U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[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, 1999.
[ ] 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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(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
- - ------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
(302) 678-0855
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b
of the Act: Name of each exchange
Title of each class on which registered
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Common Stock, par value None
$.01 per share
Securities registered under Section 12(g) of the Act:
Title of each class
- - ------------------
Common Stock, par value
$.01 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the 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 past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not 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-K
or any amendment to this Form 10-K. __
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be 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 29, 2000, based upon the last sale price on such date, such aggregate
market value was $8,363,844.
Indicate 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 29,
2000, 4,956,352 shares of the issuer's common equity were outstanding.
Documents incorporated by reference: None.
PART I
ITEM 1. 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.
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 purpose of accounting,
the acquisition has been accounted for as a purchase.
On August 5, 1997, the Company consummated the merger (the "Merger") of
Flents Products Co., Inc., a New York corporation ("FPC"), 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 FPC. 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 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 FPC in respect of each of the 77,756
issued and outstanding shares of the common stock of FPC, 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 FPC.
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 acquisition ("Karlen") of
Karlen Manufacturing, Inc. The Company acquired substantially all of the net
operating assets of Karlen. The purchase price was $17,750,000, excluding
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.
The purchase price consisted of a $16,750,000 cash payment and a $1,000,000
promissory note bearing interest at 12% per
annum.
Karlen Manufacturing Inc. 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 Karlen 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. The
Agreement provides for compensation at an annual rate of $165,000 per year. On
the first anniversary of the Agreement and on each subsequent anniversary, the
annual rate of salary shall be increased by 5% of the amount of the previous
annual rate. The Agreement also entitles the Employee to a bonus based on the
Subsidiary's increase in earnings before interest, taxes, depreciation and
amortization. Additionally, the Agreement grants the Employee an option to
purchase an aggregate of 2.0408 shares of common stock of the Subsidiary. The
exercise price shall be the value of the Subsidiary on April 14, 1999 multiplied
by 2.0408%. The option vests on the fifth anniversary of the Agreement and
expires nine months after vesting.
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 Karlen 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 December 31, 1999 the $8,000,000 promissory note had a
stated value of $5,954,841 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 PTI. Under the Management
Agreement, PTI provides 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, 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.
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 personal health and beauty care market. Products
include cosmetics and ear and eye care accessories.
Manufacturing
The Company assembles helmets at its facility in New York, imports
helmets, bicycles and bicycle accessory products, and manufactures and
distributes health and beauty care products from its facilities in Michigan. The
Company sources out the manufacturing of all the raw components of its helmets
and certain components of its health and beauty care products 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 certain components. Further, the Company sources out the
manufacturing of its helmets, bicycles and bicycle accessory products and
certain health and beauty care products to certain foreign manufacturers in East
Asia. 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 health and beauty 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 1999, the Company's sales to its single largest customer
constituted approximately 42 percent of its gross revenues, compared to
approximately 58 percent during the 1998 calendar year and 71 percent during the
1997 calender year. Sales to its second largest customer during the calender
years 1999, 1998 and 1997 accounted for 25, 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 TonkaTM and FurbyTM brand names.
Through December 31, 1999, the Company had 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. During 1999, the
Company entered into several new licensing agreements including: Lisa FrankTM,
Hello KittyTM and Power RangersTM for which the Company will manufacture and
market helmets, bicycles and bicycles accessories. The Company also entered into
a licensing agreement with Greg LeMond for which the Company will manufacture
and market helmets and bicycle accessories. Additionally, the Company entered
into an agreement with master lock for which the Company manufactures and
distributes 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 names
Comfees(TM) and 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 helmets 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 1999, the Company spent approximately $192,000
on such research and development, up from approximately $169,000 in 1998 and
approximately $117,000 in 1997. Of the $192,000 spent on research and
development during 1999, PTI spent approximately $171,000 and Flents spent
approximately $21,000.
Employees
As of March 30, 2000, the Company had approximately 250 full-time
employees, including 50 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.
Segments and Geographical areas
Financial information about segments and geographical areas is shown in
the Company's consolidated financial statements included herein.
ITEM 2. Properties.
PTI's principal facility is a 200,000 square foot warehouse and
assembly facility in Hastings on Hudson, New York. Flents' principal facility is
a 53,000 square foot manufacturing and warehouse facility in St. Charles,
Michigan. PTI and Flents occupy the facilities pursuant to leases, which expire
in 2001 and 2002, respectively. The Company also occupies approximately 12,500
square feet of office space in Yonkers, New York pursuant to a lease expiring in
2004. Additionally, the Company also uses other smaller spaces in Texas,
California, New York and Michigan.
ITEM 3. Legal Proceedings.
Certain product liability claims and actions are pending against the
Company. While the outcome of such matters 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 1999
fiscal year to a vote of security-holders.
PART II
ITEM 5. Market for Registrant's 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
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<TABLE>
<S> <C> <C>
Quarter Ended High Low
- - ------------- ------- ------
March 31, 1999 $ 4.000 $ 2.875
June 30, 1999 $ 3.250 $ 2.625
September 30, 1999 $ 3.250 $ 1.688
December 31, 1999 $ 2.063 $ 1.250
March 31, 1998 $ 10.000 $ 7.500
June 30, 1998 $ 8.813 $ 6.438
September 30, 1998 $ 8.750 $ 5.875
December 31, 1998 $ 6.500 $ 3.375
March 31, 1997 $ 9.250 $ 7.875
June 30, 1997 $ 8.813 $ 7.688
September 30, 1997 $ 9.563 $ 6.875
December 31, 1997 $ 6.500 $ 7.375
</TABLE>
The above prices are over-the-counter market quotations and reflect
inter-dealer prices, without retail mark-up, mark-down, or commission, and may
not represent actual transactions. The source of such prices is The NASDAQ Stock
Market's monthly statistical summary reports.
As of March 30, 2000, 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.
There were no recent sales of unregistered shares of the Company's
securities.
ITEM 6. Selected Financial Data.
<TABLE>
<S> <C> <C> <C> <C> <C>
Annual Financial Data:
1999 1998 1997 1996 1995
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Net Sales $68,477,246 $60,522,011 $34,566,135 $17,529,509 $8,166,788
Income (loss) from continuing operations (206,628) 2,492,229 (941,295) 1,691,118 787,936
Income (loss) from continuing operations per
share of common stock
Basic (.04) .51 (.23) .49 .22
Diluted (.04) .49 (.23) .43 .22
Total assets 50,735,035 38,386,965 21,126,970 10,607,586 6,536,909
Long-term obligations and redeemable
preferred stock $10,804,832 - - $2,500 $2,500
</TABLE>
Information about business combinations and dispositions of business operations
that materially affect the comparability of the selected financial data is
described in the company's consolidated financial statements.
Quarterly Financial Data (Unaudited):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998
- - ---------------------------------------------------------------------------- ----------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Net Sales $16,120,849 $21,769,208 $14,517,252 $16,069,937 $11,745,977 $19,397,234 $12,917,533 $16,461,267
Gross profit 4,609,257 5,573,756 4,616,936 3,240,110 3,691,468 6,086,331 3,381,549 4,079,551
Net Income (loss) 485,063 249,562 29,740 (970,993) 732,265 1,516,244 100,689 143,031
Net Income (loss) per
share of common stock
Basic .10 .05 .01 (.19) .15 .32 .02 .34
Diluted .10 .05 .01 (.19) .14 .30 .02 .32
Net income (loss) $485,063 $249,562 $29,740 $(970,993) $732.265 $1,516,244 $100,689 $143,031
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 $68,477,246 during the year ended December
31, 1999, an increase of 13% from its net sales of $60,522,011 in 1998. Net
sales for 1998 increased 75% over net sales of $34,566,135 in 1997. The 13%
sales increase from 1998 to 1999 and the 75% increase from 1997 to 1998,
resulted predominantly from the acquisitions by Flents of Karlen in 1999,
Comfees in 1998 and Flents Products in 1997. The increase from 1997 to 1998 also
resulted 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. Sales for Flents were $16,907,000 in 1999, $8,688,000 in 1998 and
$3,715,000 in 1997.
The cost of sales for the year ended December 31, 1999 was $50,437,187
(resulting in a gross profit margin of 26%), compared to the Company's cost of
sales for the year ended December 31, 1998 of $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 the gross profit margin of
31%). PTI's gross profit margin contribution approximated 21% in 1999, 25% in
1998 and 30% in 1997. Flents' gross profit margin contribution approximated 43%
in 1999, 48% in 1998 and 40% in 1997. The fluctuation in gross margins for
Flents was due primarily to changes in product mix sales. The 5% decrease in the
consolidated gross profit margin is primarily related to an increase in bicycle
sales in 1999, a lower margin product line.
Selling, general and administrative expenses for the year ended
December 31, 1999 were $15,898,016 compared to selling, general and
administrative expenses of $11,872,695 for the year ended December 31, 1998 and
$9,710,647 for the year ended December 31, 1997. Selling, general and
administrative expenses were $6,073,809 for 1997 without the non-recurring
charge for stock based compensation of $3,636,838. Without the charge, selling,
general & administrative expenses, as a percentage of sales were 23%, 20% and
18% for the years ended December 31, 1999, 1998, and 1997 respectively. The
increased selling, general and administrative spending in 1999 and 1998 was
primarily due to the higher costs associated with the expansion of the helmet,
bicycle and bicycle accessory business, licensing fees associated with the sales
of licensed products, the amortization of goodwill associated with the
acquisitions of Karlen and Comfees, the depreciation of the installation of new
systems and the higher costs for human resources.
Interest expense for the Company for the year ended December 31, 1999
was $2,365,910, compared to interest expense of $1,015,503 for the year ended
December 31, 1998 and $217,430 for the year ended December 31, 1997. The
increase in interest expense from 1997 to 1998 was due primarily to increased
inventory levels for the Company and to finance the acquisition of Flents
Products, which occurred in August 1997. Accordingly, the interest expense
associated with the acquisition for 1997 included a part year only, whereas 1998
included a full year of interest expense. The increase in interest expense from
1998 to 1999 was due primarily to the financing costs associated with the
acquisition of Karlen Manufacturing. Interest expense for Flents was $1,487,587
for the year ended December 31,1999, $247,971 for the year ended December 31,
1998 and $12,637 for the year ended December 31, 1997.
The Company had a net loss of $206,628 for the year ended December 31,
1999 compared to the Company's net income for the year ended December 31, 1998
of $2,492,229 and net loss for the year ended December 31, 1997 of ($941,295).
The reduction in earnings from 1998 to 1999 resulted primarily from reduced
margins and the financing costs associated with the acquisition of Karlen and
increased Goodwill amortization. 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.
Liquidity and Capital Resources
The Company's working capital at December 31, 1999 was $9,733,611 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 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 was decreased by ($104,088), and increased by $155,458 and
$320,282 in the years ended December 31, 1999, 1998 and 1997 respectively.
Net cash provided by (used in) operating activities was $8,444,380,
($7,741,482) and ($96,916) in the years ended December 31, 1999, 1998 and 1997
respectively. Net income (loss) was ($206,628), $2,492,229 and $(941,295) for
the same periods, respectively.
Net cash used in investing activities was $5,392,350, $3,781,515 and
$3,380,651 in the years ended December 31, 1999, 1998 and 1997 respectively. Net
cash used in investing activities included payments for acquired businesses and
assets of $17,787,747, $1,307,859 and $1,855,289 and payments primarily for
computers, manufacturing equipment and other capital expenditures of $1,769,453,
$3,330,033 and $1,960,208 in these periods, respectively.
Net cash provided by financing activities was $10,802,959, $13,289,290
and $4,198,713 in the years ended December 31, 1999, 1998 and 1997 respectively.
Cash flows from financing activities were primarily affected by the net proceeds
from issuance of common stock resulting from option and warrant exercises during
1998 and 1997 of $140,001 and $3,350,234, respectively. During the years ended
December 31, 1999, 1998 and 1997 net borrowings were $8,999,459, $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, 1999, the Company had $733,530 of cash available for
its cash needs, compared to cash of $837,618 and $682,160 as of December 31,
1998 and 1997, respectively.
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. At December 31, 1999, the balances of the lines
of credit were $7,478,099 (PTI) and $3,088,920 (Flents), and the term loan
balance was $5,649,991. The availability on the lines of credit, based on
accounts receivable and inventory balances at December 31, 1999 were
approximately $11,000,000 and $4,000,000 for PTI and Flents, respectively.
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.
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 $192,000, $169,000 and $119,000 for the years ended December 31,
1999, 1998 and 1997, respectively. It is expected that the Company will spend
approximately $200,000 on research and development during the 2000 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.
Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No.137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133. The Statement defers
for one year the effective date of SFAS No. 133, Accounting Derivative
Instruments and Hedging Activities, which was issued in June 1998 and
established accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 will now apply to all fiscal
quarters of all fiscal years beginning after June 2000. Management believes that
the implementation of SFAS No. 133 during the third quarter of year 2000 will
not have a material impact on the Company's results of operations.
ITEM 7A. Market Risks and Sensitivity Analysis
The Company is exposed to various market risks, including changes in interest
rates. The following analysis presents the hypothetical loss in earnings, cash
flows and fair values of the financial instruments which were held by the
Company at December 31, 1999, and are sensitive to the above market risks.
Interest Rate Risks
At December 31, 1999, the Company had financial assets totaling $12.1 million
and financial liabilities totaling $27.9 million. For fixed rate financial
instruments, interest rate changes affect the fair market value but do not
impact earnings or cash flows. Conversely, for variable rate financial
instruments, interest rate changes generally do not affect the fair market value
but do impact future earnings and cash flows, assuming other factors are held
constant.
At December 31, 1999, the Company had fixed rate financial assets of $12.1
million. Holding other variables constant, a ten percent increase in interest
rates would increase the unrealized fair value of the fixed financial assets by
approximately $1.2 million.
At December 31, 1999, the Company had fixed rate debt of $11.7 million and
variable rate debt of $16.2 million. A ten percent decrease in interest rates
would increase the unrealized fair value of the fixed rate debt by approximately
$2.3 million.
The net decrease in earnings for the next year resulting from a ten percent
interest rate increase would be approximately $1.6 million, holding other
variables constant.
ITEM 8. Financial Statements.
Page
Independent Public Accountants' Report 12
Consolidated Balance Sheets as of December 31, 1999 and 1998 13
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997 14
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997 15
Consolidated Statements of Cash Flows for the years 16
ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 17 - 38
<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 sheets of PTI Holding Inc.
(a Delaware Corporation) and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
April 13, 2000
New York, New York
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
DECEMBER 31,
------------------------------------------
ASSETS 1999 1998
---------------- --------------
Current assets:
Cash and cash equivalents $ 733,530 $ 837,618
Accounts receivable, net of allowance for returns and
doubtful collections of $ 515,881 (1999) and $500,000 (1998) 10,599,417 11,169,056
Inventories 12,959,906 15,811,781
Deferred tax asset 322,000 266,000
Prepaid expenses and other current assets 2,270,274 1,670,826
-------------- ------------
Total current assets 26,885,127 29,755,281
Deferred tax asset, net 90,000 218,400
Equipment and improvements, net 3,226,447 3,066,426
Intangible assets, net 19,871,196 5,346,858
Other assets 662,265 -
-------------- ------------
$ 50,735,035 $ 38,386,965
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable, bank $ 10,567,018 $ 15,217,550
Current portion of Long term debt 1,800,000 -
Accounts payable and accrued expenses 4,784,498 4,217,361
-------------- ----------
Total current liabilities 17,151,516 19,434,911
-------------- ----------
Long term debt, net of current portion 4,849,991 -
-------------- ----------
Subordinated note payable 5,954,841 -
-------------- ----------
Commitments and contingencies (Note 6)
Minority interest in Subsidiary 4,029,761 -
-------------- ----------
Stockholders' equity:
Common stock, $.01 par value; authorized 10,000,000 shares,
issued and outstanding 4,956,352 shares 49,564 49,564
Note receivable (54,822) (58,322)
Capital in excess of par 16,283,217 16,283,217
Retained earnings 2,470,967 2,677,595
-------------- ----------
Total stockholders' equity 18,748,926 18,952,054
-------------- ----------
$ 50,735,035 $ 38,386,965
============== ===========
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
------------------ --------------- -----------
Net sales $68,477,246 $60,522,011 $ 34,566,135
Cost of sales 50,437,187 43,283,112 23,751,353
------------ ----------- -----------
Gross profit 18,040,059 17,238,899 10,814,782
Selling, general and administrative expenses:
Licensing Fees 1,710,052 1,319,217 467,992
Depreciation and Amortization 1,891,408 1,639,270 736,277
Other selling, general and administrative expenses 12,296,556 8,914,208 8,506,378
------------ ---------- -----------
15,898,016 11,872,695 9,710,647
------------ --------- -----------
Income from operations 2,142,043 5,366,204 1,104,135
Interest expense, net of interest income of,
$106,145 for 1999, $102,386 for 1998 and $98,579 for 1997 2,365,910 1,015,503 217,430
------------ ---------- -----------
Income (loss) before income taxes & minority interest (223,867) 4,350,701 886,705
------------ ---------- -----------
Income taxes (benefit):
Current (119,000) 2,044,872 1,807,000
Deferred 72,000 (186,400) 21,000
------------ ---------- -----------
(47,000) 1,858,472 1,828,000
------------ ---------- -----------
Income (loss) before minority interest (176,867) 2,492,229 (941,295)
Minority interest in subsidiary (29,761) - -
------------ ---------- -----------
Net income (loss) $ (206,628) $ 2,492,229 $ (941,295)
============ ========== ===========
Net income (loss) per share of common stock :
Basic $ (0.04) $ 0.51 $ (0.23)
Diluted $ (0.04) $ 0.49 $ (0.23)
Weighted average shares outstanding :
Basic 4,956,352 4,852,389 4,083,209
Diluted 4,956,352 5,087,387 4,083,209
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<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
Net (loss) - - - - (206,628) (206,628)
Repayment of Stock receivable - - - 3,500 - 3,500
---------- ------------ ------------- --------------- ------------- -----------
Balance,
December 31, 1999 4,956,352 $ 49,564 $ 16,283,217 $ (54,822) $ 2,470,967 $ 18,748,926
========== =========== ============= =============== ============= ===========
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ----------- ----------
Cash flows from operating activities:
Net income (loss) $ (206,628) $ 2,492,229 $ (941,295)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Minority interest in income of subsidiary 29,761 - -
Provision for returns and doubtful collections (24,119) 391,500 (87,406)
Depreciation 1,932,436 1,937,244 940,628
Amortization of intangible assets 736,344 234,020 196,513
Deferred income (benefit) tax 72,400 (186,400) 21,000
Stock-based compensation - - 3,636,838
Interest expense on discount of subordinated note 154,841 - -
(Increase) decrease in operating assets exclusive of
the effects of business combinations:
Accounts receivable 1,940,904 (6,333,385) (933,737)
Inventories 4,718,907 (7,939,424) (3,424,417)
Prepaid expenses and other current assets (764,986) 182,258 88,846
Other assets (472,385) - -
Increase (decrease) in operating liabilities exclusive
of the effects of business combinations:
Accounts payable and accrued expenses 326,908 1,537,475 1,411,002
Other current liabilities (3) (56,999) (1,004,888)
------------- ------------- -----------
Net cash provided by (used in) operating activities 8,444,380 (7,741,482) (96,916)
------------- ------------- -----------
Cash flows from investing activities:
Cash payments as partial consideration for purchases
of acquired businesses and assets and
acquisition costs (17,787,474) (1,307,859) (1,855,289)
Loans to stockholders, net of repayments 205,500 (754,458) 33,982
Purchase of equipment and improvements (1,769,453) (3,330,033) (1,960,208)
--------------- ------------ ------------
Net cash (used in) investing activities (19,351,427) (5,392,350) (3,781,515)
-------------- ------------- ------------
Cash flows from financing activities:
Payments of other current liabilities - - (23,583)
Repayment of common stock recievable 3,500 - -
Proceeds from issuance of common stock - 140,001 3,350,234
Minority investment in Subsidiary 1,800,000 - -
Proceeds from long term financing 15,000,000 - -
Repayment of long term financing (1,350,009) - -
Borrowings, net (4,650,532) 13,149,289 872,062
-------------- -------------- -----------
Net cash provided by financing activities 10,802,959 13,289,290 4,198,713
-------------- -------------- -----------
Net increase (decrease) in cash and cash equivalents (104,088) 155,458 320,282
Cash and cash equivalents, beginning of year 837,618 682,160 361,878
-------------- --------------- -----------
Cash and cash equivalents, end of year $ 733,530 $ 837,618 $ 682,160
============= ============== ===========
Supplemental disclosures:
Interest paid $ 2,473,000 $ 1,026,712 $ 317,452
Income taxes paid 697,025 2,558,874 3,415,144
Non-cash investing and financing activities:
Acquisition of business:
Fair value of net assets acquired 3,336,912 - 2,198,604
Excess of purchase price over net assets acquired 14,413,088 - 2,931,572
Common stock issued as partial consideration - - 2,701,650
Promissory note used as partial consideration in
the business combination 1,000,000 - -
Accrued liabilities 240,231 - -
Conversion of preferred stock - - 2,500
Receivable from exercise of common stock warrants - - 58,322
</TABLE>
<PAGE>
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"), and 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 a variety of personal care
health and beauty aids. 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:
Intangible assets, which consist primarily of purchased intangible
assets and goodwill resulting from business acquisitions, are amortized
on a straight-line basis from a range of 7 to 40 years.
Impairment of long-lived assets:
Long-lived assets and certain identifiable intangibles, including
goodwill are reviewed for impairment whenever events or changes in
circumstances indicate that full recoverability is questionable.
Management evaluates the recoverability of its intangible assets
(primarily goodwill) and other long-lived assets and several factors are
used in the valuation including, but not limited to, management's plans
for future operations, recent operating results and projected cash
flows.
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 which consist primarily of personnel
costs are included in selling, general and administrative expenses and
are charged to operations as incurred. Such costs amounted to
approximately $192,000, $169,000 and $119,000 for the years ended
December 31, 1999, 1998 and 1997 respectively.
Earnings per share of common stock:
Net income (loss) 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.
Areconciliation between the numerators and denominators of the basic and
diluted EPS computations for net income (loss) is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997
----------------------------------- ---------------------------- -------------------------------
Per Per Per
Net share Net share Net share
loss Shares amount income Shares amount loss Shares amount
- - -------------------- ----------- ----------- -------- ----------- ----------- ------- ----------- ---------- --------
Basic EPS ($206,628) 4,956,352 ($0.04) $2,492,229 4,852,389 $0.51 ($941,295) 4,083,209 ($0.23)
Dilutive stock
Options & warrants 234,998
- - -------------------- ----------- ----------- -------- ----------- ----------- ------- ----------- ---------- --------
Diluted EPS ($206,628) 4,956,352 ($0.04) $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, 1999 566,020
Year ended December 31, 1998 174,000
Year ended December 31, 1997 837,283
Stock-based compensation:
Statement of Financial Accounting Standards ("SFAS") 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. See Note 11 for SFAS No. 123 disclosure.
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.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for
cash, accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short-term maturities. The amounts
presented for long-term debt and other long-term liabilities also
approximate their fair value.
Reclassifications
Certain items shown here have been reclassified to conform to the 1999
presentation.
2. Business combinations:
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.
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 product line
includes 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 tangible assets acquired was $481,842.
On April 14, 1999, Flents consummated an asset acquisition ("Karlen") of
Karlen Manufacturing, Inc. The Company acquired substantially all of the
operating assets of Karlen, other than one minor product line and cash.
The purchase price was $17,750,000. The assets were acquired subject to
substantially all existing operating liabilities of Karlen, other than
liabilities related to the excluded product line. The acquisition has
been accounted for as a purchase.
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 assets
acquired include approximately $1,387,000 in accounts receivables,
$1,867,000 in inventory and $323,000 in property and equipment. Flents
assumed current liabilities of approximately $240,000.
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 Manufacturing, Inc.,
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
Manufacturing, Inc.
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 Manufacturing, Inc. 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.
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.
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%.
Upon the exercise of the warrants, the Company will legally own 60% of
Flents. Because Flents is no longer a wholly owned subsidiary of the
Company, Flents also entered into a Management Agreement with PTI. Under
the Management Agreement, PTI provides 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, 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.
Refer to Note 5 for discussion of financing arrangements.
Supplemental pro forma information as though Karlen Manufacturing (1999) and
Flents (1997) Products had been combined with PTI Holding Inc. at the beginning
of the respective periods is presented below:
Years ended December 31,
--------------------------------------------
1999 1998 1997
---------------------------------------------
Revenues $71,891,000 $72,813,000 $48,339,000
Income (loss) before
income taxes (45,000) 2,623,000 704,000
Net Income (loss) (201,000) 1,747,000 1,695,000
Net Income (loss) per share
of common stock
Basic $ (0.04) 0.36 (0.42)
Diluted $ (0.04) 0.34 (0.42)
3. Inventories:
Inventories are summarized as follows:
1999 1998
--------------- ------------
Raw materials and work-in-progress $ 4,763,671 $ 3,973,179
Finished goods 8,196,235 11,838,602
--------------- -------------
$ 12,959,906 $15,811,781
=============== =============
4. Equipment and improvements:
Equipment and improvements consist of the following:
1999 1998
----------- ------------
Production equipment $ 3,201,472 $ 2,236,303
Office equipment 3,647,518 2,713,067
Leasehold improvements 722,158 529,321
------------ ------------
7,571,148 5,478,691
Less accumulated depreciation 4,344,701 2,412,265
------------ ------------
$ 3,226,447 $ 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. Financing arrangements:
On April 14, 1999, the Company negotiated new financing agreements with
a bank. Under the terms of the new financing agreement, the bank 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 December 31, the bank's base rate
was 8.5%. The availability on the lines of credit, based on accounts
receivable and inventory balances at December 31, 1999 were
approximately $11,000,000 and $4,000,000 for PTI and Flents,
respectively.
The line of credit agreements require the Company and each of PTI and
Flents to comply with certain affirmative covenants, including the
maintenance of a minimum fixed charge ratios and minimum net worth
amounts, all as defined in the agreement. The leverage, fixed charge and
net worth covenants for PTI were waived for 1999. 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,
dividend declarations or payments, distributions of assets, incurring
certain debt, and permitting liens against assets. The Company also
expects not to be in compliance with covenants in certain quarters
throughout 2000. However, the Company does not expect the non-compliance
to have a material affect on the financial statements.
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 December 31, 1999 the
$8,000,000 promissory note had a stated value of $5,954,841 after giving
consideration that the note has an effective interest rate of 19.88% due
to the warrants. 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.
The debt discount (fair market value of warrants issued) associated with
this lender is being amortized over the life of the related debt.
As summary of the Company's financing at December 31, 1999, is presented
below.
Term loans payable, bank $5,649,991
Note payable to seller of acquired business 1,000,000
Subordinated debt payable 5,954,841
------------
Long-term borrowings 12,604,832
Lines of credit, bank 10,567,018
---------------
$23,171,850
==============
The aggregate maturities of long-term debt are as follows:
2000 $1,800,000
2001 1,800,000
2002 3,049,991
2003 -
2004 -
Thereafter 5,954,841
--------------
12,604,832
Less: Current portion 1,800,000
-------------
Total Long Term debt $10,804,832
=============
The carrying amount of the Company's financing at December
31, 1999 approximates fair value due to the availability of suitable
alternative debt.
6. Commitments:
Employment contracts:
The Company has a long-term employment agreement with a key employee and
three 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:
2000 $337,000
2001 305,000
2002 175,000
2003 12,000
2004 12,000
Thereafter 33,000
--------
Total $874,000
========
Leasing arrangements:
The Company leases office space, manufacturing and warehouse facilities
under operating leases which expire at various dates through the year
2005. 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:
2000 $887,000
2001 330,000
2002 299,000
2003 304,000
2004 304,000
Thereafter 50,000
------------
$2,174,000
============
Rent expense for the years ended December 31, 1999, 1998 and 1997
totaled approximately $1,391,000, $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 contributions totaled $69,980 and $33,339 for 1999
and 1998, respectively.
7. License agreements:
The Company has entered into various licensing agreements requiring
royalty payments based on specified percentages of product sales
expiring at various dates through 2009. The future minimum guaranteed
royalty payments are $1,647,000 in 2000 and $1,632,000 in 2001, and
$500,000 per year from 2002 through 2009. Royalty expenses under these
licensing agreements totaled $1,710,000 in 1999, $1,319,000 in 1998 and
$408,000 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 and 1999, certain product liability claims and actions were
asserted against the Company. While the outcome of such claims and
actions cannot be determined, it appears the Company's product liability
insurance is adequate to cover any losses that may arise from such
matters.
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 Company's initial 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.
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 over allotment 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 1994 and 1998 joint incentive and
non-qualified stock option plans, is limited to 350,000 shares and
500,000 shares, respectively. 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 plans terminate
in 2004 and 2008, respectively. 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 three years:
<TABLE>
<S> <C> <C>
Number of Weighted average
Shares exercise price
------------ ----------------
Outstanding, January 1, 1997 658,820 $3.57
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 66,000 7.78
Exercised (105,000) 1.33
Cancelled or expired (34,500) 10.21
----------- ---------
Outstanding, December 31, 1998 672,520 4.87
Granted 66,000 2.27
Exercised - -
Cancelled or expired - -
Outstanding, December 31, 1999 738,520 4.64
------- ---------
Exercisable, December 31, 1999 716,020 4.61
</TABLE>
The weighted average grant date fair value of options granted during the
years ended December 31, 1999 and 1998 is $0.84 and $2.21 per option,
respectively.
Options outstanding and exercisable at December 31, 1999 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 1/3
1996 351,020 $5.03 351,020 $5.03 3
1997 78,000 $9.20 78,000 $9.20 2
1998 66,000 $7.78 53,500 $7.63 3
1999 66,000 $2.27 56,000 $2.32 5
</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 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> <C>
1999 1998 1997
--------- --------- ---------
Net income (loss), as reported $(206,628) $2,492,229 $(941,295)
Net income (loss), pro forma (270,600) 2,324,486 (276,706)
Basic earnings (loss) per share, as reported (0.04)
Basic earnings (loss) per share, pro forma (0.04)
Diluted earnings (loss) per share, as reported (0.04)
Diluted earnings (loss) per share, pro forma (0.04)
</TABLE>
The pro forma effect on net income (loss) as shown above 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) - 1999 3
- 1998 and 1997 5
Interest rate - 1999 5.73%
- 1998 and 1997 7.10%
Volatility - 1999 37.1%
- 1998 38.7%
- 1997 54.7%
Dividend yield 0%
12. Segment information:
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 and manufactures a wide variety of health and
beauty care 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 40% and 24% of net
sales in 1999, 51% and 26% of net sales in 1998 and 71% and 15% of net
sales in 1997. As of December 31, 1999, accounts receivable included
approximately $2,569,000 and $3,545,000 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 1999, 1998 and
1997.
<TABLE>
<S> <C> <C> <C> <C>
1999 PTI Sports Flents Other Total
----------- ---------------- ------------- ------------- --------------
Net sales $ 51,570,000 $ 16,907,000 $ - $68,477,000
Gross profit 10,748,000 7,292,000 18,040,000
Operating earnings 550,000 1,702,000 (110,000) 2,142,000
Depreciation and amortization 1,623,000 1,046,000 - 2,669,000
Interest revenue 90,000 14,000 3,000 107,000
Interest expense 971,000 1,502,000 - 2,473,000
Income tax expense (benefit) (139,000) 90,000 2,000 (47,000)
Total assets 21,982,000 27,092,000 1,661,000 50,735,000
Capital expenditures 1,342,000 427,000 - 1,769,000
1998 PTI Sports Flents Other Total
------------ ----------------- -------------- -------------- ------------
Net sales $ 51,834,000 $ 8,688,000 $ - $ 60,522,000
Gross profit 13,039,000 - 17,239,000
Operating earnings 3,718,000 (252,000)
Depreciation and amortization 1,260,000 -
Interest revenue
Interest expense 715,000 147,000
Income tax expense (benefit) 1,588,000 (108,000) 1,858,000
Total assets 29,812,000 580,000 38,387,000
Capital expenditures 2,579,000 -
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) 1,056,000 863,000 (91,000) 1,828,000
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.
<TABLE>
<S> <C> <C> <C>
Net sales 1999 1998 1997
----------- ---------- -------------
United States $ 66,637,000 $ 58,075,000 $ 33,731,000
Canada 1,665,000 725,000
Other 175,000 110,000
------------- ----------- --------------
$ 68,477,000 $ 60,522,000 $ 34,566,000
============= =========== ==============
</TABLE>
Significantly all of the Company's long-lived assets are located in the
United States.
14. Income taxes:
The income tax effects of temporary differences that give rise to
significant portions of the deferred tax assets are presented as
follows:
<TABLE>
<S> <C> <C>
1999 1998
------------ ------------
Accounts receivable due to the allowance for returns 206,000 200,000
and doubtful accounts
Inventories due to additional costs inventoried for 116,000 66,000
tax purposes and inventory reserves
Equipment and improvements due to depreciation 137,000 84,000
Intangible assets due to differences in amortization (47,000) 126,000
Accounts payable and accrued expenses due to accrued
bonuses and severence costs - 8,000
--------- ----------
Total deferred tax assets $ 412,000 $ 484,000
========= ==========
</TABLE>
The significant components of the income tax provision attributable to
continuing operations for the years ended December 31, 1999, 1998 and
1997 are presented below:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
------------ ----------- ----------
Current income tax (benefit) expense $ (94,000) $ 2,069,000 $ 1,832,000
Deferred income tax expense (benefit) (exclusive of the
effects of the other components listed below) 72,000 (186,000) 21,000
Tax credits (25,000) (25,000) (25,000)
-------------- ------------ ----------
Income taxes (benefit) provision $ (47,000) $ 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 is attributable to the following:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---------- ----------- ----------
Income tax provision (benefit) at 34% ($76,000) $1,479,000 $302,000
State income taxes net of federal income tax (7,000) 350,000 307,000
Intangible assets and amortizations 44,000 42,000 30,000
Tax credits (25,000) (25,000) (11,000)
Stock-based compensation - - 1,237,000
Other 17,000 12,000 (37,000)
----------- ----------- -----------
Actual income tax provision (benefit) ($47,000) $1,858,000 $1,828,000
=========== =========== ==========
</TABLE>
The federal and state components of the income tax provisions
(benefits) are as follows:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
----------- ---------- -----------
Federal $(32,000) $1,328,000 $1,423,000
State (15,000) 530,000 405,000
----------- ---------- -----------
$(47,000) $1,858,000 $ 1,828,000
=========== ========== ===========
</TABLE>
15. Related parties:
At December 31, 1999 and 1998, two officers/directors owed the Company
approximately $418,000 each and $507,000 each pursuant to loans. These
amounts are included in the prepaid and other current assets. The loans
outstanding at December 31, 1999 bear interest of 6% per annum and are
due in quarterly installments based on a fixed payment schedule.
For the years ended December 31, 1999, 1998 and 1997, the Company
recognized interest income of approximately $ 62,000, $26,000 and $30,000
respectively, from loan to officers/directors.
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART III
ITEM 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
ITEM 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
<TABLE>
<S> <C> <C> <C>
Executive
Officer or
Director
Name Age Position Since
-------- ------ ------------ ------------
Meredith W. Birrittella 33 Chairman, Director and Chief Executive 3/21/90
Officer
Warren Schaeffer 42 Director, Secretary and President 3/1/94
of PTI
Anthony Costanzo 30 Chief Financial Officer 10/1/97
Timothy Drumhiller 36 President of Flents Products Co., Inc 04/14/99
Nikolai Nachamkin 33 Director 6/20/99
Robert Fuhrman 71 Director 12/12/96
Gary J. Kocher 36 Director 10/21/97
</TABLE>
Meredith W. Birrittella. Mr. Birrittella, age 33, 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 30, 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.
Warren Schaeffer. Mr. Schaeffer, age 42, co-founded Foam, the company
acquired by the Company in March, 1994. Since the acquisition, he has served as
the president of PTI, and in October 1996, was elected as a director of the
Company.
Timothy Drumhiller. Mr. Drumhiller, age 36, became President of Flents
Products Co., Inc. in April of 1999. Prior to the acquisition of Karlen
Manufacturing Inc. by Flents, Mr. Drumhiller held the position of President of
Karlen Manufacturing Inc. (formerly Optico Manufacturing) since June of 1996.
Mr. Drumhiller began his career with Karlen in 1986 as National accounts
Manager. In 1987 Mr. Drumhiller was promoted to National Sales Manager and again
promoted to Vice President of Sales in 1992.
Robert Fuhrman. Mr. Fuhrman, age 71, 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 36, became a director of the Company in
1997. Mr. Kocher has been a partner in the law firm of Preston, Gates & Ellis,
LLP since 1994. 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.
Nikolai Nachamkin. Mr. Nachamkin, age 33, became a director of the Company
in June 1999. Mr. Nachamkin has been employed by Den Norske Bank as a First Vice
President since January 1997. Prior to that, Mr. Nachamkin was employed by Ceres
Financial Concepts as a Vice President between 1995 and 1997.
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, three Directors (Gary Kocher, Warren
Schaeffer and Robert Fuhrman) terms in office have expired and/or such director
is serving an interim term and have been nominated for re-election at this years
shareholders meeting. Meredith Birrittella and Nikolai Nachamkin's term 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.
Nachamkin. The Company has no executive, nominating, compensation or other
committees.
Beneficial Reporting Compliance
The following persons, each of whom was, at some time during the
Company's 1999 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:
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
ITEM 11. Executive Compensation
<TABLE>
Summary Compensation Table
<S> <C> <C> <C> <C> <C>
Securities
Name and Underlying Other Annual
Principal Position Year Salary Bonus Options Compensation
- - ----------------------- ------ ---------- ------ ------------ -----------------
Meredith W. Birritella 1999 $ 387,308 0 0 $ 2,928
Chief Executive Officer 1998 $ 226,923 0 0 $ 2,580
1997 $ 161,539 0 25,000 $ 2,580
Warren Schaeffer 1999 $ 380,769 0 0 $ 2,928
Secretary, and President 1998 $ 216,923 0 0 $ 2,580
of Operating Subsidiary 1997 $ 161,539 0 25,000 $ 2,580
Timothy Drumhiller 1999 $ 114,371 0 0 $ 1,500
President of Operating
Subsidiary
Anthony Costanzo 1999 $ 141,000 $ 40,000 31,000 $ 2,928
Chief Financial Officer 1998 $ 106,174 $ 50,000 8,000 $ 2,580
1997 $ 73,154 $ 15,000 8,000 $ 2,580
</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
options to purchase 2,500 shares of the Company's common stock to such directors
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
expired in 1999, Warren Schaeffer and Robert Fuhrman are serving terms that
expire in 2000, Meredith Birrittella and Nikolai Nachamkin 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.
Nachamkin. The Company has no executive, nominating, compensation or other
committees.
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 500,000 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. Nikolai Nachamkin 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 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 1, 2000, to the extent
known to the Company, the ownership of the Company's Common Stock by (i) each
person who is known by the Company to own of record or beneficially more than
five percent of the Company's Common Stock, (ii) each of the Company's directors
and executive officers and (iii) all directors and executive officers as a
group. Except as otherwise indicated, the shareholders listed in the table have
sole voting and investment powers with respect to the shares indicated.
<TABLE>
<S> <C> <C>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
- - ---------------------- ----------------------- --------------------
Martin P. Birrittella
One Executive Boulevard
Yonkers, NY 10701 552,698 (1) 11.2%
Meredith W. Birrittella
One Executive Boulevard
Yonkers, NY 10701 900,198 (2) 18.2%
Thomas Coleman
One Executive Boulevard
Yonkers, NY 10701 451,125 (3) 9.1%
Warren Schaeffer
One Executive Boulevard
Yonkers, NY 10701 207,000 (4) 4.2%
Anthony Costanzo
One Executive Boulevard
Yonkers, NY 10701 62,000 (5) 1.3%
Nikolai Nachamkin
One Executive Boulevard
Yonkers, NY 10701 2,500 (6) .1%
Robert Fuhrman
One Executive Boulevard
Yonkers, NY 10701 7,500 (7) .2%
Gary Kocher
One Executive Boulevard
Yonkers, NY 10701 10,500 (7) .2%
All directors and
officers as a group
(six persons) 1,186,698 (2)(4)(5)(6)(7) 23.9%
</TABLE>
(1) Includes 25,000 shares of the Company's Common Stock which are
issuable in respect of stock options at an exercise price of $1.25 per share,
and 88,320 shares of the Company's Common Stock, which are issuable in respect
of stock options at an exercise price of $4.50.
(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 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
(4) 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 $5.375 per share.
(5) 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. Includes 31,000 shares of the Company's
Common Stock which are issuable in respect of stock options at an exercise price
of $2.625 per share.
(6) Includes 2,500 shares of the Company's Common Stock which are issuable
in respect of stock options at an exercise price of $1.50
(7) Includes 7,500 shares of the Company's Common Stock which are issuable
in respect of stock options at an exercise price of $1.50
ITEM 13. Certain Relationships and Related Transactions.
In September 1994, the shareholders of the Company approved a stock
option plan, which provided that Mr. Thomas 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, 1999, Mr. Meredith Birrittella and Mr. Warren Schaeffer
each owed the company approximately $418,000. These loans bear interest at 6%
per annum. Repayment of these loans is made quarterly based on a fixed payment
schedule.
For the year ended December 31, 1999, the Company recognized interest
income of approximately $56,000 from loans to Officers/Directors.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, 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
10.10Line 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
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the registrant has duly 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)
April 14, 2000
Pursuant to the requirements of the Securities Act of 1933, this report
has been signed below by the following persons of the registrant and in the
capacities and on the dates indicated.
- - ------------------------ Chief Executive Officer, April 14, 2000
Meredith W. Birrittella Chairman and Director
- - ------------------------ Chief Financial Officer April 14, 2000
Anthony Costanzo Chief Accounting Officer
- - ------------------------- Director April 14, 2000
Robert Fuhrman
- - -------------------------- Director and Secretary April 14, 2000
Warren Schaeffer
- - --------------------------- Director April 14, 2000
Gary J. Kocher
- - ------------------------- Director April 14, 2000
Nikolai Nachamkin
<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.
<TABLE>
<S> <C> <C>
/s/ Meredith W. Birrittella Chief Executive Officer, April 14, 2000
- - ------------------------------------
Meredith W. Birrittella Chairman and Director
/s/ Anthony Costanzo Chief Financial Officer April 14, 2000
- - ------------------------------------
Anthony Costanzo Chief Accounting Officer
/s/ Robert Fuhrman Director April 14, 2000
Robert Fuhrman
/s/ Warren Schaeffer Director and Secretary April 14, 2000
- - ------------------------------------
Warren Schaeffer
/s/ Gary J. Kocher Director April 14, 2000
- - ------------------------------------
Gary J. Kocher
/s/ Nikolai Nachamkin Director April 14, 2000
Nikolai Nachamkin
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 733,530
<SECURITIES> 0
<RECEIVABLES> 11,115,298
<ALLOWANCES> 515,881
<INVENTORY> 12,959,906
<CURRENT-ASSETS> 26,885,127
<PP&E> 7,571,148
<DEPRECIATION> 4,344,701
<TOTAL-ASSETS> 50,735,035
<CURRENT-LIABILITIES> 17,151,516
<BONDS> 0
0
0
<COMMON> 49,564
<OTHER-SE> 18,699,362
<TOTAL-LIABILITY-AND-EQUITY> 50,735,035
<SALES> 68,477,246
<TOTAL-REVENUES> 68,477,246
<CGS> 50,437,187
<TOTAL-COSTS> 50,437,187
<OTHER-EXPENSES> 15,898,016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,365,910
<INCOME-PRETAX> (223,867)
<INCOME-TAX> (47,000)
<INCOME-CONTINUING> (223,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (206,628)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
