to
a borrowing that has since been repaid. During the year ended December
31, 1997, 53,250 of these warrants were exercised resulting in total
proceeds of $87,863. The remaining 1,500 warrants expired.
During November and December 1994, the Company completed a private
placement of a total of 318,956 shares of common stock. In connection
with the private placement, the underwriter received warrants to
purchase 62,500 shares of common stock at $3.75 per share and warrants
to purchase 14,765 shares of common stock at $3.95 per share at any time
during the three-year period commencing in November 1994. These warrants
were exercised during the year ended December 31, 1997 resulting in
proceeds of $233,750 and a note receivable of $58,322.
11. Stock options:
The Company has granted stock options to employees, directors and
consultants pursuant to individual agreements or to its incentive and
non-qualified stock option plan. All options granted are for exercise
prices equal to the quoted market price at date of grant.
The total amount of shares of common stock which may be issued upon
exercise of options granted under the incentive and non-qualified stock
option plan is limited to 350,000 shares. Any options granted, may be
exercisable for a period determined in each case by the Board of
Directors. Except under certain circumstances, such period cannot exceed
ten years from the date of grant. Options may not be granted after the
plan terminates in 2004. However, unexpired options granted will
continue until they lapse or terminate by their own terms and
conditions. Any options granted to employees will expire if not
exercised within three months after termination of employment. Subject
to certain limitations, options may be granted to employees, directors,
consultants, and others who the Board of Directors believes have
contributed or will contribute to the Company.
The table below summarizes plan and non-plan stock option activity for
the past two years:
Number of Weighted average
Shares exercise price
---------------- -----------------
Outstanding, January 1, 1997 $3.57
658,820
Granted
111,000 9.69
Exercised
(5,500) 4.67
Canceled or expired (18,300)
7.88
Outstanding, December 31, 1997
746,020 4.37
Granted
63,500 7.74
Exercised
(105,000) 1.33
Cancelled or expired
(35,000) 10.21
Outstanding, December 31, 1998
670,020 4.86
Exercisable, December 31, 1998
611,520 4.60
The weighted average grant date fair value of options granted during the
year ended December 31, 1998 is $2.21 per option.
Options outstanding and exercisable at December 31, 1998 and related
weighted average exercise price and life information follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options outstanding Options exercisable Remaining
---------------------------- ---------------------------
Grant date Shares price Shares price life (years)
------------------- ----------- --------- ------------ ---------- ---------------
1993-1994 17,500 $4.11 17,500 $4.11 2
1995 160,000 $1.31 160,000 $1.31 1
1996 351,020 $5.03 351,020 $5.03 3
1997 78,000 $9.20 78,000 $9.20 3
1998 63,500 $7.74 5,000 $10.00 4
</TABLE>
The Company follows the disclosure-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for
the stock options. Had compensation cost for the Company's stock options
been determined based on the fair value at the grant date for options
granted in 1998 and 1997 consistent with the provisions of SFAS No. 123,
the Company's net income and (loss) earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<S> <C> <C>
1998 1997
------------------ ----------------
Net income (loss), as reported $2,492,229 $(941,295)
Net income (loss), pro forma 2,324,486 (276,706)
Basic earnings (loss) per share, as reported 0.51 (0.23)
Basic earnings (loss) per share, pro forma 0.48 (0.23)
Diluted earnings (loss) per share, as reported 0.49 (0.30)
Diluted earnings (loss) per share, pro forma 0.46 (0.30)
</TABLE>
The pro forma effect on net income (loss) for 1998 and 1997 does not take into
consideration pro forma compensation expense related to grants made prior to
1995.
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
Expected life (years) 5
Interest rate 7.10%
Volatility - 1998 38.7%
- 1997 54.7%
Dividend yield 0%
12. Segment information:
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 adopted SFAS
No. 131 for the year ended December 31, 1998.
The information for 1997 has been restated from the prior year's
presentation in order to conform to the 1998 presentation.
The Company has two reportable segments: PTI Sports and Flents. PTI
Sports and Flents have separate management teams and infrastructures
that offer different products.
The PTI Sports segment designs, manufactures and distributes bicycle
helmets, bicycles and bicycle accessories for sale, principally to major
retailers in the United States and Canada.
The Flents segment designs, manufactures and markets earplugs and other
safety and medical supplies suchas an eye drop delivery system, styptic
devices, and air filter masks. Customers include major department
stores, drug chains and supermarket retailers in the United States.
The accounting policies of the segments are the same as those described
in the summary of the significant accounting policies. The Company
evaluates performance based on operating earnings of the respective
segments. Intersegment sales are not significant. Intersegment charges
for production, SG&A, and interest costs are determined on a pro rata
basis.
Two major retail chains accounted for approximately 51% and 26% of net
sales in 1998 and 71% and 15% of net sales in 1997. As of December 31,
1998, accounts receivable included approximately $4,365,900 and
$3,898,500, respectively, due from these two customers. The PTI sports
segment reports the sales of the larger of the two major customers, and
both segments report the sales of the second major customer. Although
other major retailers are customers, a loss of one or both of these two
established major customers would cause a significant loss of sales and
affect operating results adversely.
<TABLE>
The following table presents segment information for 1998 and 1997.
<S> <C> <C> <C> <C>
1998 PTI Sports Flents Other Total
--------------- ------------------ ----------------- --------------- ------------------
Net sales $ 51,834,000 $ 8,688,000 $ - $ 60,522,000
Gross profit -
13,039,000 4,200,000 17,239,000
Operating earnings (252,000)
3,718,000 885,000 5,366,000
Depreciation and amortization
1,126,000 379,000 - 1,639,000
Interest revenue
90,000 7,000 5,000 102,000
Interest expense
715,000 256,000 147,000 1,118,000
Income tax expense (benefit) (108,000) 1,858,000
1,588,000 378,000
Total assets
29,812,000 7,995,000 580,000 38,387,000
Capital expenditures
2,579,000 219,000 - 2,798,000
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1997 PTI Sports Flents Other Total
--------------- ------------------ ----------------- --------------- ------------------
Net sales $ 30,851,000 $ 3,715,000 $ - $ 34,566,000
Gross profit -
9,202,000 1,613,000 10,815,000
Operating earnings
748,000 406,000 (50,000) 1,104,000
Depreciation and amortization
649,000 87,000 - 736,000
Interest revenue
81,000 11,000 6,000 98,000
Interest expense - -
316,000 316,000
Income tax expense (benefit) 1,828,000
1,056,000 863,000 (91,063)
Total assets
15,049,000 5,077,000 1,001,000 21,127,000
Capital expenditures -
1,559,000 - 1,559,000
</TABLE>
Financial information relating to the Company's operations by geographic
area is presented below.
Net sales 1998 1997
------------------- ------------------
United States $ 58,075,000 $ 33,731,000
Canada 2,284,000 725,000
Other 163,000 110,000
------------------- ------------------
$ 60,522,000 $ 34,566,000
=================== =====================
Significantly all of the Company's long-lived assets are located in the
United States.
13. Income taxes:
The income tax effects of temporary differences that give rise to
significant portions of the deferred tax assets are presented as
follows:
Accounts receivable due to the allowance
for returns and doubtful accounts $ 200,000
Inventories due to additional costs inventoried for
tax purposes and inventory reserves 66,000
Equipment and improvements due to depreciation
and amortization 84,000
Intangible assets due to differences in amortization
126,000
Accounts payable and accrued expenses due to
accrued bonuses and severance costs 8,000
Other -
--------------
Total deferred tax assets $ 484,000
==============
The significant components of the income tax provision attributable to
continuing operations for the years ended December 31, 1998 and 1997 are
presented below:
<TABLE>
<S> <C> <C>
1998 1997
------------------- -------------------
Current income tax expense $ 2,069,000 $ 1,832,000
Deferred income tax expense (benefits) (exclusive of the
effects of the other components listed below) (186,000) 21,000
Tax credits (25,000)
(25,000)
----------------- -------------------
Income taxes $ 1,858,000 $ 1,828,000
=================== ===================
</TABLE>
The difference between the actual income tax provision and the income
tax provision computed by applying the statutory federal income tax rate
to income from operations for the years ended December 31, 1998 and 1997
is attributable to the following:
<PAGE>
<TABLE>
<S> <C> <C>
1998 1997
----------------- ------------------
Income tax provision at 34% $1,479,000 $ 302,000
State income taxes net of federal income tax 350,000 307,000
Intangible assets and amortizations 42,000 30,000
Tax credits (25,000) (11,000)
Stock-based compensation 0 1,237,000
Other 12,000 (37,000)
----------------- ------------------
Actual income tax provison $1,858,000 $1,828,000
================= ==================
The federal and state components of the income tax provisions are as
follows:
1998 1997
----------------- ----------------
Federal $ 1,328,000 $ 1,423,000
State 530,000
405,000
----------------- ----------------
$ 1,858,000 $ 1,828,000
================= ================
</TABLE>
14. Related parties:
At December 31, 1998, two officers/directors owed the Company
approximately $507,000 and $535,000, respectively pursuant to loans.
These amounts are included in the prepaid and other current assets. These
loans bear interest of 6% per annum.
Repayment of these loans is expected during the First Quarter 1999.
For the years ended December 31, 1998 and 1997, the Company
recognized interest income of approximately $ 26,000 and $30,000 from to
loans officers/directors.
15. Subsequent events:
On January 8, 1999, Flents entered into an Asset Purchase
Agreement with Karlen Manufacturing, Inc. ("Karlen") and certain
shareholders providing for Flents to acquire substantially all of the
net assets of Karlen for approximately $17,750,000 in cash. Karlen,
which is based in the United States, is in the business of
manufacturing, marketing and selling, personal health and beauty care
items, including some products similar to those sold by Flents.
In connection with the Karlen Agreement, the Company has paid
$225,000 in non-refundable deposits toward the purchase price. The
closing is expected during the Second Quarter 1999.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 837,618
<SECURITIES> 0
<RECEIVABLES> 11,669,056
<ALLOWANCES> 500,000
<INVENTORY> 15,811,781
<CURRENT-ASSETS> 29,755,281
<PP&E> 3,954,833
<DEPRECIATION> 888,407
<TOTAL-ASSETS> 38,386,965
<CURRENT-LIABILITIES> 19,434,911
<BONDS> 0
0
0
<COMMON> 49,564
<OTHER-SE> 18,904,490
<TOTAL-LIABILITY-AND-EQUITY> 38,386,965
<SALES> 60,522,011
<TOTAL-REVENUES> 60,522,011
<CGS> 43,283,112
<TOTAL-COSTS> 43,283,112
<OTHER-EXPENSES> 11,872,695
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,015,503
<INCOME-PRETAX> 4,350,701
<INCOME-TAX> 1,858,472
<INCOME-CONTINUING> 4,350,701
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,492,229
<EPS-PRIMARY> .51
<EPS-DILUTED> .49
</TABLE>
