FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to .
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Commission File Number: 1-11586
PTI HOLDING INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3590980
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
c/o 15 East North Street, Dover, DE 19901
(Address of principal executive offices) (Zip Code)
(302) 678-0855
(Issuer's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of August 14, 2000,
4,956,352 shares of the issuer's common equity were outstanding.
The registrant filed form 10-Q or 10-QSB in all applicable preceding
quarters.
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
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Consolidated Balance Sheets as of June 30, 2000 (un-audited) and December 31, 1999 12
Consolidated Statements of Operations for the three and six months ended June 30, 2000 and 1999 13
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 14
Notes to Consolidated Financial Statements 16 - 19
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ITEM 2. Management's Discussion and Analysis
Statements in this Quarterly Report on Form 10-Q concerning the
Company's business outlook or future economic performance, or other financial
items, and plans and objectives related thereto, and statements concerning
assumptions made or expectations as to any future events, conditions,
performance or other matters, are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors that could cause actual
results to differ materially from those stated in such statements.
PTI Holding Inc. (the "Company") was incorporated under the laws of Delaware in
March 1990.
On March 1, 1994, the Company acquired Foam-O-Rama, Inc. ("Foam"), a
New York corporation which was principally engaged in the business of the
design, marketing and sale of bicycle helmets, by merging it with and into the
company's wholly-owned operating subsidiary, Protective Technologies
International Inc., a New York corporation ("PTI"), pursuant to a Merger
Agreement and Plan of Reorganization dated February 14, 1994 among PTI, Foam and
Foam's shareholders. From and after March 2, 1994, Foam had no separate or
independent existence, having been merged into PTI. For purposes of 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 has been
accounted for as a purchase. Flents delivered at closing an aggregate merger
consideration of approximately $4.8 million. On October 5, 1998, in accordance
with certain provisions of the Flents transaction, an additional 54,846 shares
of the company's common stock were issued to the original shareholders of
Flents.
On May 12, 1998, Flents acquired certain assets of the Comfees division
of Magnivision, a subsidiary of American Greetings Corporation, for a purchase
price of approximately $1,700,000. The Comfees division manufactures and
distributes contact lens cases, liquid dispensers, medicine droppers, finger
splints and ear protectors, among other health and beauty care items.
On April 14, 1999, Flents consummated an asset 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 June 30, 2000 the $8,000,000 promissory note had a
stated value of $6,071,549 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.
Three Months ended June 30, 2000 as compared to the
Three Months ended June 30, 1999
The Company's net sales were $23,373,331 during the three months ended
June 30, 2000, an increase of 7% from net sales of $21,769,208 for the same
period in 1999. Sales for PTI were $18,182,645 for the three months ended June
30, 2000 and $16,914,859 for the same period in 1999. The increase in sales for
PTI was attributed to the initial placement of a new product line at a major
customer. Sales for Flents were $5,190,686 for the three months ended June 30,
2000 and $4,854,349 for the same period in 1999. The increase in sales for
Flents resulted predominantly from the acquisition by Flents of Karlen, which
occurred in April 1999.
The cost of sales for the three months ended June 30, 2000 was
$17,685,366 (resulting in a gross profit margin of 24%), compared to the
Company's cost of sales for the three months ended June 30, 1999 of $16,195,452
(resulting in a gross profit margin of 26%). PTI's gross profit margin
contribution approximated 18% for the three months ended June 30, 2000 and 19%
for the three months ended June 30, 1999. Flents' gross profit margin
contribution approximated 47% for the three months ended June 30, 2000 and 49%
for the three months ended June 30, 1999. The fluctuation in gross margins for
PTI and Flents was due primarily to changes in product mix sales. PTI's gross
margins for the three months ended June 30, 2000 were also affected by increased
credit allowances to major customers over the same period in 1999. The cost of
sales for PTI for the three months ended June 30, 2000 also included additional
charges for the write off of obsolete inventories and tooling in the amounts of
$420,000 and $271,000, respectively.
Selling, general and administrative expenses for the three months ended
June 30, 2000 were $5,781,312 compared to selling, general and administrative
expenses of $4,226,801 for the three months ended June 30, 1999. Selling,
general and administrative expenses, as a percentage of sales were 25% and 19%
for the quarters ended June 30, 2000 and 1999, respectively. The increased
selling, general and administrative spending in 2000 was primarily due to the
addition of the operating expenses of Karlen, which was acquired in April 1999,
higher costs associated with the expansion of the businesses, 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. Selling,
general and administrative expenses for the three months ended June 30, 2000
also included restructuring charges in the amount of approximately $392,000. The
charges were comprised of $267,000 related to excess warehouse space and other
costs and $125,000 in employee severance costs.
Interest expense, net of interest income, for the Company for the three
months ended June 30, 2000 was $874,313, compared to net interest expense of
$702,497 for the three months ended June 30, 1999. The increase in net interest
expense from 1999 to 2000 was due primarily to financing increased inventory
levels for the Company and to the financing costs associated with the
acquisition of Karlen. Net interest expense for Flents was $498,830 for the
three months ended June 30, 2000 and $430,586 for the three months ended June
30, 1999.
The Company had a net loss of ($643,033) for the three months ended
June 30, 2000 compared to the Company's net income for the three months ended
June 30, 1999 of $249,562. The reduction in earnings resulted primarily from
increased selling, general and administrative spending and the financing costs
associated with the acquisition of Karlen and from increased goodwill
amortization resulting from the acquisitions.
Six Months ended June 30, 2000 as compared to the Six
Months ended June 30, 1999
The Company's net sales were $39,117,054 during the six months ended
June 30, 2000, an increase of 3% from net sales of $37,890,057 for the same
period in 1999. Sales for PTI were $28,602,892 for the six months ended June 30,
2000 and $30,761,091 for the same period in 1999. The decrease in sales for PTI
was attributed to an overall decline in the purchasing patterns of customers as
they continue to reduce inventory levels. Sales for the six months ended June
30, 2000 from Flents were $10,514,162 compared to sales of $9,708,666 for the
same period in 1999. The increase in sales for Flents was attributed to the
additional months of sales from the acquisition of Karlen, which occurred in
April 1999.
The cost of sales for the six months ended June 30, 1999 was
$28,691,899 (resulting in a gross profit margin of 27%), compared to the
Company's cost of sales for the six months ended June 30, 1999 of $27,707,044
(resulting in a gross profit margin of 27%). PTI's gross profit margin
contribution approximated 20% for the six months ended June 30, 2000 and 22% for
the six months ended June 30, 1999. Flents' gross profit margin contribution
approximated 45% for the six months ended June 30, 2000 and 48% for the six
months ended June 30, 1999. The fluctuation in gross margins for PTI and Flents
was due primarily to changes in product mix sales. PTI's gross margins for the
six months ended June 30, 2000 were also affected by increased credit allowances
to major customers over the same period in 1999. The cost of sales for PTI for
the six months ended June 30, 2000 also included additional charges for the
write off of obsolete inventories and tooling in the amounts of $420,000 and
$271,000, respectively.
Selling, general and administrative expenses for the six months ended
June 30, 2000 were $10,689,281 compared to selling, general and administrative
expenses of $7,735,170 for the six months ended June 30, 1999. Selling, general
and administrative expenses, as a percentage of sales were 27% and 20% for the
six months ended June 30, 2000 and 1999, respectively. The increased selling,
general and administrative spending in the first six months of 2000 was
primarily due to the higher costs associated with the expansion of the helmet,
bicycle and bicycle accessory business, coupled with an increased percentage of
sales of licensed products, the acquisition of Karlen, installation of new
systems and the higher costs for human resources. Selling, general and
administrative expenses for the six months ended June 30, 2000 also included
restructuring charges in the amount of approximately $392,000. The charges were
comprised of $267,000 related to excess warehouse space and other costs and
$125,000 in employee severance costs.
The Company had a net loss of $1,196,975 after the minority interest
deduction for the 40% outside ownership in Flents for the six months ended June
30, 2000 compared to the Company's net income for the six months ended June 30,
1999 of $734,624. The reduction in earnings resulted primarily from increased
selling, general and administrative spending and the financing costs associated
with the acquisition of Karlen and from increased goodwill amortization
resulting from the acquisitions.
Liquidity and Capital Resources
The Company's working capital at June 30, 2000 was $8,826,708 as
compared to $9,733,611 at December 31, 1999.
The cash flows of the Company have fluctuated due to the impact of net
income and losses, capital spending, working capital requirements, the issuance
of common stock and other financing activities. The Company expects that cash
flows in the near future will be primarily determined by the levels of net
income, working capital requirements, and financings, if any, undertaken by the
Company. Net cash increased (decreased) by $12,657 and $(412,638) in the six
months ended June 30, 2000 and 1999, respectively.
Net cash (used in) provided by operating activities was $(3,632,889)
and $4,022,268 in the six months ended June 30, 2000 and 1999, respectively. Net
(loss) income was $(1,196,975) and $734,624 for the same periods, respectively.
Net cash (used in) investing activities was $(551,986) and
$(17,513,678) in the six months ended June 30, 2000 and 1999, respectively. Net
cash used in investing activities included payments for acquired businesses and
assets, payments primarily for computers, manufacturing equipment and other
capital expenditures of $443,674 and $573,287 in these periods, respectively.
Net cash used in investing activities for the six months ended June 30, 1999
included intangible assets acquired pertaining to the Karlen acquisition of
$14,330,589.
Net cash provided by financing activities was $4,197,532 and
$13,078,772 in the six months ended June 30, 2000 and 1999, respectively. During
the six months ended June 30, 2000, and 1999, net borrowings were $5,029,765 and
$11,275,272, respectively. The increase in net borrowings was due primarily to
increased inventory levels.
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 June 30, 2000, the Company had $746,187 of cash available for its
cash needs, compared to cash of $733,530 as of December 31, 1999.
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 available 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 June 30, 2000, the balances of the lines of credit were
$13,121,487 (PTI) and $2,475,296 (Flents), and the term loan balance was
$5,817,758. The availability on the lines of credit, based on accounts
receivable and inventory balances at June 30, 2000 were approximately
$14,000,000 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, minimum leverage ratios, and minimum net worth amounts, all as defined
in the agreement. At June 30, 2000, PTI was not in compliance with the net worth
and the fixed charge ratio requirements. Also, at June 30, 2000, Flents was not
in compliance with the leverage ratio. Both PTI and Flents are expecting to
receive waivers through June 30, 2000 from PNC Business Credit of these
covenants.
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%. 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. Under the terms of the
agreement, Flents is required to comply with certain affirmative covenants,
including the maintenance of a minimum fixed charge ratios, minimum leverage
ratios, and minimum net worth amounts, all as defined in the agreement. At June
30, 2000, Flents was not in compliance with the leverage ratio requirement.
Flents received a waiver through June 30, 2000 from the subordinated lender of
this covenant.
On July 24, 2000, the Company's board of directors approved an
agreement by which an additional $2,000,000 of equity will be contributed to the
Company by two of its officers. Under the terms of the agreement, Meredith
Birrittella and Warren Schaeffer will each agreed to contribute $1,000,000 in
exchange for 2,173,913 restricted shares of the Company's common stock. These
shares do not bear any registration rights. The price per share as set forth in
the agreement governing the issuance of the stock was $.46, which represented a
9.2% discount from the average closing price over the two day trading period
ended July 25, 2000. After the completion of the equity infusion, Mr.
Birrittella and Mr. Schaeffer will own approximately 32% and 25%, respectively,
of the Company's common stock outstanding. The transaction is expected to close
on August 15, 2000.
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 $337,000 and $72,000 for the six months ended June 30, 2000 and
1999, respectively. It is expected that the Company will spend approximately
$400,000 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 legal tender in
these countries. On January 1, 2002, the Euro is scheduled to replace the
sovereign legal currencies of these countries. The Company will evaluate the
impact the implementation that the Euro will have on its business operations,
and no assurance can be given that the implementation of the Euro will not have
a material affect on the Company's business, financial position and results of
operational, and operations, and cash flows. In addition, the Company cannot
accurately predict the impact the Euro will have on currency exchange rates or
the Company's currency exchange risk.
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company has reviewed the bulletin and
believes that its current revenue recognition policy is consistent with the
guidance provided in SAB No. 101.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
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 June 30, 2000, and are sensitive to the above market risks.
Interest Rate Risks
At June 30, 2000, the Company had financial assets totaling $16.7 million and
financial liabilities totaling $35.2 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 June 30, 2000, the Company had fixed rate financial assets of $15.7 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 June 30, 2000, the Company had fixed rate debt of $14.8 million and variable
rate debt of $20.4 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.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.
Certain product liability claims and actions are pending against the
Company. While the outcome of such claims cannot be determined, it appears the
Company's product liability insurance is adequate to cover any losses that may
arise from such claims.
ITEM 4. Submission of Matters to a Vote of Security-Holders.
No matter was submitted during the second quarter of the Company's 2000
fiscal year to a vote of security-holders.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Registrant's Articles of Incorporation, as
amended, incorporated by reference to the
like numbered exhibit in the Registrant's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-53466
3.2 Registrant's by-laws, incorporated by
reference to the like numbered exhibit in
the Registrant's Registration Statement on
Form SB-2 under the Securities Act of 1933,
as amended, File No. 33-53466
10.2 Form of Stock Option granted to employees,
independent contractors and consultants,
incorporated by reference to exhibit number
10.14 in the Registrant's Registration
Statement on Form SB-2 under the Securities
Act of 1933, as amended, File No. 33-53466
10.3 Agreement and Plan of Merger dated February
14, 1994 among Protective Technologies
International Inc., Foam-O-Rama, Inc., Ellen
Schaeffer and Lori Hillsberg, as amended,
incorporated by reference to exhibit number
2 in the Registrant's Current Report on Form
8-K dated March 16, 1994 under the
Securities Exchange Act of 1934, as amended
10.4 Non competition Agreement dated March 1,
1994 between Protective Technologies
International Inc. and Ellen Schaeffer and
Lori Hillsberg, incorporated by reference to
exhibit number 99.1 in the Registrant's
Current Report on Form 8-K dated March 16,
1994 under the Securities Exchange Act of
1934, as amended
10.5 Non-competition Agreement dated March 1,
1994 between Protective Technologies
International Inc. and Warren Schaeffer and
Alan Hillsberg, incorporated by reference to
exhibit number 99.2 in the Registrant's
Current Report on Form 8-K dated March 16,
1994 under the Securities Exchange Act of
1934, as amended
10.6 Form of Promissory Note memorializing loans
from directors and officers as authorized by
the Board of Directors on March 13, 1996,
incorporated by reference to exhibit number
10.21 in the Registrant's Annual Report on
Form 10-KSB for the period ended December
31, 1995, under the Securities Exchange Act
of 1934, as amended
10.7 Guarantee from Warren Schaeffer and Alan
Hillsberg to Protective Technologies
International Inc., incorporated by
reference to exhibit number 10.21 in the
Registrant's Quarterly Report on Form 10-QSB
for the period ended September 30, 1995,
under the Securities Exchange Act of 1934,
as amended
10.10 Line of Credit Agreement (Asset Based),
dated May 6, 1996, between Key Bank of New
York, Protective Technologies International
Inc., PTI Holding Inc. and Protective
Technologies of America Inc., and collateral
loan documents thereto, incorporated by
reference to exhibit number 10.25 in the
Registrant's Quarterly Report on Form 10-QSB
dated March 31, 1996, under the Securities
Exchange Act of 1934, as amended
10.13 Merger Agreement and plan of Reorganization
dated July 25, 1997 among PTI Holding Inc.
and Flents Products Co., Inc., as amended,
incorporated by reference to exhibit numbers
1 and 2 in the Registrant's Current Report
on Form 8-K date August 20, 1997 under the
Securities Exchange Act of 1934, as amended.
`
10.14 Asset Purchase Agreement dated January 8,
1999, by and among Flents Products Co.,Inc.,
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.
10.15 Purchase 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.
10.16 Revolving 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.
10.17 Revolving 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.
10.18 Securities 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.
10.19 Investment 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.
10.20 Management Agreement dated April 14, 1999
between Flents Products Co., Inc. and
Protective Technologies International Inc.
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.
10.21 Shareholder'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.
10.22 Fairness 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.
10.23 Consent 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
10.24 Subscription Agreement dated July 24, 2000
among the Registrant, Meredith Birrittella
and Warren Schaeffer
(b) Reports on Form 8-K
The Company did not file any Current Report on Form 8-K during the quarter ended
June 30, 2000.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PTI HOLDING INC.
By/s/ Meredith W. Birrittella
Meredith W. Birrittella,
Chairman of the Board
Chief Executive Officer (authorized signatory)
In accordance with the requirements of the Securities Act of 1933, this
report has been signed by the following persons in the capacities and on the
dates stated.
<TABLE>
<S> <C> <C>
/s/ Meredith W. Birrittella Chief Executive Officer, August 14, 2000
---------------------------
Meredith W. Birrittella Chairman and Director
/s/ Anthony Costanzo Chief Financial Officer August 14, 2000
---------------------------
Anthony Costanzo Chief Accounting Officer
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
ASSETS
June 30, 2000 December 31, 1999
(unaudited)
---------------- ------------------
Current assets:
Cash and cash equivalents $ 746,184 $ 733,530
Accounts receivable, net of allowance for returns and doubtful
collections of $863,609 (June 30, 2000) and $515,881 (December 31, 1999) 15,099,153 10,599,417
Inventories 14,919,241 12,959,906
Deferred tax asset 552,559 322,000
Prepaid expenses and other current assets 2,890,333 2,270,274
Total current assets 34,207,470 26,885,127
Deferred tax asset 53,085 90,000
Equipment and improvements, net 2,821,327 3,226,447
Intangible assets, net 19,513,074 19,871,196
Other assets 548,156 662,265
---------------- -----------------
$ 57,143,112 $ 50,735,035
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable, bank $ 15,596,783 $ 10,567,018
Current portion of long term debt 1,800,000 1,800,000
Accounts payable and accrued expenses 7,947,067 4,784,498
---------------- -----------------
Total current liabilities 25,343,850 17,151,516
---------------- -----------------
Long term debt, net of current portion 4,017,758 4,849,991
Subordinated note payable 6,071,549 5,954,841
Commitments and contingencies
Minority interest in subsidiary 4,158,004 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) (54,822)
Capital in excess of par 16,283,217 16,283,217
Retained earnings 1,273,992 2,470,967
---------------- ----------------
Total stockholders' equity 17,551,951 18,748,926
---------------- ----------------
$ 57,143,112 $ 50,735,035
================ ================
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<S> <C> <C> <C> <C>
For the Three Months ended June 30, For the Six Months ended June 30,
-------------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- ------------- -------------- --------------
Net sales $ 23,373,331 $ 21,769,208 $ 39,117,054 $ 37,890,057
Cost of sales 17,685,366 16,195,452 28,691,899 27,707,044
------------- ------------ ------------ ------------
Gross profit 5,687,965 5,573,756 10,425,155 10,183,013
------------- ------------ ------------ ------------
Operating expenses :
Selling, general and administrative expenses 4,375,841 2,979,885 8,268,199 5,578,528
Restructuring charge 391,765 - 391,765 -
Licensing fees 560,582 645,678 1,121,229 1,124,379
Depreciation and amortization 453,124 601,238 908,088 1,032,263
------------- ------------ ------------ ------------
Total operating expenses 5,781,312 4,226,801 10,689,281 7,735,170
------------- ------------ ------------ ------------
Income (loss) from operations (93,347) 1,346,955 (264,126) 2,447,843
Interest expense, net 874,313 702,497 1,578,515 967,070
------------- ------------ ------------ ------------
Income (loss) before income taxes and
minority interests (967,660) 644,458 (1,842,641) 1,480,773
Income taxes (benefit) (406,417) 270,672 (773,909) 621,925
------------- ------------ ------------ ------------
Income (loss) before minority interests (561,243) 373,786 (1,068,732) 858,848
Minority interests in subsidiary (81,790) (124,224) (128,243) (124,224)
============= ============ ============= ============
Net income (loss) $ (643,033) $ 249,562 $(1,196,975) $ 734,624
============= ============ ============= ============
Net income (loss) per share of common stock :
Basic $ (.13) $ 0.05 $ (.24) $ .15
Diluted (.13) 0.05 (.24) .15
Weighted average shares outstanding :
Basic 4,956,352 4,956,352 4,956,352 4,956,352
Diluted 4,956,352 5,008,291 4,956,352 5,011,760
</TABLE>
<PAGE>
<TABLE>
PTI HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<S> <C> <C>
2000 1999
----------- ----------
Cash flows from operating activities:
Net income (loss) $ 7,071,224 $ 734,624
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Minority interests in income of subsidiary 128,243 124,224
Provision for returns and doubtful accounts 347,728 525,000
Depreciation 848,794 823,518
Amortization of intangible assets 480,633 216,779
Amortization of discount on Subordinated note payable 116,708 -
Deferred income tax (benefit) (193,644) (183,200)
(Increase) decrease in operating assets and liabilities:
Accounts receivable (4,847,464) (3,153,000)
Inventories (1,959,335) 5,123,914
Prepaid expenses and other current assets (520,149) (1,454,343)
Accounts payable and accrued expenses 3,162,572 916,153
Other current liabilities - 348,599
----------- -----------
Net cash (used in) provided by operating activities 4,635,310 4,022,268
=========== ===========
Cash flows from investing activities:
Cash payments as consideration for purchase of acquired businesses (8,402) (16,750,000)
Loan to stockholders (99,910) (190,391)
Purchase of equipment and improvements (443,674) (573,287)
----------- ------------
Net cash used in investing activities (551,986) (17,513,678)
=========== ============
Cash flows from financing activities:
Repayment of long term Financing (832,233) -
Borrowings, net 5,029,765 11,275,272
Repayments of common stock receivable - 3,500
Minority investment in Subsidiary - 1,800,000
----------- ------------
Net cash provided by financing activities 4,197,532 13,078,772
=========== ============
Net increase (decrease) in cash and cash equivalents 8,280,856 (412,638)
Cash and cash equivalents, beginning of period 733,530 837,618
----------- ------------
Cash and cash equivalents, end of period $ 9,014,386 $ 424,980
=========== ============
Supplemental disclosures:
Interest paid $ 1,520,481 $ 1,024,191
Income taxes paid - 417,325
Noncash investing and financing activities:
Fair value of net assets acquired - 3,419,411
Promissory note used as partial consideration in the business combination - 1,000,000
Excess of purchase price over net assets acquired - 14,330,589
Accrued liabilities - 240,231
</TABLE>
<PAGE>
PTI HOLDING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation:
The consolidated financial statements included herein have been prepared
by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 and filed with the
Securities and Exchange Commission.
In the opinion of the Company's management, these unaudited consolidated
financial statements include all adjustments, consisting solely of
normal recurring adjustments, necessary in order to present fairly the
Company's consolidated financial position as of June 30, 2000 and the
results of its operations and its cash flows for the six months ended
June 30, 2000. The results of operations for an interim period are not
necessarily indicative of the results to be attained in any other fiscal
period.
Reclassification:
For comparability, certain 1999 amounts have been reclassified where
appropriate to conform to the financial statement presentation used in
2000.
2. Intangible assets:
Intangible assets are summarized as follows:
<TABLE>
<S> <C> <C>
6/30/00 12/31/99
-------------- ---------------
Goodwill $ 14,485,325 $ 14,476,923
Customer lists 5,200,000 5,200,000
Non-compete agreement 500,000 500,000
Administrative infrastructure 300,000 300,000
In-place value of fixed assets 225,000 225,000
Exclusive supply contract 100,000 100,000
Trademarks 7,539 7,539
----------------- ----------------
20,817,864 20,809,462
Accumulated amortization (1,304,790) (938,266)
---------------- ---------------
$ 19,513,074 $ 19,871,196
================ ================
</TABLE>
3. Commitments:
In April 2000, the Company entered into a 65 month lease for a
warehousing and distribution facility. The lease calls for minimum
monthly rentals of $16,000 per month for the first 5 months and $72,054
per month thereafter through August 31, 2005.
4. 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 1999, certain product liability claims were asserted against the
Company. While the outcome of such claims cannot be determined, it
appears the Company's product liability insurance is adequate to cover
any losses that may arise from such claims.
5. Financing arrangements:
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 subsidiaries. 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 available 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 at 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 June 30, 2000, the balances
of the lines of credit were $13,121,487 (PTI) and $2,475,296 (Flents),
and the term loan balance was $5,817,758. The availability on the lines
of credit, based on accounts receivable and inventory balances at June
30, 2000 were approximately $14,000,000 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, minimum
leverage ratios, and minimum net worth amounts, all as defined in the
agreement. At June 30, 2000, PTI was not in compliance with the net
worth and the fixed charge ratio requirements. Also, at June 30, 2000,
Flents was not in compliance with the leverage ratio requirement. Both
PTI and Flents are expecting to receive waivers through June 30, 2000
from PNC Business Credit of these covenants.
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 June 30, 2000, the
$8,000,000 promissory note had a stated value of $6,071,549 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. Under the terms of
the agreement, Flents is required to comply with certain affirmative
covenants, including the maintenance of a minimum fixed charge ratios,
minimum leverage ratios, and minimum net worth amounts, all as defined
in the agreement. At June 30, 2000, Flents was not in compliance with
the leverage ratio. Flents received a waiver through June 30, 2000 from
the subordinated lender of this covenant.
6. 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, manufactures and markets earplugs and other
safety and medical supplies such as an eye drop delivery system, styptic
devices, and air filter masks. Customers include major department
stores, drug chains and supermarket retailers in the United States.
The accounting policies of the segments are the same as those described
in the summary of the significant accounting policies. The Company
evaluates performance based on operating earnings of the respective
segments. 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 47% and 19% of net
sales for the six months ended June 30, 2000. The same two retailers
accounted for approximately 47% and 23% of net sales for the same period
in 1999. As of June 30, 2000, accounts receivable included approximately
$6,200,000 and $4,400,000 respectively, due from these two customers.
The PTI sports segment reports the sales of the larger of the two major
customers, and both segments report the sales of the second major
customer. Although other major retailers are customers, a loss of one or
both of these two established major customers would cause a significant
loss of sales and affect operating results adversely.
The following table presents segment information for the six months
ended June 30, 2000 and 1999.
<TABLE>
<S> <C> <C> <C> <C>
2000 PTI Sports Flents Other Total
--------------- -------------- ---------- ------------ ----------------
Net sales $ 28,603,000 $ 10,514,000 $ - $ 39,117,000
Gross profit 5,659,000 4,766,000 - 10,425,000
Operating earnings 7,435,000 3,221,000 33,000 10,689,000
Depreciation and amortization 312,000 596,000 - 908,000
Interest revenue 46,000 11,000 1,000 58,000
Interest expense 633,000 1,004,000 - 1,637,000
Income tax expense (benefit) (993,000) 232,000 (13,000) (774,000)
Total assets 28,864,000 26,410,000 1,675,000 56,949,000
Capital expenditures 447,000 268,000 - 715,000
1999 PTI Sports Flents Other Total
----------- ------------- ------------ ----------- -----------
Net sales $ 30,761,000 $ 7,129,000 $ - $ 37,890,000
Gross profit 6,785,000 3,398,000 - 10,183,000
Operating earnings (loss) 1,351,000 1,141,000 (44,000) 2,448,000
Depreciation and amortization 682,000 350,000 - 1,032,000
Interest revenue 50,000 6,000 1,000 57,000
Interest expense 499,000 525,000 - 1,024,000
Income tax expense (benefit) 379,000 261,000 (18,000) 622,000
Total assets 26,734,000 27,006,000 906,000 54,646,000
Capital expenditures 473,000 100,000 - 573,000
</TABLE>
Financial information relating to the Company's operations by geographic
area is presented below.
Net sales 2000 1999
---------------- -------------
United States $ 37,974,000 $ 36,344,000
Canada 1,068,000 1,496,000
Other 75,000 50,000
----------------- -------------
$ 39,117,000 $ 37,890,000
================= =============
Significantly all of the Company's long-lived assets are located in the
United States.
7. Subsequent events:
On July 24, 2000, the Company's board of directors approved an agreement
by which an additional $2,000,000 of equity will be contributed to the
Company by two of its officers. Under the terms of the agreement, the
officers will each agreed to contribute $1,000,000 in exchange for
2,173,913 restricted shares of the Company's common stock. These shares
do not bear any registration rights. The price per share as set forth in
the agreement governing the issuance of the stock was $.46, which
represented a 9.2% discount from the average closing price over the two
day trading period ended July 25, 2000. After the completion of the
equity infusion, these officers will own approximately 32% and 25%, of
the Company's common stock outstanding. The transaction is expected to
close on August 15, 2000.
