ITEM 1. BUSINESS.
Bollinger Industries, Inc. ("The Company") is a leading domestic supplier of consumer fitness accessory products. The Company manufactures and distributes, primarily to mass retailers, an extensive consumer fitness line, including barbells and dumbbells, aerobic steps and other aerobics products, trampolines, weightlifting belts and gloves, exercise mats, ankle and wrist weights, weightlifting bars, waist trimmers, compression shorts, and walking accessories.
RESULTS OF THE RESTRUCTURING OF OPERATIONS
In the fourth quarter of fiscal 1996, following a comprehensive review of the Company's marketing method, operating policies and liquidity, management formulated a plan to restructure the Company's operations. The primary elements of the restructuring plan were to promote the Bollinger brand name, dramatically reduce inventory levels and improve operating efficiency. (Please refer to the Company's Form 10K for fiscal 1996 for additional information).
Since 1993, a significant portion of the Company's fitness accessory products were sold with the use of celebrity endorsements. These endorsements carried heavy incremental costs and were subsequently abandoned in favor of the Bollinger brand. Customer acceptance of this change has been favorable but sales for fiscal 1997 have been virtually flat as the Company worked through existing inventory and marketing programs. The Company has introduced a line of products in striking packaging geared toward the female consumer that is ready for shipment in early fiscal 1998.
Inventory has been reduced from $30.1 million in 1996 to $16.2 million in 1997, or a reduction of 46%. Of the approximately $14.0 million reduction, approximately $8.0 million came from inventory targeted for expedient disposal in the restructuring plan. The inventory reduction has allowed the Company to reduce trade payables and debt. There is an additional opportunity for further reductions of inventory in fiscal 1998.
Concurrent with the inventory reductions, the Company has consolidated warehouse operations. This action resulted in the closing of two leased warehouses, the reduction of the warehouse workforce, and reduction in other operating costs through enhanced efficiency. In addition, domestic production of trampolines is in the process of being scaled down and relocated to corporate headquarters from Georgia. This action, in addition to the lower inventory levels, will allow the Company to further consolidate operations and reduce fixed overhead.
The Company has plans to review all avenues of product sourcing in order to significantly reduce product costs, thereby improving gross margin. Management expects that such cost reductions will be attained during fiscal 1998, but the full annual effect will not be achieved until fiscal 1999.
DISCONTINUED OPERATION
Management determined during the fourth quarter of fiscal 1996 that it would be in the best interest of the Company to dispose of its Sports Medicine and Safety Products business, known as Bollinger Healthcare (Healthcare). The Healthcare business had been unprofitable for the prior two years during which time sales had declined by 52%. The largest portion of this division was sold in September, 1996 with the remainder disposed of or abandoned in January 1997. The manufacturing facility in Lubbock ceased operation in November, 1996.
PRODUCTS AND MARKETS
Fitness Accessory Products
The Company manufactures and sells a complete line of more than 250 fitness accessory products, including barbells and dumbbells, aerobic steps and other aerobics products, trampolines, weightlifting belts and gloves, exercise mats, ankle and wrist weights, weightlifting bars, waist trimmers, compression shorts and walking accessories. Other fitness accessory products include weight sets, supports and support belts, handgrips and jump ropes. The majority of the Company's fitness accessory products retail for less than $20 but the trampolines retail for $200 to $275.
In addition to the Bollinger Fitness(TM) trademark, the Company's fitness accessories are sold under various trademarks to promote consumer identification and coordinate affiliated products. Weightlifting products include StarLock(C), SlipLock(TM) and CamLock(C) weightlifting systems, Zoom Off(C) quick release weightlifting gloves, and BrightBells(C) dumbbells. Aerobics items include the Step by Step(TM), FlexStep and SoftStep(TM) low impact aerobic steps, RibMat(TM) exercise mats, TrimRider(TM) aerobic riders, and NBF(TM) and UltraBounce(TM) trampolines. Solar(TM) trimming products, Softone(C) wrist weights, and Exergrip(TM) strengthening putty are examples of other fitness accessory products available through Bollinger.
In May 1994, as the result of an asset & business acquisition, the Company began selling NBF(TM) and Ultra Bounce(TM) trampolines through its established distribution channels for other fitness accessory products. In fiscal 1997, 1996 and 1995, trampoline sales accounted for approximately 40%, 26% and 13% respectively of the Company's total net sales.
The Company markets its fitness accessories primarily to mass retailers. The Company broadly defines mass retailers to include discount chains, department stores, sporting goods retailers and sports superstores, warehouse clubs and direct response television. In 1997, 1996, and 1995, the Company served approximately 500 accounts, although the Company's ten largest fitness accessory products customers accounted for approximately 88%, 80%,and 77% of the Company's total net sales. In fiscal 1997 Wal-Mart accounted for 32.2% of gross sales and KMart accounted for 35.7% of gross sales. Examples of discount chain customers include Wal-Mart, KMart and Target. Sears is a representative department store customer. The mass retailer category also encompasses catalog customers like J.C. Penney and catalog showroom customers such as Service Merchandise. Sporting goods retailers and sports superstore customers include chains like Oshman's Sporting Goods, H. Modell & Company, The Sports Authority, and The Academy. QVC is a shop at home cable television network that provided a direct response television outlet for Bollinger. Wal-Mart, KMart, J.C. Penney and Oshman's have been customers of the Company for approximately 20 years. The loss of one or more of the Company's major customers could have a material adverse impact on the Company.
Quality is an important element of the Company's merchandising strategy. To convey the image of quality to the consumer, the Company uses a merchandising approach that emphasizes quality through easily recognizable packaging and graphics. The Company's packaging style is uniform, with bright, coordinating colors. This has enabled it to increase the in-store merchandising impact of its products and awareness of the Bollinger brand name.
Bollinger believes it pioneered program marketing of fitness accessories. This approach allows the presentation and sales of the products as an integrated line rather than as stand alone items. The Company offers program management services to help retail customers maximize results from the presentation, merchandising and sale of its products. Program management assistance includes helping plan product mix, helping merchandise the product, and responsive inventory management. Through the use of distinctive marketing presentations, and its computerized Plan-O-Gram system, Bollinger is able to customize an in-store merchandising display for a customer, and quickly illustrate how the optimum selection of fitness accessory products would fit into a given amount of shelf space. Bollinger's ability to provide these program management services is enhanced by the size and diversity of its extended product line. The Company continually analyzes and validates its recommendations with product tracking and store level research.
MANUFACTURING AND PRODUCT SOURCING
During fiscal 1997, domestic production of fitness accessory items has been reviewed with the objective of becoming the low cost provider to the customer and at the same time recovering the gross margin erosion the Company has experienced in the last two years. The Company will seek and obtain the lowest cost product available, while maintaining high quality standards. These savings will enable the Company to remain competitive in the market place and will provide additional gross margin for operations. The Company is currently evaluating the cost effectiveness of continuing to manufacture certain of its product lines. Approximately 49%, 50%, and 55% of the Company's net sales for fiscal 1997, 1996 and 1995, respectively, were derived from the sale of U.S.-made products, the majority of which were manufactured by Bollinger.
Many of the Company's fitness accessory products are currently manufactured in a cut-and-sew operation in the Company's Grand Prairie, Texas, facility. The Company currently manufactures many of its NBFTM trampolines at its facility in Americus, Georgia.
The remainder of Bollinger's sales of fitness accessory products, including barbells, dumbbells, weightlifting bars and weightlifting gloves and trampolines, are attributable to products imported from China, Taiwan, and Pakistan. The Company's imported products are packaged in custom packaging designed by the Company. Depending on the particular product, the packaging materials may be printed overseas and packaging is part of the foreign manufacturing process. Bollinger's custom packaging differentiate its products from its competitors.
SALES
The Company utilizes both a network of independent sales representatives, and in-house sales management personnel. In-house management is responsible for overseeing the independent representatives and for direct sales to major customers. The independent sales representatives work on a commission only basis, and specialize in the sale of sporting goods products to mass retailers. These independent sales representatives market a variety of sporting goods, and therefore generally have strong relationships with the trade customers. The Company's in house sales management staff, and these independent representatives, coordinate with Bollinger's marketing department to produce a unified marketing and sales effort.
Bollinger's executive officers directly manage the accounts of the largest customers and focus on the development of new customers. Two sales managers are assigned primary responsibility for all other customers and the management of the independent sales representative firms. These sales managers also have responsibilities in new customer development. During this past year, Bollinger has consolidated its sales representation, and brought responsibility for more accounts in house. The Company believes this will give it greater flexibility in handling accounts, and improve net margins in some instances.
In a growing global economy, the Company is increasing its emphasis on the development of international sales. Through its separate International Division, it works to identify countries with significant population densities that fit the demographic profile for fitness accessory sales, and to implement programs which allow the Company to take advantage of its sourcing flexibility, its merchandising expertise, and the depth of its product line to move into those markets. It uses a variety of distributorship and trading partner arrangements to allow it access to these markets. Currently, the Company's products are sold in 40 nations and export sales in fiscal 1997 were approximately $2.8 million.
PRODUCT DEVELOPMENT
The Company's product development effort continuously focuses on creating, obtaining and developing new and innovative products and product ideas. Similar effort is given to regular reevaluation of existing products and how they may be repositioned to enhance the Company's competitive position in the marketplace. Bollinger also frequently examines many unsolicited product ideas, but generally does not make any advance commitments to purchase or license a new product submission. New products and product ideas may come from individual inventors, small companies that do not have sufficient manufacturing capability or the relationships with mass retailers needed to market a new product or consumers who submit new ideas based on personal experience. Once the Company has identified a product, it will determine appropriate sourcing for the product to attempt to ensure both quality manufacture and low costs. The Company's product lines currently include more than 250 fitness accessory products, including several trampoline items.
COMPETITION
Bollinger participates in a highly competitive industry, competing with a number of established manufacturers, importers and distributors of fitness products. Many competitors have significantly greater financial and other resources than those available to the Company. The Company believes that the principal competitive factors affecting its business include customer service, manufacturing and distribution capabilities, price, marketing and merchandising expertise, quality, brand name recognition and the ability to create and develop a broad variety of innovative products and concepts.
The Company believes its principal competitors are large fitness equipment manufacturers, which also sell fitness accessory products, and smaller importers, which offer a more limited assortment of products than Bollinger or the larger competitors. There are relatively few barriers to entry in the fitness accessory products market.
The Company believes that one of the largest fitness and exercise equipment manufacturers is Icon Health & Fitness, Inc. ("Icon"), which markets products under the brand names of Weslo, Jumpking, Healthrider, Weider and ProForm. Icon offers, among many other items, a line of packaged fitness accessory products similar to Bollinger's fitness accessory products and backyard trampolines. Although the Company believes that the majority of Icon's sales come from treadmills, exercise machines, and weight benches, Icon
competes directly with Bollinger for sales of a large number of handheld fitness accessories and trampoline products. The Company believes that Icon has larger net sales than the Company.
RDM Inc., formerly the Roadmaster Company, is another of the largest fitness equipment and trampoline manufacturers. The Company believes that RDM Inc. has larger net sales than the Company.
PATENTS AND TRADEMARKS
The Company has rights to a number of patented inventions, trademarks and trade names used in connection with the sale and marketing of its products. The company does not believe it infringes any patent, trademark or trade name rights.
The Company currently holds and protects the rights to a number of U.S. patents and additionally has a number of exclusive and nonexclusive licenses under various other U.S. patents. It does not hold any foreign patents. Bollinger does not view any single patent as critical to its business and none of the patents or trademarks expire (without a renewal option) in the next five years except for the exclusive rights to the name and likeness of Nolan Ryan, in connection with his endorsement of Bollinger products, which expire in May, 1997.
Bollinger owns a number of trademarks and has licensed the use of additional trademarks in the U.S. The Company intends to protect them to the fullest extent practicable. Bollinger has registered its trademark in a number of foreign countries.
EMPLOYEES
As of March 31, 1997, the Company employed approximately 350 persons on a full-time basis, of which approximately 290 employees were engaged in receiving, manufacturing, warehousing, and shipping activities. Approximately 60 employees were engaged in sales, customer service, accounting, MIS, and other administrative functions. In addition, the Company, from time to time, uses part-time workers and/or contract labor. None of the Company's employees are represented by a union. The Company believes relations with its employees are good.
REGULATIONS
The Company and its products are subject to numerous federal, state, and local laws, rules and regulations ("Regulations"). Among the more significant of such Regulations are consumer product safety laws under which a company's products can be barred from sale or subject to recall if found to be hazardous; occupational safety and health laws; and environmental laws.
The Company is not a party to any threatened or pending material regulatory action, other than as discussed below in Item 3. Legal Proceedings.
ITEM 2.
ITEM 2. PROPERTIES.
The Company leases approximately 402,000 square feet in Grand Prairie, Texas, which is currently used as the Corporate offices and houses its accounting and sales effort as well as serving as the main manufacturing, warehousing, and shipping facility. One lease for approximately 102,000 square feet expires June 30, 1999, and has a renewal option for an additional four years. The other lease for approximately 300,000 square feet expires May 1, 2004, and contains a renewal option to extend the lease an additional three years.
The Company also manufactures, warehouses, and ships trampolines out of a facility in Americus, Georgia, which contains approximately 60,000 square feet. The lease for this location expires on December 20, 2005, at which time the Company is obligated to purchase the facility for a nominal amount.
The Company owns a facility in Irving, Texas, which contains approximately 43,000 square feet. This facility, which held the Company's corporate offices, has been placed on the market for sale.
The Company intends to consolidate all operations to the Grand Prairie facility and to reduce the Company's space requirements to allow relinquishing or sub-leasing a significant portion of this location.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company, Glenn D. Bollinger (Chairman & CEO), Bobby D. Bollinger (President), Curtis D. Logan (former CFO), Michael J. Beck (former CAO), John L. Maguire (Director), William Blair & Company, Rauscher Pierce Refnes, Inc. (former underwriters of initial public offering), and Grant Thornton, L.L.P. (former independent accountants), are defendants (the "Suntrust Defendants") in a suit brought in the District Courts, Dallas County, Texas, by shareholder Suntrust Bank Atlanta, as trustee for Suntrust Retirement Sunbelt Equity Fund, on behalf of themselves and all persons similarly situated. In addition, the Company, Glenn D. Bollinger, Bobby D. Bollinger, Curtis D. Logan, and Michael J. Beck, are defendants (the "STI Defendants"), in a lawsuit brought in the United States District Court for the Northern District of Texas, Dallas Division, by shareholders STI Classic Fund and STI Classic Sunbelt, on behalf of themselves and all persons similarly situated. The lawsuits purport to be class actions and allege certain misrepresentations and fraudulent actions by the Suntrust and STI Defendants. Both lawsuits seek damages, exemplary damages, interest, costs, and expenses. Management of the Company does not believe either lawsuit has merit. However, if the plaintiffs should prevail in either lawsuit, it could have a material adverse effect on the Company.
The Company has been contacted by the Department of Labor (DOL) in regard to certain questions about its former Employee Stock Ownership Plan (the "ESOP"). Assets of the ESOP are held in the Company's 401(K) plan which is the successor to the ESOP. The Company has responded to and cooperated with the DOL. The DOL has not initiated any proceeding with respect to the ESOP or any other of the Company's employee benefit plans.
On September 24, 1996, the United States Securities and Exchange Commission filed a Civil Injunctive Action in the United States Court for the District of Columbia naming Bollinger Industries, Inc., Glenn Bollinger and Ronald Bollinger, Cause No. 96-2257. The Company consented to the entry of an order of permanent injunction which directs the Company to comply with the Securities and Exchange Act of 1934 in the future in the conduct of its business. Glenn Bollinger and Ronald Bollinger also consented to the entry of orders of permanent injunction which enjoins them from future violations of the provisions of the Securities Exchange Act of 1934. and in addition, Glenn Bollinger agreed to the payment of a monetary penalty in the amount of $40,000. Ronald Bollinger also agreed to a bar from holding office as an officer or director of a publicly-held company.
The Company filed a lawsuit against Denise Austin on December 2, 1996 in the 162nd District Court of Dallas County, Texas and was subsequently removed to the United States District Court for the Northern
District of Texas, Dallas Division Case Number 3-97-CV-0246-G on February 6, 1997. Subsequently a suit was filed on December 30, 1996, by Denise Austin in the United States District Court, Eastern District of Virginia. The suit was filed for payment of royalties alleged to be due of approximately $655,000. The Company has filed counter claims in excess of such amount.
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. The Company is not currently a party to any other material litigation and is not aware of any litigation threatened against the Company, arising in the ordinary course of business, that could have a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on November 7, 1996. During this meeting, five directors, which constitutes the entire Board of Directors, were elected to serve until the next Annual Meeting of Stockholders or until their successors are elected and qualified. The following individuals were elected:
King Griffin & Adamson P.C. were appointed as the Company's auditors for fiscal 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company completed its initial offering during November 1993 at a price of $12.50 per share. The Common Stock was quoted on the NASDAQ National Market under the trading symbol "BOLL." However, due to delinquency in filing certain reports with the Securities and Exchange Commission, and other matters, the NASDAQ "delisted" the Company's common stock during August 1995. The Company's common stock is currently traded over-the-counter. The following table sets forth, on a per share basis for the periods indicated, the high and low closing sale prices for the Common Stock as reported by NASDAQ for the period April 1, 1995 through August 16, 1995 and a market maker of the Company's common stock or the over-the-counter Bulletin Board for the period from August 17, 1995 through March 31, 1997.
On June 16, 1997, the closing sale price of the Common Stock as reported by the over-the-counter Bulletin Board was $.9375 per share. As of June 16, 1997, there were approximately 54 holders of record of the Common Stock.
The Company has not paid cash dividends on its Common Stock since its inception. The Company's board of directors does not anticipate payment of any cash dividends by the Company in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The selected historical financial data presented below is derived from the consolidated financial statements of the Company. The consolidated financial data of the Company for the years ended March 31, 1993 and 1994, is derived from the historical consolidated financial statements of the Company, which have been audited by Grant Thornton, L.L.P., independent certified public accountants. (The Company's historical consolidated financial statements for the years ended March 31, 1993, and 1994 are not included in this Report.) The consolidated financial data for the years ended March 31, 1995, 1996 and 1997, are derived from the historical consolidated financial statements of the Company, which have been audited by King Griffin & Adamson P.C (successor to King Burns & Company P.C.). The selected financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and with the Company's consolidated financial statements and related notes included elsewhere in this Report.
(1) The Company sold substantially all of the assets of its C. G. Products subsidiary effective September 13, 1993. The Company sold substantially all of the assets of the Healthcare Division during September 1996. Earnings from continuing operations does not reflect the results of operations for C. G. Products and the Healthcare Division. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note C of "Notes to Consolidated Financial Statements." (2) Represents results of discontinued operations of C. G. Products and the Healthcare Division. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note C of "Notes to Consolidated Financial Statements." (3) The Statements of Operations for fiscal 1995, 1994, and 1993 have been reclassified to reflect the discontinuance of the Healthcare operation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto appearing elsewhere in this Report.
GENERAL
Bollinger Industries, Inc. designs, manufactures, imports, and distributes a variety of fitness equipment and accessories.
During the fourth quarter of fiscal 1996, management undertook a comprehensive review of the Company's marketing strategy, profitability and liquidity. This strategy necessitated a three point plan (refer to Form 10-K for fiscal 1996).
The components of the plan comprised: providing a restructuring charge to cover disposal of certain inventory and phase out of certain celebrity endorsed products: disposal of the Company's Sports Medicine and Safety Products business ("Healthcare Division"), and revision of certain operating policies and procedures.
RESTRUCTURING OF OPERATIONS
The significant elements of the Restructuring Plan were to substantially reduce inventory levels, which had been excessive in prior years, and to de-emphasize celebrity endorsed products. The Company expected to reduce interest costs, generate much needed capital, reduce warehousing and related costs, reduce royalty expense, improve gross profit, and increase net earnings per share.
Inventory levels have decreased substantially from $30.1 million in 1996 to $16.2 million in 1997 and inventory originally targeted for expedient disposal has been reduced from approximately $12.0 million in 1996 to approximately $4.0 million in 1997. This reduction in inventory has allowed the Company to consolidate operations, relocate its Corporate Offices, and reduce both short term and long term debt.
The Company did not experience the improved gross profit and related increase in net earnings per share from this restructuring due to a decline in the overall sales level of fitness accessory products and to a change in product mix from higher margined light equipment items to lower margined backyard trampolines.
DISCONTINUED OPERATIONS-HEALTHCARE DIVISION
Management of the Company determined in January of fiscal 1996 that it would be in the best interest of the Company to dispose of its Sports Medicine and Safety Products business, known as Bollinger Healthcare. The largest portion of this division was sold in September, 1996 with the remainder disposed of or abandoned in January 1997. The Company recorded a one time gain in relation to this sale of $477,000 net of income tax expense of $246,000.
PROFITABILITY
The Company has experienced several areas of improvement, due to the implementation of the Restructuring Plan, but there are many areas that need to be addressed in fiscal 1998 for the Company to return to profitability.
NET SALES: The Company has suffered with Customer returns and allowances over the last 2 1/2 years but is beginning to see an improvement in the number and dollar amount of these returns and deductions. The controls surrounding the prompt handling of returns has been improved and the response time and tracking of these returns and related deductions has improved substantially. Customer deductions from payments improved approximately $3.0 million dollars from fiscal 1996 to 1997 but the Company believes even more progress can be made in this area, the effect of which is a higher net sales dollar and improved gross margin.
COST OF SALES: During the year, as inventory was sold and warehouses consolidated, the Company saw improvements in the fixed costs associated with warehousing and storing goods, but these improvements were not enough to counteract the deteriorating margins due to freight demurrage charges, scrapping of many of the returns from previous periods that were not cost effective to repair, and the cost of contract labor to handle the start up of trampoline production in the Grand Prairie facility.
The Company is currently in the process of examining the need to maintain domestic production of several line items. Due to the highly competitive nature of the overseas market it has become cost advantageous to source more items from overseas. Additionally, there are potential savings to be negotiated with steamship lines, freight forwarders and U.S. Customs as well as major reductions in product costs previously referred to Part I, Item 1, of this form 10-K.
GROSS MARGIN: The Company experienced a down turn in sales of the Fitness Accessory line (excluding trampolines) in fiscal 1997, primarily due to the ebbing popularity of the light equipment items such as Trimriders(TM) and Powerriders(TM), many of which were celebrity endorsed. These items traditionally carried a higher margin than the majority of the Fitness Accessory line because they were sold through the televised shopping clubs. Additionally, $5.0 million dollars of sales on the targeted inventory were at a 9% gross margin, causing an overall erosion of margin of one half of a percentage point for the year. Historically
there has been an 11% deferential between the gross margin on Fitness items and trampolines. The Company experienced a sales shift of $12.8 million from accessories to trampolines. This had a negative gross margin effect, on a consolidated basis, of two percentage points for the year.
The Company believes that sourcing their products from the lowest cost, high quality provider, in addition to strengthening the controls and response time surrounding customer deductions, will enable it to substantially improve gross margins in fiscal 1998.
WAREHOUSING EXPENSES: The Company plans to continue to consolidate warehouse facilities in fiscal 1998 thereby lowering fixed costs. The Company is also exploring the use of freight expediters on the west coast to receive the product from the orient, unload and inspect it, and repack it for shipment to the customer. Using the west coast facilities, as opposed to the Grand Prairie operation, should save additional manpower and freight. Other improvements include establishing more rigid quality standards for our imported products to pass back to the supplier the cost of repackaging items with incorrect or faulty labeling, resorting items grouped by the wrong size or color, etc. The Company has, in the past, absorbed these costs as part of its operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, General and Administrative expenses have continued to decline as Company management is constantly challenged to find innovative ways to produce results with limited funds. Staffing levels are monitored closely and expenses continue to be scrutinized.
FINANCING: The Company experienced an increase in the cost of financing from fiscal 1996 to 1997 of $300,000 primarily due to higher interest paid in the first two quarters.
ACQUISITIONS
Effective May 24, 1994, the Company, through a newly formed and wholly owned subsidiary, NBF, Inc., a Georgia Corporation, acquired substantially all the assets, liabilities and business of NBF, Inc., a Florida Corporation, in exchange for 138,000 shares of the Company's restricted Common Stock. The purchase price was approximately $2.8 million, including the assumption of certain liabilities. Additionally, the Company acquired from an individual all of the intellectual property rights to the products manufactured by NBF, Inc., a Florida Corporation, for $150,000 in cash. NBF, Inc. is a manufacturer of trampolines and other outdoor playground equipment. The acquisition was accounted for as a purchase and accordingly, results of operations have been included in the Consolidated Statement of Earnings since the acquisition date.
SALE OF ASSETS
In September of 1996, the Company sold substantially all of the assets of its Healthcare Division. The Healthcare division supplied sports medicine and safety products to the medical markets. The Company realized a net gain from the sale of this division of $477,000 net of income tax expense of $246,000. The results of operations of the Healthcare Division are reflected in the Company's consolidated financial statements as discontinued operations.
RESULTS OF OPERATIONS
The following table presents for the periods indicated, certain items derived from the Company's consolidated statements of operations expressed as a percentage of net sales. The trends in sales or earnings illustrated in the following table may not be indicative of future results.
(1) The percentages for 1995 have been recalculated to reflect the discontinuance of the Healthcare Division. See Management's Discussion of Financial Condition and Results of Operations and Note C to "Notes to Consolidated Financial Statements."
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
The Company's fitness accessory products (Fitness Accessory Products) consist of two major product categories - trampoline products (Trampoline Products) and other fitness accessory products (Other Fitness Accessory Products).
Net sales of Fitness Accessory Products in fiscal 1997 increased by approximately $2.3 million from fiscal 1996, an increase of 2.9%. Approximately $12.8 million of this growth is attributable to net sales of Trampoline Products which increased 62.2%. The reduction of approximately $10.5 million is attributable to net sales of Other Fitness Accessory products, which decreased 17.6%. The Company introduced Trampoline Products to its Fitness Accessory Product line during May 1994. Since that time net sales of Trampoline Products has increased rapidly due to placement of trampolines at several of the Company's high volume mass merchant customers. The Company expects net sales of Trampoline Products will continue to grow at a high rate. However, it is unlikely that the prior year percentage increase in net sales can be maintained. The decrease in net sales of Other Fitness Accessory Products resulted from a continuing trend of a slow down of purchases of the Company's light equipment items.
In fiscal 1995 and 1996 the Company had experienced a high rate of product returns and customer chargebacks. The Company's method for recording and analyzing chargebacks, including returned merchandise deductions, has improved substantially over the last 2 1/2 years. The Company has developed internal procedures for receiving and reworking product returns as they arrive in the warehouse, increased the number and talent of the accounts receivable staff, and included a full review of customer deductions and payment practices in the management review process.
Returns and deductions from customers was reduced in fiscal 1997 from a high of approximately 11% of sales in the first quarter to approximately 6% by year end.
Gross profit for Fitness Accessory Products in fiscal 1997 decreased by approximately $5.2 million over fiscal 1996, and decreased as a percentage of net sales from 22.5% in 1996 to 15.6% in fiscal 1997. This is due, in part, to trampoline products earning a lower gross margin than other Fitness Products and comprising a higher proportion of sales in 1997. Gross margins of the other Fitness Accessory Products were lower in 1997 than 1996 due primarily to the sales of $5 million of targeted inventory at a gross margin of 9% and the loss of the light equipment sales which carry higher gross margin percentage that other fitness accessories. Management expects the impact of selling targeted inventory will be less in fiscal 1998.
Selling expenses for Fitness Accessory Products in fiscal 1997 decreased by approximately $1.0 million compared to fiscal 1996 and decreased as a percentage of net sales of Fitness Accessory Products from 9.8% in fiscal 1996 to 8.3% in fiscal 1997. The dollar decrease and percentage decrease in selling expenses is attributed to the decrease in celebrity commissions, sales commissions and royalties, as a result of discontinuing celebrity endorsements, which will continue in fiscal 1998.
Distribution, general and administrative expenses for Fitness Accessory Products decreased by $600,000 compared to fiscal 1996 and decreased as a percentage of net sales of Fitness Accessory Products from 15.1% in fiscal 1996 to 13.9% in fiscal 1997. The decrease in distribution, general and administrative expenses in dollars is attributed to the reduction of excess warehouse rent and labor costs. In addition, distribution, general and administrative expenses were lower than previous year due to a decrease in the use of temporary employees in the office, and better cost controls.
Operating loss from continuing operations in fiscal 1997 as compared to fiscal 1996 decreased by $300,000. As a percentage of net sales, operating losses decreased from a 7.3% operating loss in 1996 to a 6.7% operating loss in fiscal 1997.
Interest expense for continuing operations in fiscal 1997 increased approximately $300,000 from fiscal 1996 primarily due to fees associated with obtaining alternative financing. The average loan balance was lower in fiscal 1997 due to substantially lower inventory levels and decreases in accounts payable. Interest rates improved from 11.75% to 10.0% in fiscal 1997.
FISCAL YEAR ENDED MARCH 31 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31,1995
Net sales of Fitness Accessory Products in fiscal 1996 increased by approximately $12.4 million from fiscal 1995, an increase of 18.3% Approximately $11.5 million of this growth is attributable to net sales of Trampoline Products which increased 127.9%. The balance of approximately $900,000 is attributable to net sales of Other Fitness Accessory products, which increased 1.4%. The relatively flat net
sales of Other Fitness Accessory Products resulted from weak demand and a high level of product returns. The high returns were a result of both defective product and accommodations to certain of the Company's larger customers. Returns and other customer deductions were particularly high in the fourth quarter of fiscal 1996.
Gross profit for Fitness Accessory Products in fiscal 1996 increased by approximately $800,000 over fiscal 1995, but decreased as a percentage of net sales from 25.6% in 1995 to 22.5% in fiscal 1996. This is due to the fact that trampoline products earn a lower gross margin than other Fitness Products and were a higher proportion of sales in 1996. Gross margins of the other Fitness Accessory Products were lower in 1996 than 1995 due primarily to a higher level of customer returns and chargebacks.
Selling expenses for Fitness Accessory Products in fiscal 1996 increased by approximately $1.0 million compared to fiscal 1995 and decreased as a percentage of net sales of Fitness Accessory Products from 10.1% in fiscal 1995 to 9.8% in fiscal 1996. The dollar increase in selling expenses is attributed to the overall increase in net sales of Fitness Accessory Products. The decrease in selling expenses as a percentage of net sales of Fitness Accessory Products is attributable to increased sales volume.
Distribution, general and administrative expenses for Fitness Accessory Products increased by $3.7 million compared to fiscal 1995 and increased as a percentage of net sales of Fitness Accessory Products from 12.4% in fiscal 1995 to 15.1% in fiscal 1996. The increase in distribution, general and administrative expenses in dollars is attributed to the increase in net sales; excessive warehouse rent and labor costs associated with product returns. In addition, distribution, general and administrative expenses were higher than anticipated due to increased consulting and temporary employee expenses to address problems with the Company's computer system; increased legal expenses and audit fees; expenses associated with taking extra physical inventories; and certain other expenses.
In particular, the fourth quarter of fiscal 1996 was impacted by significant temporary storage charges associated with in-transit inventory, legal expenses, and insurance costs associated with product liability.
Operating profit from continuing operations in fiscal 1996 as compared to fiscal 1995 decreased by $7.9 million including a restructuring charge of $4.0 million. As a percentage of net sales, operating profit decreased from a 3.0% operating profit to a 7.3% operating loss.
Interest expense for continuing operations in fiscal 1996 increased approximately $1.0 million from fiscal 1995 primarily due to a higher interest rate on the Company's borrowings. In addition, the average loan balance was higher in fiscal 1996 due to increased working capital required to support increased sales volume partially offset by higher accounts payable.
Due to a loss from continuing operations the Company recorded an income tax benefit of $1.0 million which is based on an effective tax rate of 14.2%. The tax benefit was reduced to reflect the amount expected to be realized.
SEASONALITY; QUARTERLY RESULTS
In the past, the Company's net sales and earnings have been higher in the last six months of the fiscal year compared to the first six months of the fiscal year. This trend has been mitigated by the seasonality of trampoline sales which tend to be higher in the spring and Christmas selling seasons. Net earnings for the Company will generally rise and fall with sales volume although not directly in proportion to the change in net sales due to certain of the Company's expenses being relatively fixed while others are variable. The
Company's quarterly operating results may also vary depending on such other factors as the timing of significant customer orders, the mix of products sold, and the efficiency of operations.
The following table sets forth selected quarterly unaudited information for the 1997, 1996, and 1995 fiscal years. In the opinion of the Company, such information reflects all adjustments, consisting only of normal recurring adjustments necessary to present fairly the information set forth below. The operating results for any quarter are not necessarily indicative of the results for any future period.
The above table for Fiscal 1995 has been reclassified to retroactively recognize the discontinued Healthcare Division.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of financing in the past several years have been short-term borrowings from banks, asset based lenders and an IPO. The Company's cash flow from operations was approximately $5.0 million for fiscal 1997 and approximately $4.0 million in fiscal 1996. The improvement in cash flow from operations is due primarily to the sell down of inventory, the collection of an income tax refund and the collection of receivables offset by a decrease in trade payables and continuing losses.
In fiscal 1997 the Company successfully secured a revolving credit facility with a financial institution providing a maximum line of credit of $25.0 million, subject to certain borrowing base requirements and covenants. As of March 31, 1997 the outstanding balance was $15.5 million. This facility matures August 16, 2000. As of March 31, 1997 the Company was in default or out of compliance with certain of the covenants or other provisions of the Credit Line. The financial institution has agreed to forebear exercising any of its rights and remedies regarding these defaults or non compliance items through year end and has restated the financial covenants for the periods covering fiscal 1998, 1999, and beyond. The Company is currently in compliance with the new terms and covenants.
The outstanding balance under the Credit Line is collateralized by substantially all of the Company's assets including accounts receivable, inventory and real estate. The Company also has a note payable to a bank of $1.7 million which is collateralized by a building in Irving, Texas.
From April 1, 1996 to August 16, 1996 the outstanding balances under the previous credit facility bore interest at the bank's prime interest plus 3% or approximately 11.75%. The new credit facility, as acquired August 16, 1996, bore interest at the rate of 10.00% through March 26, 1997, at which time it increased to 10.25%.
The Company expects to be able to raise funds from operations, the additional sell down of inventory and the collection of accounts receivable. Improved liquidity is crucial to the future success and growth of the Company. There is no guarantee the Company will be successful in raising adequate funds from any of these sources and the failure to raise adequate funds from any of these sources and failure to raise adequate alternative and additional funds will have a materially adverse effect on the Company.
Capital expenditures during fiscal 1997 were approximately $621,000. The Company has budgeted approximately $250,000 for capital expenditures for fiscal 1998.
INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
To date, inflation and foreign currency fluctuations have not had a material impact on the Company's operations. There can be no assurance, however, that future inflation or foreign currency fluctuations will not have a material adverse effect on the Company, or that the Company will be able to pass on resulting cost increases without experiencing a reduction in demand for its products. A substantial portion of the Company's existing indebtedness bears, and future indebtedness may bear, interest that fluctuates with the prime rate.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
Certain statements contained in this Annual Report on Form 10-K, including without limitation, statements containing the words "believes", "anticipates", "intends", "expects", and words of similar import, constitute "forward-looking statements". Such forward-looking statements involve numerous assumptions about known and unknown risks, uncertainties and other factors which may ultimately prove to be inaccurate. Certain of these factors are discussed in more detail elsewhere in this Annual Report, including without limitation under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and include the Company's ability to reverse the erosion of gross margin efficiencies, to reduce general and administrative expenses, including those associated with litigation, and to achieve profitability. Actual results may differ materially from any future results expressed or implied by such forward looking statements. The Company disclaims any obligation to update any forward-looking statements or publicly revise any of the forward-looking statements contained herein to reflect future events or developments.
ONGOING OPERATIONAL LOSSES AND LIQUIDITY
The changes mentioned here and elsewhere in this report were implemented in late fiscal 1997 and the other additional improvements are continuing to be implemented in fiscal 1998. Management believes that based on fully implementing these plans in fiscal 1998, and realizing the benefit of these improvements in fiscal 1998 and 1999, the Company's operating losses will be reversed and its liquidity improved.
LEGAL PROCEEDINGS
The Company and certain officers and directors are defendants in two separate lawsuits that purport to be class actions and allege certain misrepresentations and fraudulent actions by the defendants. While the Company believes both actions are without merit, a negative outcome would have a material adverse effect upon the Company's business, operating results and financial condition. See Item 3. Legal Proceedings.
The Company is involved in several other legal issues, particularly with Denise Austin, a former celebrity endorsement representative, that may be difficult to resolve and may continue to absorb Company management time and resources.
PRODUCTS AND MARKETS
The Company believes there will continue to be a strong market for its products and product lines but a substantial change in consumer preference away from a particular product, particularly trampolines, could seriously effect the Company's ability to produce sales at the same level as is currently enjoyed.
The Company's customer base is highly concentrated with a few key mass merchandisers. Insolvency, or a slow down in payments or a change in buying habits, of any of these customers would have a material adverse impact on the Company.
VENDOR PRICING
The Company plans to continue to negotiate better prices from its vendors in fiscal 1998. The Company has had initial success and plans to explore all avenues of product sourcing. However, there are no guarantees that it will have additional success in this regard. Failure to negotiate lower prices would have a material adverse on the Company's future earnings.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The consolidated financial statements and schedules of the Company as of March 31, 1997, and 1996, and for each of the years in the three-year period ended March 31, 1997, are included as part of this Report beginning on page hereof.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive officers of the Company are as follows:
Set forth below is a description of the backgrounds of each of the directors and executive officers of the Company.
Glenn D. Bollinger is a co-founder of the Company and has served as Chairman of the Board and Chief Executive Officer since 1979. Mr. Bollinger is primarily responsible for the Company's overall operations, including inventory, manufacturing and warehousing.
Bobby D. Bollinger is a co-founder of the Company and has served as Vice Chairman of the Board and President since 1979. Mr. Bollinger is primarily responsible for sales, marketing and product development. Mr. Bollinger is Glenn Bollinger's brother.
Rose Turner became Senior Vice President - Finance, Chief Financial Officer, Treasurer and Secretary of the Company in January 1997 after joining the Company on a contract and full time basis starting in November 1995. Ms. Turner is a certified public accountant. Ms. Turner was most recently employed by Mission Foods, a Division of Gruma Corporation, a privately held company headquartered in Los Angeles, California. Mission Foods is a food manufacturing firm with operations throughout the United States. Ms. Turner served as Regional Controller, Southwest Region, for the past four years. She was employed by a variety of food manufacturing companies for approximately seventeen years in increasing roles of responsibility.
James A. Burgin became Vice President - Sales in December 1993. He became Executive Vice President of Sales in November 1994. Before joining the Company, Mr. Burgin was Executive Vice President of Dynamic Classics, Ltd., distributor of fitness products. Mr. Burgin was employed by Dynamic for approximately three years. Prior to Dynamic, Mr. Burgin was employed by various companies in the fitness and toy industries for approximately twenty years.
Jack P. Carrithers became acting Vice President - Marketing in December 1993 and was elected Vice President - Marketing in May 1994. He became Executive Vice President in November 1994. Before joining the Company, Mr. Carrithers was a Vice President and Creative Director of Penny & Speier Advertising Agency from July 1991 to November 1993. Prior to that employment, he was an Executive Vice President and Creative Director of Evans Communications for six years. In these past positions, Mr. Carrithers had responsibility for developing marketing and advertising programs and materials for a broad range of products and services.
Dell K. Bollinger became involved in the Company's business when it was founded by her sons, Glenn and Bobby Bollinger, in 1974. Mrs. Bollinger has served as a Vice President of the Company since 1979.
David Barr became Vice President - Product Development in July 1994 and became Executive Vice President of New Products and Product Acquisition in August 1996. Prior to joining the Company Mr. Barr was President and Owner of New Zone Corporation, a privately held distributor of children's safety and related products. Prior to that employment Mr. Barr held various positions at Tandy Corporation, Fort Worth Texas, including Director of Marketing for Computer City.
Floyd DePauw became Controller and Chief Accounting Officer in October 1996. Mr. DePauw is a certified public accountant. Before joining the Company, Mr. DePauw was most recently the controller of Taylor Publishing Company, a subsidiary of Insilco Corporation, a publicly owned company. He was employed by Taylor in a variety of accounting positions for approximately 16 years. Prior to Taylor, Mr. DePauw was employed by Zoecon Industries, Inc., a chemical manufacturer, for approximately five years.
John L. Maguire became a director in September 1993 and served as interim Chief Financial Officer from August 1992 to August 1993. In addition, the Company employs Mr. Maguire as a salaried consultant on certain financial matters and acquisitions. Mr. Maguire is a certified public accountant. Since 1982, he has been self-employed, concentrating on private family investments. He was previously Chief Financial Officer of Tyson Foods, Inc., for 12 years. Mr. Maguire was a director of Arkansas Equity Growth Fund, Inc., a publicly held investment company which was liquidated in July 1993 and subsequently dissolved.
Stephen L. Parr became a Director of the Company in November 1995. Mr. Parr is currently President of Navigator Capital Management, LLC. Mr. Parr was previously a Vice President of Goldman Sachs where he was an international specialist. Mr. Parr was with Goldman Sachs from 1977 to 1995. Mr. Parr serves on the Board of Directors of DayStar Digital, a Georgia computer company, Nextek, Inc., an Alabama electronics company, and Corphealth, Inc., a Texas behavioral healthcare company.
Richard J. Tucker was retained by the Company in July of 1995 as a consultant on certain financial and other matters, and shortly thereafter became a director. He is the Chairman and Chief Executive Officer of First Fidelity Acceptance Corp., a nationwide automobile finance company headquartered in Plano, Texas. Mr. Tucker has been employed by First Fidelity since 1992. Prior to First Fidelity, Mr. Tucker was President of two holding companies, EntreCap International, Inc. and International Asset Management Group, Inc.
The Company's board of directors is currently composed of five directors, two of whom are not employees of the Company. However, one of the non-employee directors is currently retained as a consultant to the Company. All of the current directors serve until the next annual shareholder's meeting or until their successors have been duly elected and qualified. Certain of the directors and officers are defendents to lawsuits as discussed in part 1, item 3 of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid to the Company's chief executive officer and the Company's three other most highly compensated executive officers for services rendered in all capacities to the Company during fiscal 1997, 1996 and fiscal 1995.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
- -------------------- (1) Certain of the Company's executive officers receive personal benefits in addition to salary and cash bonuses. The aggregate amount of the personal benefits, however, do not exceed the lesser of $50,000 or 10% of the total of the annual salary and bonus reported for the named executive.
OPTIONS EXERCISES AND HOLDINGS
The following table sets forth information with respect to the named executives concerning exercise of options during fiscal 1997 and unexercised options held as of the end of fiscal 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
- -----------------
(1) Based on the closing sale price of the common stock on March 31, 1997, of $.75 per share as reported by the over-the-counter Bulletin Board and a weighted average exercise price per share of $10.30.
DIRECTOR'S COMPENSATION
Each independent director receives a fee of $10,000 annually and is reimbursed for out-of-pocket expenses incurred in connection with attendance at board of directors and committee meetings. Each independent director was granted options to purchase 8,333 shares of Common Stock at the time he became a director.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the beneficial ownership of the shares of Common Stock of the Company, as of June 16, 1997, by (i) each director, (ii) the Company's chief executive officer and two other most highly compensated executive officers in fiscal 1997, (iii) all officers and directors of the Company as a group, and (iv) each person deemed to beneficially own more than five percent of the outstanding shares of Common Stock. Except as otherwise indicated, each stockholder identified in the table has sole voting and investment power with respect to its or his shares.
- ------------------ * Less than 1% of the outstanding shares of Common Stock. (1) Business mailing address is 602 Fountain Parkway, Grand Prairie, Texas 75050. (2) Includes (i) 425,069 shares over which Glenn Bollinger has sole voting and investment control; (ii) 436,000 shares held by Glenn Bollinger Family Enterprises, Ltd., a Texas limited partnership, over which Glenn Bollinger has shared voting and investment power because he and his brother Bobby Bollinger each own 49.5% of the outstanding stock of the sole general partner; (iii) 436,000 shares held by Bob Bollinger Family Enterprises, Ltd., a Texas limited partnership, over which Glenn Bollinger has shared voting and investment
power because he and his brother Bobby Bollinger each own 49.5% of the outstanding stock of the sole general partner; and (iv) 588,494 shares held by the trustees of the Company's 401(K) Plan successor to the Company's Employee Stock Ownership Plan (the "401(K) Plan"), including Glenn Bollinger, and over which he has shared voting and investment power. Neither the inclusion of shares owned by Bob Bollinger Family Enterprises, Ltd., nor the inclusion of any 401(K) Plan shares not allocated to Glenn Bollinger's 401(K) participant account is to be construed as an admission that he is the beneficial owner of such shares. (3) Includes (i) 425,069 shares over which Bobby Bollinger has sole voting and investment control; (ii) 436,000 shares held by Bob Bollinger Family Enterprises, Ltd., a Texas limited partnership, over which Bobby Bollinger has shared voting and investment power because he and his brother Glenn Bollinger each own 49.5% of the outstanding stock of the sole general partner; (iii) 436,000 shares held by Glenn Bollinger Family Enterprises, Ltd., a Texas limited partnership, over which Bobby Bollinger has shared voting and investment power because he and his brother Glenn Bollinger each own 49.5% of the outstanding stock of the sole general partner; and (iv) 588,494 shares held by the trustees of the 401(K) Plan, including Bobby Bollinger over which he has shared voting and investment power. Neither the inclusion of shares owned by Glenn Bollinger Family Enterprises, Ltd., nor the inclusion of any 401(K) Plan shares not allocated to Bobby Bollinger's 401(K) participant account is to be construed as an admission that he is the beneficial owner of such shares. (4) Includes options to purchase 8,500 shares of Common Stock that are currently exercisable or will be exercisable within sixty days. (5) Includes options to purchase 54,999 shares of Common Stock that are currently exercisable or will be exercisable within sixty days. Does not include 1,000 shares of Common Stock held in trust for which the reporting person is the trustee and is a contingent beneficiary. The reporting person disclaims beneficial ownership of these shares. (6) Includes options to purchase 86,499 shares of Common Stock that are currently exercisable or will be exercisable within sixty days. (7) Shares which are included beneficially under both Glenn and Bobby Bollinger are only included once in the group total. (8) Includes 1,300 and 100 shares of Common Stock, respectively, beneficially owned by two executive officers of the Company, which are held by brokers as custodians for the officers' individual retirement accounts.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In April 1993, an independent sales representative of the Company, advanced $500,000 to the Company for working capital. The loan was evidenced by the Company's real estate lien note bearing interest at 10% per annum due March 31, 1996, and secured in part by a lien on the Company's Irving facility. In connection with this loan, the Company issued 34,405 shares of Common Stock. In December 1993, Messrs. Glenn and Bobby Bollinger and Mrs. Dell Bollinger purchased the note and received an assignment of the real estate lien in consideration of payment of the outstanding principal balance of the note. On March 29, 1996, the Company paid each of Messrs. Glenn and Bobby Bollinger $110,000 against the note. The proceeds of the note payments were used by Messrs. Glenn and Bobby Bollinger to exercise certain stock options granted in 1991. The Company extended the maturity of the $100,000 note to March 31, 1998 and remaining notes of $180,000 to August 16, 2000. In May 1996, a priority lien on the real estate was granted to a bank to secure the Company's credit facility.
The Company believes that the terms of the above transaction were at least as favorable to the Company as those which could have been obtained in an arm's length transaction with an unaffiliated party.
During July, 1995, the Company retained Mr. Richard Tucker as a consultant. Shortly after his retention, Mr. Tucker became a director of the Company. Pursuant to the consulting agreement, Mr. Tucker received $75,000 per year for 2 years, of which $75,000 was paid in fiscal 1997 and $56,250 was paid in fiscal 1996. The remaining $18,750 was paid in the first quarter of fiscal 1998.
All transactions, if any, between the Company and any of its directors, officers, principal stockholders, employees and other affiliates of the Company are subject to the approval of a majority of the independent directors of the Company who are disinterested in the transactions. All such transactions and loans must be on terms no less favorable to the Company than those generally available from unaffiliated third parties.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. - Consolidated financial statements to this Report are listed in the "Index to Consolidated Financial Statements and Schedules" at page .
2. - Consolidated financial statement schedules to this Report are listed in the "Index to Consolidated Financial Statements and Schedules" at page. All other schedules are omitted because they are inapplicable or the requested information is shown in the financial statements or noted therein.
3. - Exhibits.
3.1 - Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Form S-1 Registration Statement No. 33-69708)
3.2 - By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Form S-1 Registration Statement No. 33-69708)
4.1 - Form of certificate representing shares of the Company's Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Form S-1 Registration Statement No. 33-69708)
10.1 - Bollinger Industries 1993 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Form S-1 Registration Statement No. 33-69708)
10.2 - Bollinger Industries Employee Stock Ownership Plan and Trust (incorporated by reference to Exhibit 10.2 to the Company's Form S-1 Registration Statement No. 33-69708)
10.3 - Form of Indemnification Agreement with independent director (incorporated by reference to Exhibit 10.3 to the Company's Form S-1 Registration Statement No. 33-69708)
10.4 - Bollinger Industries, Inc. 1991 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Company's Form S-1 Registration Statement No. 33-69708)
10.5 - Lease Agreement dated April 4, 1991, between William A. McCarty, Jr., and Elinor F. McCarty and Bollinger Sports, Inc., formerly known as Bollinger Industries, Inc. ("Bollinger-Texas") (incorporated by reference to Exhibit 10.8 to the Company's Form S-1 Registration Statement No. 33-69708)
10.6 - Assignment and Assumption Agreement dated as of October 1, 1993, between Bollinger-Texas as Assignor and Bollinger Industries, L.P., as Assignee with respect to such lease (incorporated by reference to Exhibit 10.8.1 to the Company's Form S-1 Registration Statement No. 33-69708)
10.7 - Lease Agreement dated August 30, 1992, between Reba McPherson, individually and as Trustee of the Reba McPherson Trust u/w/o Harold Lynn McPherson, and Tarbox, Inc., as extended by an Agreement dated August 9, 1993 (incorporated by reference to Exhibit 10.9 to the Company's Form S-1 Registration Statement No. 33-69708)
10.8 - Assignment and Assumption Agreement dated as of October 1, 1993, between Tarbox, Inc., as Assignor and Bollinger Industries, L.P., as Assignee with respect to such lease (incorporated by reference to Exhibit 10.9.1 to the Company's Form S-1 Registration Statement No. 33-69708)
10.9 - Standard Industrial Lease dated March 17, 1993, between National Life Insurance Company and Bollinger-Texas (incorporated by reference to Exhibit 10.10 to the Company's Form S-1 Registration Statement No. 33-69708)
10.10 - Assignment and Assumption Agreement dated as of October 1, 1993, between Bollinger-Texas as Assignor and Bollinger Industries, L.P., as Assignee with respect to such lease (incorporated by reference to Exhibit 10.10.1 to the Company's Form S-1 Registration Statement No. 33-69708)
10.11 - $500,000 Real Estate Lien Note dated March 18, 1993, in favor of Sid Reisman and executed by Bollinger-Texas, as modified by a Renewal, Extension, and Modification Agreement dated as of April 6, 1993, and subsequently assigned to Glenn, Bobby and Dell Bollinger (incorporated by reference to Exhibit 10.10 to the Company's Form S-1 Registration Statement No. 33-69708)
10.12 - Asset Purchase and Sale Agreement dated as of September 13, 1993, by and between California Gym Equipment Company, S. G. Equipment, Inc. and, for limited purposes, Bollinger-Texas and Sherman Grider (incorporated by reference to Exhibit 10.13 to the Company's Form S-1 Registration Statement No. 33-69708)
10.13 - Standard Sublease dated as of September 13, 1993, between California Gym Equipment Company and S. G. Equipment, Inc., together with the Industrial Real Estate Lease dated June 1, 1992, between New England Mutual Life Insurance Company and Bollinger-Texas attached thereto (incorporated by reference to Exhibit 10.14 to the Company's Form S-1 Registration Statement No. 33-69708)
10.14 - Assignment and Assumption Agreement dated as of September 1, 1993, between Bollinger-Texas and California Gym Equipment Company with respect to Industrial Real Estate Lease dated June 1, 1992 (incorporated by reference to Exhibit 10.15 to the Company's Form S-1 Registration Statement No. 33-69708)
10.15 - Letter agreement dated May 19, 1992, between Bollinger-Texas, Denise Austin and Jeff Austin (incorporated by reference to Exhibit 10.16 to the Company's Form S-1 Registration Statement No. 33-69708)
10.16 - Letter agreement dated April 13, 1994, between Bollinger Industries, L.P., Denise Austin and Jeff Austin (incorporated by reference to Exhibit 10.16 to the Company's form 10-K for the fiscal year ended March 31, 1994)
10.17 - Endorsement Agreement dated September 1, 1993, between Bollinger-Texas and Nolan Ryan (incorporated by reference to Exhibit 10.17 to the Company's form 10-K for the fiscal year ended March 31, 1994)
10.18 - Loan Agreement dated as of January 4, 1994, between Bollinger Industries, L.P., the Company, and First Interstate (incorporated by reference to Exhibit 10.18 to the Company's form 10-K for the fiscal year ended March 31, 1994)
10.19 - Standard Office/Warehouse Lease dated May 11, 1994, between Fountain Parkway, Ltd., and Bollinger Industries, L.P. (incorporated by reference to Exhibit 10.19 to the Company's form 10-K for the fiscal year ended March 31, 1994)
10.20 - Lease dated December 21, 1990, between Americus/Sumter Payroll Development Authority and N.B.F., Inc. and R. Wayne Rich (incorporated by reference to Exhibit 10.20 to the Company's form 10-K for the fiscal year ended March 31, 1994)
10.21 - Assignment and Assumption of Lease dated May 1, 1994, between Americus/Sumter Payroll Development Authority, NBF, Inc., a Florida corporation, and NBF, Inc., a Georgia corporation (incorporated by reference to Exhibit 10.21 to the Company's form 10-K for the fiscal year ended March 31, 1994)
10.22 - Amendment to Lease between Americus-Sumter Payroll Development Authority and NBF, Inc., a Georgia corporation and R. Wayne Rich amending the lease dated December 21, 1990 reflected at exhibit No. 10.20 above (incorporated by reference to Exhibit 10.2 to the Company's form 10-Q for the quarter ended June 30, 1994)
10.23 - Asset Purchase Agreement dated May 24, 1994, and effective as of May 1, 1994, between NBF, Inc., a Florida corporation, and NBF, Inc., a Georgia corporation (incorporated by reference to Exhibit 10.3 to the Company's form 10-Q for the quarter ended June 30, 1994)
10.24 - First Amendment to Loan Agreement dated as of June 22, 1994, between Bollinger Industries, L.P., the Registrant, Bollinger Holding Corp., NBF and First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.5 to the Company's form 10-Q for the quarter ended June 30, 1994)
10.25 - Loan and Security Agreement dated September 9, 1994, between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.1 to the Company's form 10-Q for the quarter ended September 30, 1994)
10.26 - First Amendment to Loan and Security Agreement dated September 9, 1994, between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.2 to the Company's form 10-Q for the quarter ended September 30, 1994)
10.27 - Second Amendment to Loan and Security Agreement dated December 8, 1994, between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.1 to the Company's form 10-Q for the quarter ended December 31, 1994)
10.28 - Lease Agreement dated November 16, 1994, between John Wilkerson, individually and Bollinger Industries (incorporated by reference to Exhibit 10.2 to the Company's form 10-Q for the quarter ended December 31, 1994)
10.29 - Modification and Ratification of Lease dated November 1, 1994, between Fountain Parkway, Ltd. and Bollinger Industries, L.P. (incorporated by reference to Exhibit 10.3 to the Company's form 10-Q for the quarter ended December 31, 1994)
10.30 - Third Amendment to Loan and Security Agreement dated March 3, 1995 between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.30 to the Company's Form 10-K for the fiscal year ended March 31, 1995)
10.31 - Fourth Amendment to Loan and Security Agreement dated May 15, 1995 between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.31 to the Company's Form 10-K for the fiscal year ended March 31, 1995)
10.32 - Modification and Ratification of Lease dated February 22, 1995, between Fountain Parkway, Ltd. and Bollinger Industries, L.P. (incorporated by reference to Exhibit 10.32 to the Company's Form 10-K for the fiscal year ended March 31, 1995)
10.33 - Fifth Amendment to Loan and Security Agreement dated September 9, 1995, between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended December 31, 1995)
10.34 - Sixth Amendment to Loan and Security Agreement dated December 29, 1995, between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended December 31, 1995)
10.35 - Seventh Amendment to Loan and Security Agreement dated March 8, 1996, between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.35 to the Company's Form 10K for the year ended March 31, 1996)
10.36 - Eighth Amendment to Loan and Security Agreement dated May 8, 1996, between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.36 to the Company's Form 10K for the year ended March 31, 1996)
10.37 - Deed of Trust, Assignment, Security Agreement and Financing Statement dated May 8, 1996, between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.37 to the Company's Form 10K for the year ended March 31, 1996)
10.38 - Ninth Amendment to Loan and Security Agreement dated May 17, 1996, between Bollinger Industries, L.P. and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.38 to the Company's Form 10K for the year ended March 31, 1996)
10.39 - Amended and Restated Promissory Note dated March 29, 1996, between Bollinger Industries, L.P., and Glenn D. Bollinger (incorporated by reference to Exhibit 10.39 to the Company's Form 10K for the year ended March 31, 1996)
10.40 - Amended and Restated Promissory Note dated March 29, 1996, between Bollinger Industries, L.P., and Bobby D. Bollinger (incorporated by reference to Exhibit 10.40 to the Company's Form 10K for the year ended March 31, 1996)
10.41 - Amended and Restated Promissory Note dated March 29, 1996, between Bollinger Industries, L.P., and Dell Bollinger (incorporated by reference to Exhibit 10.41 to the Company's Form 10K for the year ended March 31, 1996)
10.42 - Second Amendment to standard industrial lease dated January 31, 1996, between National Life Insurance Company and Bollinger Industries, L.P., as assignee (incorporated by reference to Exhibit 10.42 to the Company's Form 10K for the year ended March 31, 1996)
10.43 - U.S. Trademark License Agreement between International Apparel Marketing Corp. dba Nautilus Wear International and Bollinger Industries, Inc. dated May 1, 1995 (incorporated by reference to Exhibit 10.43 to the Company's Form 10K for the year ended March 31, 1996)
10.44 - Amendment to U.S. Trademark License Agreement between International Apparel Marketing Corp. and Bollinger Industries, Inc. dated March 1, 1996 (incorporated by reference to Exhibit 10.44 to the Company's Form 10K for the year ended March 31, 1996)
10.45 - Intercreditor and Subordination Agreement dated May 8, 1996, between NationsBank of Texas, N.A. and Glenn D. Bollinger, Bobby D. Bollinger, and Dell Bollinger (incorporated by reference to Exhibit 10.45 to the Company's Form 10K for the year ended March 31, 1996)
10.46 - Eleventh Amendment to Loan and Security Agreement dated July 8, 1996, between Bollinger Industries, LP, and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.46 to the Company's form 10-Q for the quarter ended September 29, 1996)
10.47 - Loan and Security Agreement dated August 16, 1996 between Bollinger Industries, Inc., Bollinger Industries, LP and NBF, Inc. and Foothill Capital Corporation and related schedules. (incorporated by reference to Exhibit 10.47 to the Company's form 10-Q for the quarter ended September 29, 1996)
10.48 - Collateral Assignment of Patents and Trademarks dated August 16, 1996 between Bollinger Industries, LP and Foothill Capital Corporation. (incorporated by reference to Exhibit 10.48 to the Company's form 10-Q for the quarter ended September 29, 1996)
10.49 - Subordination Agreement dated August 16, 1996 between Glenn D. Bollinger, Bobby D. Bollinger, Dell Bollinger and Foothill Capital Corporation. (incorporated by reference to Exhibit 10.49 to the Company's form 10-Q for the quarter ended September 29, 1996)
10.50 - Deed of Trust dated August 16, 1996 executed by Bollinger Industries, LP (incorporated by reference to Exhibit 10.50 to the Company's form 10-Q for the quarter ended September 29, 1996)
10.51 - Asset Purchase Agreement dated August 29, 1996 between Bollinger Industries, LP, and Rehab Plus Therapeutic Products, Inc. (incorporated by reference to Exhibit 10.51 to the Company's form 10-Q for the quarter ended September 29, 1996)
10.52 - Tenth Amendment to Loan and Security Agreement dated July 8,1996, between Bollinger Industries, LP, and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.1 to the Company's form 10-Q for the quarter ended June 30, 1996)
10.53 - Asset Purchase Agreement dated August 29, 1996 between Bollinger Industries, LP, and Rehab Plus Therapeutic Products, Inc. (incorporated by reference to Exhibit 2.01 to the Company's form 10-Q for the quarter ended September 29, 1996)
10.54 - Asset Purchase Agreement dated November 7, 1996, between Bollinger Industries, LP, and SST Acquisition Corporation (incorporated by reference to Exhibit 2.01 to the Company's form 10-Q for the quarter ended December 29, 1996)
10.55 - First Amendment to Loan and Security Agreement dated August 16, 1996, between Bollinger Industries, Inc., Bollinger Industries, LP and NBF, Inc. and Foothill Capital Corporation.
10.56 - Second Amendment to Loan and Security Agreement dated August 16, 1996, between Bollinger Industries, Inc., Bollinger Industries, LP and NBF, Inc. and Foothill Capital Corporation.
10.57 - Lease Agreement dated December 1, 1996 between Southwest Properties Group, Inc. and Bollinger Industries, LP
11.1 - Statement re Computation of Per Share Data
21.1 - List of the Company's subsidiaries (incorporated by reference to Exhibit 21.1 to the Company's Form 10-K for the fiscal year ended March 31, 1995)
27.1 - Financial Data Schedule
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 16th day of June, 1997.
BOLLINGER INDUSTRIES, INC.
By: /S/ Glenn D. Bollinger ------------------------------------ Glenn D. Bollinger Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 16th day of July, 1996.
S-1
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Bollinger Industries, Inc. and Subsidiaries as of March 31, 1997, and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bollinger Industries, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years ended March 31, 1997, in conformity with generally accepted accounting principles.
KING GRIFFIN & ADAMSON, PC
Dallas, Texas June 16, 1997
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
The accompanying notes are an integral part of these consolidated financial statements.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
The accompanying notes are an integral part of these consolidated financial statements.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
The accompanying notes are an integral part of these consolidated financial statements.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31,
The accompanying notes are an integral part of these consolidated financial statements.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BUSINESS ACTIVITY
The Company is a supplier of consumer fitness equipment and accessories. (See Note C for a discussion of discontinued operations.)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bollinger Industries, Inc. (Bollinger) which was reincorporated in Delaware in September 1993, its wholly-owned subsidiaries and Bollinger Industries, L.P., a partnership wholly-owned by Bollinger's subsidiaries (collectively "the Company"). All significant intercompany accounts and transactions have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market (determined product by product on management knowledge of current market conditions and existing stock levels).
The provision for obsolete and slow moving inventory is adjusted based on current inventory levels, historical and expected future sales levels.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using straight-line and accelerated methods for financial reporting purposes over the following useful lives:
Maintenance and repairs are expensed as incurred. Major renewals and improvements are capitalized.
ADVERTISING COSTS
Advertising and promotional costs are expensed as incurred. The advertising expense amounted to $1,627,464, $1,558,397, and $1,790,521 in fiscal 1997, 1996 and 1995, respectively.
FAIR VALUE
The Company believes that the carrying amounts of its current assets and current liabilities approximate the fair value of such items due to their short-term nature. The carrying amount of long-term debt approximates its fair value because interest rates approximate market.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES - Continued
INCOME TAXES
Deferred income taxes are determined using the asset and liability method, under which deferred tax assets and liabilities are calculated based on differences between financial accounting and tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the payable or refund for the period plus or minus the change during the period in deferred tax assets and liabilities.
EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share is based on the net earnings (loss) applicable to the weighted average number of common shares and common stock equivalents outstanding. Common stock equivalents include the dilutive effect of all stock options outstanding (except in the case of a net loss, in which case they would be anti-dilutive), as though they had been outstanding for all periods presented.
GOODWILL AND COVENANT NOT TO COMPETE
The excess of the purchase price of acquired companies over the fair value of net identifiable assets at the date of acquisition has been recorded as goodwill and is being amortized on a straight line basis over a twenty year period. The Company periodically evaluates the net balance of goodwill based on the projected operating income of the respective businesses on an undiscounted cash flow basis. If necessary, the goodwill would be written down to fair market value.
A covenant not to compete in the amount of $206,633 net of accumulated amortization of $146,367 is included in "Notes receivable and other" and is being amortized on a straight-line basis over its duration of 41 months.
USE OF ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. In particular, the provision for chargebacks and buybacks is subject to estimation. The actual chargebacks and buybacks could vary from the estimate.
REVENUE RECOGNITION AND PROVISIONS FOR CHARGEBACKS AND BUYBACKS
The Company recognizes sales revenue at the time the products are shipped to its customer. Provision is made currently for estimated product returns and deductions which may occur. These returns are generally for products that are salable with minor reworking of packaging or replacement of missing components. The provision for returns is estimated based on current trends and historical experience of returns. Additionally, provision is made for chargebacks from the customer for marketing programs, volume discounts and other items.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES - Continued
In certain circumstances, the Company has followed a "buyback" policy whereby the Company purchases competitors' product from a new customer in order to obtain shelf space for the Company's product lines. The cost of such "buybacks" is amortized over the life of the program, which typically has been two to three years.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1997 presentation and to retroactively recognize the discontinued Healthcare Division.
STOCK OPTIONS
Prior to April 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On April 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock options grants made in 1996 and future years as if the fair value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 commencing in its March 31, 1997 financial statements. The effect of applying the requirements of SFAS No. 123 is not considered to be material to the financial statements.
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company intends to adopt SFAS No. 128, "Earnings per Share" ("SFAS 128") effective December 15, 1997. This statement requires the replacement of primary earnings per share with basic earnings per share and fully diluted earnings per share with diluted earnings per share. Management of the Company does not expect the adoption of this statement will have a material impact on the earnings per share computation.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ONGOING OPERATIONAL LOSSES AND LIQUIDITY
As indicated in the accompanying financial statements, the Company has suffered losses of $7,441,395 and $8,223,360 during the years ended March 31, 1997 and 1996.
Funds provided by operating activities for fiscal 1997 were generated primarily by the reduction of inventory, the sale of discontinued operations and the receipt of an income tax refund. These funds were used to fund operating losses and to decrease outstanding accounts payable and long term debt. Management intends to further decrease inventory levels in fiscal 1998 but does not expect the impact of those reductions to be as significant. Funds provided by operating activities for fiscal 1996 were generated primarily by an increase in accounts payable.
In fiscal 1998, management intends to substantially improve operating gross margins on all product lines. Due to the highly competitive nature of the overseas market it has become cost advantageous to source more items from overseas. There are potential savings to be negotiated with steamship lines, freight forwarders and U.S. Customs as well as major reductions in product costs. The Company has actively pursued and negotiated directly with overseas suppliers and factories. Additionally, the domestic manufacturing operations have been analyzed and will be maintained only where it is cost advantageous to do so. The Company believes that sourcing their product from the lowest cost, high quality provider, in addition to strengthening the controls and response time surrounding customer deductions, which have been a drain on gross margin in fiscal 1995 and 1996, will enable it to substantially improve gross margin in 1998.
The Company plans to continue to consolidate warehouse facilities in fiscal 1998 thereby lowering fixed costs. The Company is also exploring the use of freight expediters on the west coast, to receive product from the orient, unload and inspect, and repack for shipment to the customer. The Company intends to reduce warehouse space, outside facilities, staffing levels and related overhead expenses.
Some of these changes were implemented in late fiscal 1997 and the other additional improvements are continuing to be implemented in fiscal 1998. Management believes that based on fully implementing these plans in fiscal 1998, and realizing the benefit of these improvements in fiscal 1998 and 1999, the Company's operating losses will be reversed and its liquidity improved.
NOTE C - ACQUISITION, DISCONTINUED OPERATIONS, AND RESTRUCTURING OF OPERATIONS
ACQUISITION
On May 24, 1994, in exchange for 138,000 shares of its restricted common shares, the Company acquired substantially all of the assets and liabilities of NBF, Inc. (a Florida Corporation) which manufactures trampolines and other outdoor playground equipment. The total consideration for the assets and liabilities acquired including liabilities assumed was approximately $2,762,472. Additionally, for cash of $150,000, the Company acquired from an individual, all of the intellectual property rights to the products manufactured. If the acquisition had occurred as of April 1, 1994, consolidated results would not have been materially effected. The acquisition was accounted for as a purchase and accordingly the consolidated financial statements include the results of operations from the acquisition date.
DISCONTINUED OPERATIONS
The Company determined during January 1996 to dispose of its Healthcare Division which manufactured a line of sports medicine and safety products. The Company sold the largest portion of the Healthcare Division in September 1996 with the balance sold or disposed of through January 1997. A gain on the sale of $722,676 was recorded in fiscal 1997. Result of operations in prior years have been restated to reclassify the Healthcare Division as discontinued operations.
Interest expense has been allocated to discontinued operations based on the proportion of average net assets of the discontinued Healthcare operations as compared to consolidated average net assets of the Company.
Following is a summary of the discontinued operations:
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(1) April 1, 1996, to December 31, 1996 (final disposition) (2) April 1, 1995, to December 31, 1995
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Proceeds upon sale of the Healthcare Division were as follows; $1,418,130 in cash and $293,547 as a note receivable.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - Continued
RESTRUCTURING OF OPERATIONS
During the fourth quarter of 1996, the Company implemented a plan ("the Plan") to reorganize and restructure its operations. The significant portion of this Plan has been completed. In accordance with the Plan, management disposed of its Healthcare Division, and sold a significant portion of the excess inventory which it used to reduce accounts payable and debt, and fund operations.
The Company also obtained a new credit facility. At March 31, 1997, the Company still has approximately $4.0 million of inventory which it intends to sell rapidly. The provisions for restructuring of operations at March 31, 1997 of $2,160,169 is the remaining provision against inventory identified for sale in connection with the restructuring.
NOTE D - CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosures are as follows:
For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
NOTE E - CREDIT RISK
The Company's assets which are subject to potential credit risk consist of trade accounts receivable and cash. The Company sells its products primarily to retailers, including national chains, geographically dispersed throughout the United States on an unsecured basis. Risks associated with extension of credit to customers are affected by the economic condition of the retail industry. The Company performs ongoing credit evaluations of its customers' financial condition to reduce credit risk. The Company has provided an allowance for doubtful accounts which reflects its estimate of uncollectible accounts.
Cash is at risk to the extent that it exceeds Federal Deposit Insurance Corporation ("FDIC") insured amounts (approximately $575,000 at March 31, 1997). To minimize risk, the Company places its cash with high credit quality institutions.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - INVENTORIES
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Depreciation expense for the years ended March 31, 1997, 1996, and 1995 was approximately $558,000, $554,000, and $407,000, respectively.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - NOTES PAYABLE AND LONG TERM DEBT
(1) The loan agreement with the bank provides that borrowings are reduced monthly by the amount of required principal payments (approximately $25,000 per month) in terms of an agreement reached in June, 1997. The balance is payable on the loan expiration date of September 15, 1998.
(2) The loan agreement with the financial institution provides that borrowings under the line of credit are subject to limitations based on the borrowing base, as defined in the agreement, with a maximum facility of $25.0 million. The terms of the agreement require the Company to maintain specific current ratio levels, levels of debt to net worth, levels of tangible net worth and other financial covenants as defined in the loan agreement. At December 31, 1996 and March 31, 1997, the Company was not in compliance with all covenants. The financial institution has waived such defaults through March 31, 1997 and restated those covenants on a going forward basis. At March 31, 1997 the Company had $447,000 available in additional borrowing capacity under the loan agreement. The loan agreement has an extended expiration date of August 16, 2000.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - NOTES PAYABLE AND LONG TERM DEBT - Continued
Future maturities of notes payable and long-term debt at March 31, 1997 are as follows:
NOTE I - RELATED PARTY TRANSACTIONS
In 1993 certain officers of the Company purchased third party notes payable of $500,000 with interest payable at 10% per annum (see Note H). The officers assumed the same terms of the notes which matured on March 31, 1996. On March 29, 1996 the Company paid each of two shareholders $110,000 on the notes. The Company extended the maturity of the $100,000 note to March 31, 1998 and remaining notes of $180,000 to August 16, 2000.
The Company retains a director of the Company as a consultant on certain matters. Consulting fee expense recorded by the Company was $75,000 and $56,250 for the years ended March 31, 1997 and 1996.
NOTE J - EMPLOYEE STOCK OWNERSHIP PLAN AND 401(K) PLAN
The Company had an employee stock ownership plan which provided for discretionary contributions by the Company. During 1995, the Company amended and restated the plan to qualify as a 401(k) employee deferred compensation plan under the terms of which employees who have been employed for one year or more are entitled to contribute up to the lesser of $9,500 or 15% of their annual compensation. The Company may at its discretion contribute to the 401(k) plan. No Company contributions were made under either plan for any of the three years in the period ended March 31, 1997.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
NOTE K - STOCK OPTIONS
1991 PLAN
The 1991 Stock Option Plan provides for options covering a total of 542,820 common shares, all of which were issued to the Chief Executive Officer and the President of the Company. The exercise price of the options granted must be at least 110% of the fair value of the common stock at date of grant. The remaining options were exercised on March 29, 1996. At March 31, 1997, there were no options outstanding or available for grant.
Following is a summary of option activity under the 1991 Plan:
1993 PLAN
The 1993 Stock Option Plan provides for options covering a total of 500,000 common shares to be issued to key employees and directors other than the Chief Executive Officer and the President. Under the Plan, incentive stock options (ISO's) and non-qualified stock options may be granted at prices no less than 100% and 50%, respectively, of the fair value of the Company's common stock. Options granted expire in ten years and will generally vest in annual installments. At March 31, 1997, options for 246,501 shares were available for grant.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
Following is a summary of option activity under the 1993 Plan:
All the options are considered compensatory. The outstanding stock options expire from November 1999 through January 2003.
The following summarizes information about compensatory options outstanding at March 31, 1997:
The options granted in Fiscal 1997, 1996 and 1995 have exercise prices which approximate fair value and accordingly, no compensation cost has been recognized for compensatory stock options in the consolidated financial statements.
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - INCOME TAXES
Income tax expense (benefit) from continuing operations consists of the following:
The Company's effective income tax rate from continuing operations differed from the Federal statutory rate as follows:
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
Following are the components of deferred tax assets and deferred tax liabilities:
At March 31, 1997, the Company has net operating losses available to offset future taxable income of approximately $10,950,000 which begin expiring in 2011. The valuation allowance increased by $3,073,265 during the year ended March 31, 1997.
NOTE M - MAJOR CUSTOMERS
Customers accounting for 10% or more of total net sales from continuing operations are as follows:
YEAR ENDED MARCH 31,
BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
NOTE N - COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing and warehouse space; manufacturing and computer equipment; and other items. These leases are operating leases and have future minimum lease payments, excluding sublease income, as follows:
Total lease expense for the years ended March 31, 1997, 1996, and 1995 was approximately $1,449,000, $1,552,000 and $793,000, respectively.
The Company, certain of its officers and directors, former officers, former independent auditor, and the underwriters of the Company's initial IPO are defendants in certain shareholder lawsuits. The Company believes the lawsuits are without merit. However, if the plaintiffs prevail, the lawsuits could have a material adverse effect on the Company. The Company is unable to estimate the range of loss, if any.
The Company filed a lawsuit against Denise Austin on December 2, 1996 in the 162nd District Court of Dallas County, Texas and was subsequently removed to the United States District Court for the Northern District of Texas, Dallas Division Case Number 3-97-CV-0246-G on February 6, 1997. Subsequently a suit was filed on December 30, 1996, by Denise Austin in the United States District Court, Eastern District of Virginia. The suit was filed for payment of royalties alleged to be due of approximately $655,000. The Company has accrued all amounts which it believes may be due.
In the normal course of business, the Company is involved in various litigation. Management believes that the aggregate effect of any liability arising from such items would not be material to the consolidated statements of operations or financial position at March 31, 1997.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
BOARD OF DIRECTORS AND STOCKHOLDERS BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
In connection with our audit of the consolidated financial statements of Bollinger Industries, Inc. and Subsidiaries referred to in our report dated June 16, 1997, we have also audited Schedule II for the years ended March 31, 1997, 1996 and 1995. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
King Griffin & Adamson PC
Dallas, Texas June 16, 1997
Schedule II BOLLINGER INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
Note - Deductions represent uncollectible accounts or inventories written off.
EXHIBIT INDEX
II-1
II-2
II-3
II-4
II-5
II-6