FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to ____ - _____.
Commission File Number : 1-11586
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PTI HOLDING INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3590980
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(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
c/o 15 East North Street, Dover, DE 19901
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(Address of principal executive offices) (Zip Code)
(302) 678-0855
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(Issuer's Telephone Number, Including Area Code)
Indicate by check marker whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 the past 90 days. X Yes ___ No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS :
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. ___ Yes ___ No
APPLICABLE ONLY TO CORPORATE ISSUERS :
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of November 15, 1999,
4,956,352 shares of the issuer's common equity were outstanding.
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Page
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 12
Consolidated Statements of Operations for the three and nine months
ended September 30, 1999 and 1998 13
Consolidated Statements of Cash Flows for the nine months 14
ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements 15 - 19
ITEM 2. Management's Discussion and Analysis
Statements in this Quarterly Report on Form 10-Q 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. (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-NY"), 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 ("Flents"), pursuant to an Agreement and Plan of Merger among the
Company, Flents and Flents-NY. 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. Flents delivered at closing an aggregate merger consideration
of approximately $4.8 million. On October 5, 1998, in accordance with certain
provisions of the Flents transaction, 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.
On April 14, 1999, Flents consummated an Asset Purchase Agreement with
Karlen Manufacturing, Inc. ("Karlen") and certain shareholders providing for the
acquisition of substantially all of the operating net assets (other than cash)
of Karlen for approximately $17,750,000, excluding the acquisition costs. The
Karlen operation, 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 has financed the acquisition of Karlen and its working capital needs
through a variety of sources.
Flents has entered into a Revolving Credit, Term Loan and Security
Agreement with PNC Bank providing for a three-year term loan of $4,000,000 with
interest at the bank's base rate plus .75% and a line of credit of $6,000,000
with interest at the bank's base rate plus .25%. Flents pledged all of its
assets as security for this financing.
Flents has also borrowed $8,000,000 from The 1818 Mezzanine Fund (the
"Fund"), an affiliate of Brown Brothers Harriman and Co. The loan is due in its
entirety in six years and provides for interest at 12% per year. 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 exercise 22% of the
outstanding shares of common stock of Flents.
Flents has also issued, for $1,800,000, shares of its common stock that
constitutes 18% of Flents' common stock The purchasers are two individuals, both
of whom are directors and officers of the Company. A fairness opinion has been
obtained to support the purchase price paid by these two directors.
In addition, the Company has contributed $1,000,000 in cash to Flents'
capital, lent an additional $1,000,000 to Flents and assumed a three-year
promissory note representing part of the purchase price to Karlen in the amount
of $1,000,000 with interest at 12% per year. The Company has also guaranteed
repayment of Flents' loans from PNC Bank.
After the sale of shares to the two directors and exercise of the Fund's
warrant, the Company will 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 has entered into a Revolving
Credit, Term Loan and Security Agreement with PNC Bank providing for a
three-year term loan of $3,000,000 with interest at the bank's base rate plus
.75% and a line of credit of $22,000,000 with interest at the bank's base rate
plus .25% interest. Upon the closing of such financing, the Company has repaid
its previous outstanding bank financing in full. PTI pledged all of its assets
as security for this financing. The company has also guaranteed repayment of
PTI's loans from PNC Bank.
Three Months ended September 30,1999 as compared to the
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Three Months ended September 30,1998
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The Company's net sales were $14,517,252 during the three months ended
September 30, 1999, an increase of 12% from net sales of $12,917,533 for the
same period in 1998. The 12% sales increase from 1998 to 1999 resulted
predominantly from an increase in sales of the Flents subsidiary. Sales for the
third quarter ended September 30, 1999 from Flents were $5,050,803 compared to
sales of $2,610,883 for the same period in 1998. The increase primarily results
from sales from the acquisition of Karlen in April 1999.
The cost of sales for the quarter ended September 30, 1999 was
$9,900,316 (resulting in a gross profit margin of 32%), compared to the
Company's cost of sales for the quarter ended September 30, 1998 of $9,535,984
(resulting in a gross profit margin of 26%). Flents' gross profit margin
contribution approximated 41% in 1999 and 47% in 1998. PTI's gross margin
increased due to sales of higher margined items during the quarter.
Selling, general and administrative expenses for the quarter ended
September 30, 1999 were $3,871,090 compared to selling, general and
administrative expenses of $2,784,640 for the quarter ended September 30, 1998.
SG&A expenses, as a percentage of sales were 27% and 22% for the quarters ended
September 30, 1999 and 1998, respectively. The increased selling, general and
administrative spending was primarily due to the higher costs associated with
the expansion of the helmet, bicycle and bicycle accessory business, coupled
with an increased percentage of sales of licensed products, the acquisition of
Karlen, installation of new systems and the higher costs for human resources.
The Company had a net income (after the minority interest deduction for
the 40% outside ownership in Flents) of $29,740 for the quarter ended September
30, 1999 compared to the Company's net income for the quarter ended September
30, 1998 of $100,689.
Nine Months ended September 30, 1999 as compared to the
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Nine Months ended September 30, 1998
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The Company's net sales were $52,407,307 during the nine months ended
September 30, 1999, an increase of 19% from net sales of $44,060,744 for the
same period in 1998. The 19% sales increase from 1998 to 1999 resulted
predominantly from an increase in sales of the Flents subsidiary. Sales for the
nine months ended September 30, 1999 from Flents were $12,179,768 compared to
sales of $6,654,788 for the same period in 1998. The increase primarily results
from sales from the acquisition of Comfees in May 1998 and Karlen in April 1999.
The cost of sales for the nine months ended September 30, 1999 was
$37,607,359 (resulting in a gross profit margin of 28%), compared to the
Company's cost of sales for the nine months ended September 30, 1998 of
$3,091,396 (resulting in a gross profit margin of 30%). Flents' gross profit
margin contribution approximated 45% in 1999 and 48% in 1998, the 2% decrease in
the consolidated gross profit margin is primarily related to the following:
o An increase in bicycle sales in 1999, a lower margin product line.
o An increase in the reserves for discounts, allowances, and bad debts for
customers who have recently filed for bankruptcy o The closing out of
competitors' inventory bought back to secure future sales and relationships with
future customers o Higher manufacturing costs associated with new safety
standards implemented by the Company in 1999
Selling, general and administrative expenses for the nine months ended
September 30, 1999 were $11,604,232 compared to selling, general and
administrative expenses of $8,402,243 for the nine months ended September 30,
1998. SG&A expenses, as a percentage of sales were 22% and 19% for the nine
months ended September 30, 1999 and 1998, respectively. The increased selling,
general and administrative spending in the first nine months of 1999 was
primarily due to the higher costs associated with the expansion of the helmet,
bicycle and bicycle accessory business, coupled with an increased percentage of
sales of licensed products, the acquisition of Karlen, installation of new
systems and the higher costs for human resources.
The Company had a net income (after the minority interest deduction for
the 40% outside ownership in Flents Products) of $764,365 for the nine months
ended September 30, 1999 compared to the Company's net income for the nine
months ended September 30, 1998 of $2,349,198.
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
$530,000, through internal cash flow, through the issuance of common shares
representing 18% of Flents for $1,800,000 in April 1999 and through the
Company's credit facilities described elsewhere in "Management's Discussion and
Analysis" 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 September 30, 1999 was $10,953,923 as
compared to $10,320,370 at December 31, 1998.
The cash flows of the Company have fluctuated due to the impact of net
income, 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 (decreased) increased by $(601,344) and $112,100 in the nine months ended
September 30, 1999 and 1998, respectively.
Net cash provided by (used in) operating activities was $5,464,203 and
$(10,776,445) in the nine months ended September 30, 1999 and 1998,
respectively. Net income was $764,365 and $2,349,198 for the same periods,
respectively.
Net cash used in investing activities was $18,391,036 and $5,084,533 in
the nine months ended September 30, 1999 and 1998, respectively. Net cash used
in investing activities included intangible assets acquired pertaining to the
Karlen and Comfees acquisitions of $17,408,486 and $1,703,809 respectfully, plus
capital expenditures of $323,004 and $1,916,173 in these periods, respectively,
primarily for computer and manufacturing equipment.
Net cash provided by financing activities was $12,325,489 and
$15,973,078 in the nine months ended September 30, 1999 and 1998, respectively.
During the nine months ended September 30, 1999 and 1998 proceeds from the bank
and other loans were $10,521,989 and $15,848,077, 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 September 30, 1999, the Company had $236,274 of cash available
for its cash needs, compared to cash of $837,618 as of September 30, 1998.
On May 6, 1996, PTI opened a revolving line of credit at Key Bank of
New York. The line of credit which was repaid on April 14, 1999, was
collateralized by the Company's inventory, receivables and other assets, and
guaranteed by the Company.
On April 14, 1999, the Company negotiated new financing agreements with
PNC Business Credit. Under the terms of the new financing agreement, PNC
Business Credit has issued separate financing agreements for PTI and Flents.
Each company now has a line of credit collateralized by such company's
inventory, receivables and other assets, and guaranteed by the Company as well
as a separate term loan. PTI has available on its line of credit up to
$22,000,000, and has a term loan of $3,000,000; Flents has the availability on
its line of credit up to $6,000,000 and a term loan of $4,000,000. Each term
loan is for three years and bears interest of the bank's base rate plus .75%.
The lines of credit for each bear interest at the bank's base rate plus .25%. At
the closing of these financing agreements, the balance owed to Key Bank,
pursuant to the line of credit with Key Bank, was fully repaid and the Karlen
asset acquisition was completed.
Flents also entered into, with a subordinated lender, a Securities
Purchase Agreement by which the lender advanced $8,000,000 to Flents and
acquired (1) detachable warrants (the "Flents warrants") exercisable to purchase
22 shares of common stock of Flents, par value $.01 per share, which would
constitute upon exercise 22% of the issued and outstanding common stock of
Flents on a fully diluted basis, and (2) an $8,000,000 promissory note with an
interest rate of 12%. The Flents warrants are exercisable for a nominal purchase
price until April 14, 2009. The promissory note is payable interest only for six
years and is due in full at maturity in six years.
Pursuant on a fully diluted basis to an Investment Agreement by and
among the Company and two of the Company's officers/directors, Flents issued an
aggregate of 18% of its common stock of Flents, for consideration of $1,800,000.
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'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 $88,000 for the nine months ended September 30, 1999 and
approximately $130,000 for the nine months ended September 30, 1998. It is
expected that the Company will spend approximately $200,000 on research and
development during the 1999 year.
Introduction of the Euro
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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 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 that the Euro will have on its business operations,
and no assurance can be given that the implementation of the Euro will not have
a material affect on the Company's business, financial position and results of
operational, and cash flows. 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
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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.
The year 2000 issue is expected to affect the systems of various
entities with which the Company interacts, including suppliers and vendors.
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.
Recently Issued Accounting Standards
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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 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risks and Sensitivity Analysis
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The Company is exposed to various market risks, including changes in interest
rates. This analysis presents the hypothetical loss in earnings, cash flows and
fair values of the financial instruments which are held by the Company at
September 30, 1999, and are sensitive to the above market risks. As of September
30, 1999, the financial instruments subject to this risk were the bank loans
payable outstanding at September 30, 1999 with interest at market rate. See
discussion of refinancing in the notes to the consolidated financial statements.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.
In the first quarter of 1999, 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 first six months of the Company's
1999 fiscal year to a vote of security-holders.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Registrant's Articles of Incorporation, as amended, incorporated by
reference to the like numbered exhibit in the Registrant's Registration
Statement on Form SB-2 under the Securities Act of 1933, as amended, File
No. 33-53466
3.2 Registrant's by-laws, incorporated by reference to the like numbered
exhibit in the Registrant's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-53466
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 Non-competition 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
10.10Line 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.
`
10.14Asset Purchase Agreement dated January 8, 1999, by and among Flents
Products Co., Inc., Karlen Manufacturing, Inc., and the shareholders of
Karlen Manufacturing, Inc., incorporated by reference to exhibit number 1
in the Registrant's Current Report in Form 8-K dated April 14, 1999 under
the Securities Exchange Act of 1934, as amended.
10.15Purchase Money Promissory Note made payable to Karlen Manufacturing, Inc.
dated April 14, 1999, incorporated by reference to exhibit number 2 in the
Registrant's Current Report in Form 8-K dated April 14, 1999 under the
Securities Exchange Act of 1934, as amended.
10.16Revolving Credit, Term Loan and Security Agreement dated April 14, 1999
between Flents Products Co., Inc., and PNC Bank, National Association,
incorporated by reference to exhibit number 3 in the Registrant's Current
Report in Form 8-K dated April 14, 1999 under the Securities Exchange Act
of 1934, as amended.
10.17Revolving Credit, Term Loan and Security Agreement dated April 14, 1999 by
and among Protective Technologies International Inc., Zacko Sports Inc. and
PNC Bank, National Association, incorporated by reference to exhibit number
4 in the Registrant's Current Report in Form 8-K dated April 14, 1999 under
the Securities Exchange Act of 1934, as amended.
10.18Securities Purchase Agreement dated April 14, 1999 between Flents Products
Co., Inc. and The 1818 Mezzanine Fund, LP, incorporated by reference to
exhibit number 5 in the Registrant's Current Report in Form 8-K dated April
14, 1999 under the Securities Exchange Act of 1934, as amended.
10.19Investment Agreement dated April 14, 1999 by and among Meredith
Birrittella, Warren Schaeffer, and Flents Products Co., Inc, incorporated
by reference to exhibit number 6 in the Registrant's Current Report in Form
8-K dated April 14, 1999 under the Securities Exchange Act of 1934, as
amended.
10.20Management Agreement dated April 14, 1999 between Flents Products Co.,
Inc. and Protective Technologies International Inc., incorporated by
reference to exhibit number 7 in the Registrant's Current Report in Form
8-K dated April 14, 1999 under the Securities Exchange Act of 1934, as
amended.
10.21Shareholder's Agreement dated April 14, 1999 by and among Flents Products
Co., Inc., PTI Holding Inc., The 1818 Mezzanine Fund, L.P., Meredith
Birrittella, and Warren Scheaffer, incorporated by reference to exhibit
number 8 in the Registrant's Current Report in Form 8-K dated April 14,
1999 under the Securities Exchange Act of 1934, as amended.
10.22Fairness Opinion rendered by Management Planning, Inc. dated April 13,
1999, incorporated by reference to exhibit number 9 in the Registrant's
Current Report in Form 8-K dated April 14, 1999 under the Securities
Exchange Act of 1934, as amended.
10.23Consent of Management Planning, Inc., incorporated by reference to exhibit
number 10 in the Registrant's Current Report in Form 8-K dated April 14,
1999 under the Securities Exchange Act of 1934, as amended
(b) Reports on Form 8-K
On April 29, 1999, the Company filed Form 8-K, reporting the asset acquisition
of Karlen Manufacturing Inc., and other matters related to this acquisition
including new financing arrangements and minority interests in the Company's
Flents Products Co., Inc.subsidiary. An amendment to the 8-K was filed for the
Karlen Acquisition on June 28, 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
Meredith W. Birrittella,
Chairman of the Board
Chief Executive Officer (authorized signatory)
In accordance with the requirements of the Securities Act of 1933, this
report has been signed by the following persons in the capacities and on the
dates stated.
________________________ Chief Executive Officer, November 15, 1999
Meredith W. Birrittella Chairman and Director
________________________ Chief Financial Officer November 15, 1999
Anthony Costanzo Chief Accounting Officer
<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
report has been signed by the following persons in the capacities and on the
dates stated.
/s/ Meredith W. Birrittella Chief Executive Officer, November 15, 1999
- -----------------------------
Meredith W. Birrittella Chairman and Director
/s/ Anthony Costanzo Chief Financial Officer November 15, 1999
- -----------------------------
Anthony Costanzo Chief Accounting Officer
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<S> <C> <C>
September 30,1999 December 31, 1998
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ASSETS (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 236,274 $ 837,618
Accounts receivable, net of allowance for returns and doubtful collections 11,142,052 11,169,056
Inventories 15,263,432 15,811,781
Deferred tax asset 468,000 266,000
Prepaid expenses and other current assets 2,194,126 1,670,826
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Total current assets 29,303,884 29,755,281
Deferred tax asset 186,175 218,400
Equipment and improvements, net 3,173,539 3,066,426
Intangible assets, net 20,025,763 5,346,858
Other Assets 705,475 -
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$ 53,394,836 $ 38,386,965
======================= ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable, bank $ 11,538,882 $ 15,217,550
Current portion of long term debt 1,800,000 -
Accounts payable and accrued expenses 4,654,317 4,217,361
Income tax liability 356,762 -
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Total current liabilities 18,349,961 19,434,911
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Long term debt, net of current portion 5,299,994 -
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Subordinated debt payable, net 5,900,663 -
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Commitments and contingencies
Minority interests in subsidiary 4,124,297 -
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Stockholders' equity:
Common stock, $.01 par value; authorized 10,000,000 shares, issued
and outstanding 4,956,352 shares 49,564 49,564
Common Stock receivable (54,822) (58,322)
Capital in excess of par 16,283,217 16,283,217
Retained earnings 3,441,962 2,677,595
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Total stockholders' equity 19,719,921 18,952,054
----------------------- ----------------------
$ 53,394,836 $ 38,386,965
======================= ======================
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE & NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months ended Sept. 30, For the Nine Months ended Sept. 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -----------
Net sales $ 14,517,252 $ 12,917,533 $ 52,407,307 $ 44,060,744
Cost of sales 9,900,316 9,535,984 37,607,359 30,901,396
------------- ------------- ------------- -------------
Gross profit 4,616,936 3,381,549 14,799,948 13,159,348
------------- ------------- ------------- -------------
Operating expenses :
Licensing fees 166,560 143,752 1,290,939 569,295
Depreciation and amortization 447,655 461,815 1,143,899 940,123
Other selling, general and administrative expenses 3,256,875 2,179,073 9,169,394 6,892,825
------------- ------------- ------------- -------------
Total operating expenses 3,871,090 2,784,640 11,604,232 8,402,243
------------- ------------- ------------- -------------
Income from operations 745,846 596,909 3,195,716 4,757,105
Interest expense, net 694,444 423,309 1,663,540 698,349
------------- ------------- ------------- -------------
Income before income taxes and minority interests 51,402 173,600 1,532,176 4,058,756
Income taxes 21,589 72,911 643,514 1,709,558
------------- ------------- ------------- -------------
Income before minority interests 29,813 100,689 888,662 2,349,198
Minority interests in subsidiary (73) - (124,297) -
------------- ------------- ------------- -------------
Net income $ 29,740 $ 100,689 $ 764,365 $ 2,349,198
============== ============== ============= ==============
Net income per share of common stock :
Basic $ 0.01 $ 0.02 $ 0.15 $ 0.49
Diluted 0.01 0.02 0.15 0.46
Weighted average shares outstanding :
Basic 4,956,352 4,862,499 4,956,352 4,818,745
Diluted 5,001,699 5,118,380 5,010,298 5,140,356
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<S> <C> <C>
1999 1998
----------- ----------
Cash flows from operating activities:
Net income $ 764,365 $ 2,349,198
Adjustments to reconcile net income to net cash used in operating
activities:
Minority interests in income of subsidiary 124,297 -
Provision for returns and doubtful accounts 525,000 349,074
Depreciation 1,286,015 1,015,053
Amortization of intangible assets 392,669 173,974
Deferred income tax (benefit) (169,775) (194,507)
(Increase) decrease in operating assets exclusive of the effects of the
business combination:
Accounts receivable 849,150 (7,127,097)
Inventories 2,415,381 (13,015,690)
Prepaid expenses and other current assets (570,912) (1,208,601)
Other assets (705,475) -
Increase in operating liabilities exclusive of the effects of the
business combination:
Accounts payable and accrued expenses 196,727 6,128,263
Other current liabilities 356,761 753,888
----------- -----------
Net cash provided by (used in) operating activities 5,464,203 (10,776,445)
----------- -----------
Cash flows from investing activities:
Cash payment as partial consideration for purchase of acquired assets
and acqusition costs (17,408,486) (1,703,809)
Loans to stockholders, net of repayments 87,574 (923,048)
Purchase of equipment and improvements (1,070,124) (2,457,676)
----------- -----------
Net cash (used in) investing activities (18,391,036) (5,084,533)
----------- -----------
Cash flows from financing activities:
Repayment of common stock receivable 3,500 -
Proceeds from issuance of common stock - 125,001
Minority investment in Subsidiary 1,800,000 -
Borrowings, net 10,521,989 15,848,077
----------- -----------
Net cash provided by financing activities 12,325,489 15,973,078
----------- -----------
Net (decrease) increase in cash and cash equivalents (601,344) 112,100
Cash and cash equivalents, beginning of period 837,618 682,160
----------- -----------
Cash and cash equivalents, end of period $ 236,274 $ 794,260
=========== ===========
Supplemental disclosure:
Interest paid $ 1,648,136 $ 742,860
Income taxes paid 697,025 1,784,500
Noncash investing and financing activities (see note 4.):
Fair value of net assets acquired 3,336,912 -
Promissory note used as partial consideration in the business combination 1,000,000 -
Excess of purchase price over net assets acquired 14,413,088 -
Accrued Liabilities 240,231 -
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 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, 1999 and
the results of its operations for the three and nine months ended
September 30, 1999 and its cash flows for the nine months ended
September 30, 1999. The results of operations for an interim period are
not necessarily indicative of the results to be attained in any other
fiscal period.
Reclassification:
For comparability, certain 1998 amounts have been reclassified where
appropriate to conform to the financial statement presentation used in
1999.
2. 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.
3. 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 1998 has been restated from the prior year's
presentation in order to conform to the 1999 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 health and beauty
products. 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. Inter-segment sales are not significant. Inter-segment charges
for production, SG&A, and interest costs are determined on a pro rata
basis.
Two major retail chains accounted for approximately 44% and 27% of net
sales in 1999 and 46% and 27% of net sales in 1998. As of September 30,
1999, accounts receivable included approximately $2,597,000 and
$4,609,000 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.
The following table presents segment information for the nine months
ended September 30, 1999 and 1998.
<TABLE>
<S> <C> <C> <C> <C>
1999 PTI Sports Flents Other Total
----------- ------------- ------------ ------------ -------------
Net sales $ 40,227,000 $ 12,180,000 $ - $ 52,407,000
Gross profit 9,345,000 5,455,000 - 14,800,000
Operating earnings 1,625,000 1,628,000 (57,000) 3,196,000
Depreciation and amortization 1,046,000 633,000 - 1,679,000
Interest revenue 72,000 9,000 2,000 83,000
Interest expense 732,000 1,015,000 - 1,747,000
Income tax expense (benefit) 406,000 261,000 (23,000) 644,000
Total assets 25,508,000 29,897,000 (2,010,000) 53,395,000
Capital expenditures 764,652 305,472 - 1,070,124
1998 PTI Sports Flents Other Total
------------- ------------- ------------- ------------ ---------------
Net sales $ 37,406,000 $ 6,655,000 $ - $ 44,061,000
Gross profit 10,024,000 3,135,000 - 13,159,000
Operating earnings 3,500,000 1,331,000 (74,000) 4,757,000
Depreciation and amortization 940,000 249,000 - 1,189,000
Interest revenue 22,000 5,000 4,000 31,000
Interest expense 521,000 208,000 - 729,000
Income tax expense (benefit) 1,177,000 562,000 (29,000) 1,710,000
Total assets 36,955,000 7,876,000 1,500,000 46,331,000
Capital expenditures 2,398,968 58,708 - 2,457,676
</TABLE>
Financial information relating to the Company's operations by geographic
area is presented below.
<TABLE>
<S> <C> <C>
Nine Months ended September 30,
Net sales 1999 1998
------------- -------------
United States $ 50,729,000 $ 41,857,000
Canada 1,628,000 2,164,000
Other 50,000 40,000
------------- -------------
$ 52,407,000 $ 44,061,000
============= =============
</TABLE>
Significantly all of the Company's long-lived assets are located in the
United States.
4. Business Combination:
On April 14, 1999, Flents Products Co., Inc., ("Flents"), prior to that
date a wholly owned subsidiary of the Company, consummated an asset
acquisition (the "Acquisition") of Karlen Manufacturing, Inc.,
("Karlen"). The Company acquired substantially all of the operating
assets of Karlen, other than one product line and cash. The purchase
price was $17,750,000 subject to adjustment. The assets were acquired
subject to substantially all existing operating liabilities of Karlen,
other than liabilities related to the excluded product line. The
Acquisition was consummated pursuant to an Asset Purchase Agreement dated
January 8, 1999, as amended by amendment dated April 14, 1999, among
Flents, Karlen and the shareholders of Karlen.
The purchase price consisted of a $16,750,000 cash payment and a
$1,000,000 promissory note bearing interest at 12% per annum. The
operating assets which were not acquired in the Acquisition include
Karlen's Blue Devil product line, which constituted approximately 1% - 2%
of Karlen's net sales in 1998.
Karlen had revenues in the amount of approximately $12,345,000 in 1998.
The assets acquired include approximately $1,585,000 in accounts
receivables, $1,800,000 in inventory and $372,000 in property and
equipment. Flents assumed current liabilities of approximately $373,000.
All agreements entered into and described below are dated April 14,1999
unless noted otherwise
In connection with the Acquisition, Flents entered into an Employment
Agreement with the chief operating officer of Karlen, to serve as the
President of Flents. The Employment Agreement has a term of five years.
Flents also entered into a Lease Agreement. The lease is for a term of
three years and is at specified rental payments, which Flents believes
are fair market rates. The lessor is a shareholder of Karlen.
In addition, Flents has entered into a Requirements Agreement by which
Flents has agreed to buy all of its requirements of non-latex
polyurethane cosmetic grade foam, subject to the terms of the Agreement,
from an entity related to a Karlen shareholder. This raw material is used
in the manufacture of foam wedges which are used in various cosmetic
products. The term of this agreement is for three years with purchase
prices under the Requirements Agreement approximately equal to the
historic purchase prices charged to Karlen for this critical raw
material.
To finance the Acquisition, at the Closing, Flents entered into a
$10,000,000 financing facility pursuant to a Revolving Credit, Term Loan
and Security Agreement with a bank. The facility includes a Term loan of
$4,000,000, fully funded at closing, and a line of credit of $6,000,000
of which at closing approximately $2,900,000 was drawn and approximately
$1,000,000 was available under the facility's various borrowing limits.
Flents pledged all of its assets as security for this financing. The term
loan is for three years and bears interest at the bank's base rate plus
.75%. The line of credit bears interest at the bank's base rate plus
.25%.
Flents also entered into, with a subordinated lender, a Securities
Purchase Agreement by which the lender advanced $8,000,000 to Flents and
acquired (1) detachable warrants (the "Flents warrants") exercisable to
purchase 22 shares of common stock of Flents, par value $.01 per share,
which would constitute upon exercise 22% of the issued and outstanding
common stock of Flents on a diluted basis, and (2) an $8,000,000
promissory note with an interest rate of 12%. At September 30, 1999 the
$8,000,000 promissory note had a stated value of $5,900,663 after giving
consideration that the note has an effective interest rate of 19.88%. The
Flents warrants are exercisable for a nominal purchase price until April
14, 2009. The promissory note is payable interest only for six years and
is due in full at maturity in six years.
Pursuant to an Investment Agreement by and among the Company and two of
the Company's officers/directors, Flents issued an aggregate of 18% of
its common stock of Flents, for consideration of $1,800,000.
Upon the exercise of the warrants, the Company will own 60% of Flents.
Because Flents is no longer a wholly owned subsidiary of the Company,
Flents also entered into a Management Agreement with Protective
Technologies International Inc., ("PTI Sports"), a wholly owned
subsidiary of the Company. Under the Management Agreement, PTI Sports
will provide various services to Flents, including senior executive
services of the Chief Executive Officer and the Chief Financial Officer,
information and data processing functions and services, management
systems and services, and senior human resource management functions and
services, such as payroll, benefits, pension and related functions.
Flents also entered into a Shareholders' Agreement by and among Flents,
the Company, the Subordinated lender and the two officers/directors
owning 18% of Flents. The Shareholders' Agreement places various
restrictions on the shareholders, including restrictions on the transfer
of shares of Flents common stock.
Also at Closing, PTI Sports and Zacko Sports Inc., ("Zacko"), both of
which are wholly owned subsidiaries of the Company, entered into a
$25,000,000 financing facility pursuant to a Revolving Credit, Term Loan
and Security Agreement by and among PTI Sports, Zacko and the Bank. The
facility includes a term loan of $3,000,000, fully funded at closing, and
a line of credit of $22,000,000 of which at closing approximately
$11,100,000 was drawn and approximately $4,400,000 was available under
the facility's various borrowing limits. PTI Sports and Zacko pledged all
of their assets as security for this financing.
The proceeds of the loans from the Bank were also used to repay all
existing bank financing of Flents, PTI Sports and Zacko, outstanding.
The aggregate maturities of long-term debt are as follows:
Twelve months ending September 30,
---------------------------------
2000 $ 1,800,000
2001 1,800,000
2002 3,949,997
2003 -
2004 -
Thereafter 5,450,660
-----------------
$ 13,000,657
=================
Supplemental pro forma information as though the enterprises had combined at the
beginning of the periods is presented below:
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months ended For the Nine Months ended
Sept. 30, Sept. 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -----------
Revenues $ 14,517,000 $ 16,003,000 $ 52,821,000 $ 53,265,000
Income before income taxes 52,000 595,000 1,711,000 4,925,000
Gross profit 30,000 250,000 954,000 2,698,000
Net income per share of common stock
Basic $ 0.01 $ 0.05 $ 0.19 $ 0.55
Diluted 0.01 0.05 0.19 0.53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 236,274
<SECURITIES> 0
<RECEIVABLES> 12,172,477
<ALLOWANCES> 1,030,425
<INVENTORY> 15,263,432
<CURRENT-ASSETS> 29,303,884
<PP&E> 6,846,545
<DEPRECIATION> 3,673,006
<TOTAL-ASSETS> 53,394,836
<CURRENT-LIABILITIES> 18,349,961
<BONDS> 0
0
0
<COMMON> 49,564
<OTHER-SE> 19,670,357
<TOTAL-LIABILITY-AND-EQUITY> 53,394,836
<SALES> 52,407,307
<TOTAL-REVENUES> 52,407,307
<CGS> 37,607,359
<TOTAL-COSTS> 37,607,359
<OTHER-EXPENSES> 11,604,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,663,540
<INCOME-PRETAX> 1,532,176
<INCOME-TAX> 643,514
<INCOME-CONTINUING> 3,195,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 764,365
<EPS-BASIC> .15
<EPS-DILUTED> .15
</TABLE>
