<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the fiscal year end September 30. 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
Commission File Number: 0-10128
PERSONAL DIAGNOSTICS, INCORPORATED
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-23251136
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. Box 5310, Parsippany, New Jersey 07054
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (201) 952-9000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of each exchange
on which registered
<S> <C> <C>
NONE NONE
</TABLE>
Securities registered pursuant to Section 1(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K. [ ]
<PAGE> 2
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $1,475,000 based upon the average closing
bid and ask price for the Company's Common Stock, $.01 par value, as reported by
the National Association of Securities Dealers Automated Quotation System on
December 15, 1996.
Indicate the number of shares outstanding of each of the registrants
classes of common stock as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at December 15, 1996
----- --------------------------------
<S> <C>
Common Stock, $.01 par value 5,014,000
</TABLE>
2
<PAGE> 3
1996 Annual Report on Form 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
<S> <C> <C>
Item 1 Business and "Subsequent Events" ........................................................................4
Item 2 Properties ..............................................................................................5
Item 3 Legal Proceedings .......................................................................................5
Item 4 Submission of Matters to a Vote of Security Holders .....................................................6
PART II
Item 5 Market for the Registrant's Common Stock and
Related Security Holder Matters .........................................................................7
Item 6 Selected Financial Data .................................................................................8
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations and
"Subsequent Events" .....................................................................................8
Item 8 Financial Statements and Supplementary Data ............................................................12
Item 9 Disagreements on Accounting and Financial Disclosure ...................................................12
PART III
Item 10 Directors and Executive Officers of the Registrant......................................................13
Item 11 Executive Compensation..................................................................................13
Item 12 Security Ownership of Certain Beneficial Owners
and Management .........................................................................................20
Item 13 Certain Relationships and Related Transactions..........................................................20
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K ....................................................................................21
</TABLE>
3
<PAGE> 4
PART I
Item 1 - Business
General
Prior to May 15,1995, Personal Diagnostics operated a contract
manufacturing business primarily devoted to the production of orthopedic
products and the assembly of various medical systems. During early fiscal 1995,
the Company essentially completed its assembly operations and on May 15, 1995,
concluded the sale of its manufacturing plant and equipment to EBI Medical
Systems, Inc. for $4.4 million dollars.
Subsequent to May 15, 1995 the Company retained ownership of
receivables which it collected and other miscellaneous assets which it sold.
Management continued to work diligently to assure that the Company's obligations
to customers, employees and others were honored completely. The Company has
continuing potential product liability exposure for equipment manufactured over
the years. The Company has maintained product liability insurance and knows of
no present or threatened claim.
Management intends to continue in business and has no intention to
liquidate the Company. The Company has considered various business alternatives
including the possible acquisition of an existing business, but to date, has
found possible opportunities unsuitable or excessively priced. The Company is
also considering developing a business itself, believing that start up costs may
be preferable to the premiums required to purchase a going concern. The Company
does not contemplate limiting the scope of its search to any particular
industry. Management has considered the risk of possible opportunities as well
as their potential rewards. Two possible acquisitions in the Company's primary
business (precision machinery of medical implants) were evaluated in detail and
rejected for a variety of reasons including potential long-term profitability
and competitive position. Management has also invested considerable time
evaluating and finally rejecting numerous proposals for possible acquisition or
combination. These proposals included media operations (small market television
stations), a data search system and several other proposals and suggestions
presented by investment professionals, the Company's advisors and others. The
Company believes present valuation levels requested for alternative operating
entities are excessive partly due to the expectations of sellers being raised by
generally high stock market valuations. After much thought and deliberation, the
Company has decided to focus its present operating activities on the
acquisition, improvement and resale of real property. This decision does not
preclude the possibility of becoming involved in the future with additional
businesses in other areas.
On June 13, 1996 the Company purchased the residence of the late
Senator J. William Fulbright which is located in the Embassy section of
Washington, D.C. adjacent to Rock Creek Park. The net purchase price of this
property was $855,000 plus closing costs. The Company is presently evaluating
all options with respect to this property including the possibility of modest
($100,000) or more extensive ($300,000 - $500,000) improvement prior to resale.
Many factors are involved including the actions of the DC Fine Arts Commission
and certain Historical and Neighborhood
4
<PAGE> 5
Advisory Boards. Frankly, the process has become more costly and time consuming
than originally anticipated. The Company is working with the architectural firm
of Rixey & Rixey with respect to alternative acceptable improvement plans. Also
the Company continues to monitor the resale market to determine an appropriate
improvement level. The Company has made several offers to purchase additional
properties for improvement and resale but has been unsuccessful with one
exception (see "Subsequent Events").
The Company intends to continue its investing and trading activities
and as a consequence the future financial results of the Company may be subject
to substantial fluctuations. Mr. Michael, the President of the Company is a
graduate of Harvard Business School (MBA). As part of the Company's investment
activities the Company may buy and sell a variety of equity, debt or derivative
securities including market index options and future contracts. Such investments
often involve a high degree of risk and must be considered extremely
speculative. Futures Contracts are particularly risky since a relatively small
amount of capital controls a large nominal market value thus greatly
exaggerating the exposure to potential losses. (See "Subsequent Events").
At September 30, 1996, approximately 80% of total Company assets were
held in U.S. Government Treasury Bills. The Company had no other trading or
investment positions. Since it is the intention of the Company to acquire or
develop an operating business, the Company presently intends to risk no more
than 20% of net worth in trading or investment activities. (See "Subsequent
Events")
Employees
The Company has one full time officer employee and utilizes part-time
help as required. At the present time the Company is heavily dependent on the
skills of John H. Michael, the Company's President, who is 53 years old and a
graduate of Georgetown University School of Foreign Service and Harvard Business
School.
Item 2 - Properties
The Company maintains offices at 1810 24th Street N.W., Washington,
D.C. at a rent of $2,500 per month. This property is owned at September 30, 1996
by the Company President, John H. Michael. Management believes that the rental
price is reasonable and fair compared with other available facilities. The
Company also maintains a small office in New Jersey for a nominal consideration.
(See "Subsequent Events").
Item 3 - Legal Proceedings
Not Applicable.
5
<PAGE> 6
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable.
Subsequent Events
1. During November and early December 1996, Management became convinced
that the overall stock market had become at least temporarily severely
overpriced. Management took short term short positions in S & P 500 Futures and
S & P 500 Index Options. The Company realized a pre-tax non-recurring trading
gain of approximately $425,000 which will be reflected in the results for the
first fiscal 1997 quarter ended December 31, 1996. This trading gain should not
be interpreted as indicative of final net fiscal 1997 first quarter results.
2. Also, on October 2, 1996 the Board of Directors approved the
purchase for improvement and resale of a property owned by the Company President
John H. Michael. The property is located at 1810 24th Street N.W., Washington,
D.C. The purchase price was set at $817,500 and the transfer was scheduled to
take place on or about December 20, 1996. This transaction has been consummated
and the property is in the process of renovation. The Board carefully considered
and deliberated the issue of potential conflict of interest inherent in this
transaction. The Board reviewed independent appraisals of the property which
were conducted by a designee of Riggs National Bank, J. Lee Donnelly & Son, and
a second appraisal conducted by Sotheby's Realty. These appraisals suggested a
range of net value in "as is" condition of between $840,000 and $900,000. The
issue was considered carefully by the Board and it concluded that a price of
$817,500 was extremely fair to shareholders particularly taking into account Mr.
Michael's recent expenditure of over $20,000 on permanent improvements beyond
the "as is" scope of the appraisals. Mr. Michael agreed to permit certain
improvement work to be initiated prior to December in order to expedite the
improvement process and to utilize available labor and management. The Board and
Management believe this project represents a solid step in becoming more active
in the acquisition improvement and resale of property. At December 20, 1996 the
Company owned two properties undergoing renovation at a total original cost of
approximately $1,685,000.
3. The Company continues to consider and evaluate possible
acquisitions, business combinations, or start up projects which could be
advantageous to shareholders. These include a small medical instrument
development project the Company is engaged in with Precision Assembly, Inc. in
New Jersey. The Company is also actively negotiating to purchase a controlling
interest in a small start-up trucking company specializing in refrigerated
transport in South America. No assurance can be given that either of these
projects will be favorably concluded.
6
<PAGE> 7
PART II
Item 5 - Market for the Registrant's Common Stock and Related Security Holder
Matters
(a) Market Information
The Company's Common Shares are traded on the "Bulletin Board System"
under the symbol PERS.U. The following table sets forth the high and low bid
prices of the Common Shares as reported for each quarter, as stated below since
the beginning of Fiscal 1995. The quotations represent prices between dealers
without adjustment for retail mark ups, mark downs, or commissions and may not
represent actual transactions.
<TABLE>
<CAPTION>
Trading Quarter Bid Price
- --------------- ---------
1995 High Low
---- ---- ---
<S> <C> <C>
December 31, 1994 (First Quarter) 7/8 9/16
March 31, 1995 (Second Quarter) 1-5/32 9/16
June 30, 1995 (Third Quarter) 13/16 5/8
September 30, 1995 (Fourth Quarter) 7/8 11/16
1996 High Low
---- ---- ---
December 31, 1995 (First Quarter) 7/8 3/4
March 31, 1996 (Second Quarter) 1 3/4
June 30, 1996 (Third Quarter) 1 7/8
September 30, 1996 (Fourth Quarter) 31/32 7/8
1997 High Low
---- ---- ---
December 15, 1996 (First Quarter) 15/16 25/32
</TABLE>
(b) Holders
As of December 15, 1996 there were approximately 505 record holders of
the Company's Common Stock. Included are shares held in "nominee" or "street
name."
(c) Dividends
The Company has paid no cash dividends on its Common Shares and has no
intention of paying cash dividends in the foreseeable future. It is the present
policy of the Board of Directors to
7
<PAGE> 8
retain all earnings to provide for the growth of the Company. Payment of cash
dividends in the future will depend, among other things, upon future Company
earnings and future Company policy.
Item 6 - Selected Financial Data
<TABLE>
<CAPTION>
(In thousands except per share amount)
Year Ended September 30,
OPERATING RESULTS 1996 1995 1994 1993 1992
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Investment Income (Loss) $ 308 ($ 241) $ 215 $ 1,268 $ 452
Income (Loss) From Continuing Operations (149) (352) 69 689 200
Income (Loss) From Discontinued Operations -- (751) (1,329) 45 1,443
Net Income (Loss) (149) (1,103) (1,260) 734 1,643
Per Share Data:
Income (Loss) From Continuing Operations (.03) (.07) .01 .14 .04
Income (Loss) from Discontinued Operations -- (.09) (.27) .01 .29
Loss on Sale of Discontinued Operations -- (.07) -- -- --
Net Income (Loss) (.03) (.23) (.26) .15 .33
Average Number of Shares Outstanding 4,866 4,864 4,864 4,941 4,935
FINANCIAL POSITION At year End
Working Capital $ 7,502 $ 7,546 $ 6,785 $ 7,528 $ 7,450
Total Assets 7,882 7,921 12,738 15,656 12,240
Long-Term Debt -- -- 3,104 3,203 1,479
Accumulated Deficit (1) (5,968) (5,819) (4,716) (3,456) (4,190)
Total Stockholders' Equity 7,502 7,546 8,649 9,909 8,733
</TABLE>
Notes:
(1) No dividends have been paid since incorporation.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
At September 30, 1996 the Company had cash and equivalents of
$6,910,000 which represented an increase from the $2,794,000 balance at
September 30, 1995. This $4,116,000 increase in net cash flows from operations
is the result of a net loss of $149,000 combined with the
8
<PAGE> 9
benefit of a reduction in a cash debt reserve of $50,000 and the purchase of
property held for development and sale for $866,000, offset by changes in
operating assets and liabilities of $5,181,000. The Company's working capital
position at September 30, 1996 was $7,502,000 as compared to a September 30,
1995 balance of $7,546,000.
Management intends to continue in business and has no intention to
liquidate the Company. The Company has considered various business alternatives
including the possible acquisition of an existing business, but to date, has
found possible opportunities unsuitable or excessively priced. The Company is
also considering developing a business itself, believing that start up costs may
be preferable to the premiums required to purchase a going concern. The Company
does not contemplate limiting the scope of its search to any particular
industry. Management has considered the risk of possible opportunities as well
as their potential rewards. Two possible acquisitions in the Company's primary
business (precision machinery of medical implants) were evaluated in detail and
rejected for a variety of reasons including potential long-term profitability
and competitive position. Management has also invested considerable time
evaluating and finally rejecting numerous proposals for possible acquisition or
combination. These proposals included media operations (small market television
stations), a data search system and several other proposals and suggestions
presented by investment professionals, the Company's advisors and others. The
Company believes present valuation levels requested for alternative operating
entities are excessive partly due to the expectations of sellers being raised by
generally high stock market valuations. After much thought and deliberation the
Company has decided to focus its present operating activities on the
acquisition, improvement and resale of real property. This decision does not
preclude the possibility of becoming involved in the future with additional
businesses in other areas.
On June 13, 1996 the Company purchased the residence of the late
Senator J. William Fulbright which is located in the choice Embassy section of
Washington, D.C. adjacent to Rock Creek Park. The net purchase price of this
property was $855,000 plus closing costs. The Company is presently evaluating
all options with respect to this property including the possibility of modest
($100,000) or more extensive ($300,000 - $500,000) improvement prior to resale.
Many factors are involved including the actions of the DC Fine Arts Commission
and certain Historical and Neighborhood Advisory Boards. The Company is working
with the architectural firm of Rixey & Rixey with respect to alternative
acceptable improvement plans. Also the Company continues to monitor the resale
market to determine an appropriate improvement level.
The Company intends to continue its investing and trading activities
and as a consequence the future financial results of the Company may be subject
to substantial fluctuations. Mr. Michael, the President of the Company is a
graduate of Harvard Business School (MBA). As part of the Company's investment
activities the Company may buy and sell a variety of equity, debt or derivative
securities including market index options and future contracts. Such investments
often involve a high degree of risk and must be considered extremely
speculative. Futures Contracts are particularly risky since a relatively small
amount of capital controls a large nominal market value thus greatly
exaggerating the exposure to potential losses.
9
<PAGE> 10
At September 30, 1996, approximately 80% of total Company assets were
held in U.S. Government Treasury Bills. The Company had no other trading or
investment positions. Since it is the intention of the Company to acquire or
develop an operating business, the Company presently intends to risk no more
than approximately 20% of net worth in trading or investment activities.
Subsequent Events
1. During late November and early December 1996, Management became
convinced that the overall stock market had become at least temporarily severely
overpriced. Management took short term short positions in S & P 500 Futures and
S & P 500 Index Options. The Company realized a pre-tax non-recurring trading
gain of approximately $425 ,000 which will be reflected in the results for the
first fiscal 1997 quarter ended December 31, 1996. This trading gain should not
be interpreted as indicative of final net fiscal 1997 first quarter results.
2. Also, on October 2, 1996 the Board of Directors approved the
purchase for improvement and resale of a property owned by the Company President
John H. Michael. The property is located at 1810 24th Street N.W., Washington,
D.C. The purchase price was set at $817,500 and the transfer was scheduled to
take place on or about December 20, 1996. This transaction has been consummated.
The Board carefully considered and deliberated the issue of potential conflict
of interest inherent in this transaction. The Board reviewed independent
appraisals of the property which were conducted by a designee of Riggs National
Bank, J. Lee Donnelly & Son, and a second appraisal conducted by Sotheby's
Realty. These appraisals suggested a range of net value in "as is" condition of
between $840,000 and $900,000. The issue was considered carefully by the Board
and it concluded that a price of $817,500 was extremely fair to shareholders
particularly taking into account Mr. Michael's recent expenditure of over
$20,000 on permanent improvements beyond the "as is" scope of the appraisals.
Mr. Michael agreed to permit certain improvement work to be initiated prior to
December in order to expedite the improvement process and to utilize available
labor and management. The Board and Management believe this project represents a
solid step in becoming more active in the acquisition improvement and resale of
property. At December 31, 1996 the Company owned two properties undergoing
renovation at a total original cost of $1,685,000.
3. Additionally, the Company continues to consider and evaluate
possible acquisitions, business combinations, or start up projects which could
be advantageous to shareholders. These include a small medical instrument
development project the Company is engaged in with Precision Assembly, Inc. in
New Jersey. The Company is also actively negotiating to purchase a controlling
interest in a small start-up trucking company specializing in refrigerated
transport in South America. No assurance can be given that either of these
projects will be favorably concluded.
Results of Operations
As a result of the sale of the Company's manufacturing assets, the
financial results of the Company's manufacturing operation has been reported as
"Discontinued Operations" in accordance
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with Accounting Principles Board Opinion No. 30. The prior years' results have
been restated to conform to the new reporting format.
Fiscal Year 1996 Compared to 1995
Income (Loss) from Continuing Operations
Income (loss) from continuing operations consists of interest and
trading gains and losses, general and administrative expenses and an income tax
credit. The Company incurred a $149,000 loss from continuing operations in the
current year versus a loss of $352,000, in the prior year period. Interest
income increased $73,000 to $390,000 due to more invested funds. The Company
experienced trading losses of $82,000 versus losses of $558,000 in the prior
year which were substantially attributable to Standard & Poor's 500 index
contracts. General and administrative expenses of $459,000 were $334,000 higher
than the prior year period of $125,000 due mainly to higher payroll costs and
the fact that operations in the two years were quite dissimilar.
For fiscal 1996, total compensation to Mr. Michael amounted to
approximately $328,000 including $150,000 accrued bonus at September 30, 1996
related to Mr. Michael's new Employment Agreement. This bonus will be paid
January 2, 1997 and $105,000 will be immediately returned to the Company in
connection with the exercise of existing incentive stock options.
During fiscal 1996, the Company recorded an income tax benefit of
$1,000 related to its remaining loss carrybacks.
Discontinued Operations
During the current year the Company experienced no gain or less from
discontinued operations versus a loss of $751,000 in the prior year. The loss of
$751,000 in the prior year included a loss on the sale of the Company's
manufacturing operations of $336,000. See note 2 to the Company's financial
statements for a description of the sale transactions.
Fiscal Year 1995 Compared to 1994
Income (Loss) from Continuing Operations
Income from continuing operations consists of interest and trading
gains and losses, general and administrative expenses and an income tax credit.
The Company incurred a $352,000 loss from continuing operations in the current
year versus earnings of $69,000 in the prior year. Interest income increased
$136,000 to $317,000 due to more invested funds and higher interest rates. The
Company experienced trading losses of $558,000 substantially attributable to
losses on Standard and Poor's 500 index contracts. For the comparable prior year
period the Company experienced trading gains of $34,000.
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<PAGE> 12
During fiscal 1995, the Company's income tax benefit of $14,000 related
to its loss carrybacks.
Discontinued Operations
During fiscal 1995, the Company incurred a $415,000 loss from
discontinued operations versus a loss of $1,329,000 in the prior year. Net sales
in fiscal 1995 were $1,907,000 versus $6,278,000 in the prior year. This decline
in sales of $4,371,000 or 70% results from a decline of business with major
customers and the sale of the manufacturing assets on May 15, 1995. The
operating loss for both years results from the Company's inability to lower
fixed costs and expenses in proportion to the sales decline.
In addition to its operating loss, the Company incurred a loss on the
sale of its manufacturing operations of $336,000. See Note 2 to the Company's
financial statements for a description of the sale transaction.
Inflation
The Company believes that inflation does not have a material adverse
effect on the results of its operations at the present time.
Item 8 - Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this
Report commencing on page F-1.
Item 9 - Disagreements on Accounting and Financial Disclosure
Not applicable.
12
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PART III
Item l0 - Directors and Executive Officers of the Registrant
Mr. Michael has served as a director of the Company since 1980. In 1986
he was appointed Chairman of the Board of Directors and Chief Executive Officer
and in 1987 he was named President. Mr. Michael graduated from Georgetown
University School of Foreign Service in 1964 (BSFS) and Harvard Business School
(MBA) in 1969.
Dr. Alfonso Espinosa was elected to the Board of Directors effective
May 2, 1996 to fill the position of the retiring Mr. Oberdorf. Dr. Espinosa is a
former Peruvian diplomat who served as Cultural Minister of Peru to the United
States for many years and retired from the Foreign Ministry with the rank of
Ambassador. Dr. Espinosa is also a highly respected retired faculty member of
Georgetown University in Washington, D.C. Dr. Espinosa has been an educator and
a consultant for the past five years.
Directors of the Company are elected by the Company's shareholders and
serve in such capacity until the Company's next annual meeting, and until their
successors are elected and qualified. Officers of the Company serve at the
pleasure of the Board of Directors.
Item 11 - Executive Compensation
The following table sets forth a summary for the fiscal years ended
September 30, 1996, 1995 and 1994, of the cash compensation paid by the Company,
as well as certain other compensation paid or accrued for those years, to the
Company's Chief Executive Officer. No disclosure is provided as to the cash
compensation paid by the Company to other executive officers of the Company
since the compensation paid to each such executive officer was less than
$100,000 in the fiscal year ended September 30, 1996.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Fiscal Options All Other
Principal Position Year Paid Deferred Bonus (# of Shares) Compensation(2)
- ------------------ ------ ---- -------- ----- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John H. Michael, 1996 $138,000 --- $190,000(4) $4,200
Chairman, Chief
Executive Officer
President, and
Treasurer
1995 $60,000 $75,000(3) --- $1,300
1994 $83,000 $52,000(3) --- 300,000(1) $1,700
</TABLE>
(1) On August 8, 1994, 312,500 incentive stock options granted to Mr.
Michael under the Company's 1986 Stock Option Plan and 112,900
incentive stock options granted to Mr. Michael under the Company's 1988
Stock Option Plan were surrendered and cancelled in exchange for
300,000 incentive stock options granted under the Company's 1988 Stock
Option Plan, each having an exercise price of $.70 per share. The new
options are exercisable in 100,000 share increments on each of
September 15, 1994, January 1, 1995 and January 1, 1996. 150,000 of
these incentive stock options were exercised on September 25, 1996.
(See "Employment Contract")
(2) Represents contributions to the Company's 401(k) plan on behalf of
Mr. Michael to match pre-tax elective deferral compensation (included
under the salary column) made to such plan.
(3) In fiscal 1994 and 1995 Mr. Michael agreed to defer receipt of a
portion of his salary. This deferred portion was paid in fiscal 1996.
(4) Of this amount, $150,000 is related to Mr. Michael's new Employment
Agreement and, will be paid on January 2, 1997. $105,000 of this amount
will be immediately returned to the Company in connection with the
exercise of existing stock options.
Performance Graph
The following graph provides a comparison on a cumulative basis of the
yearly percentage change over the last five fiscal years in (a) the total
shareholder return on the Company's Common Stock with (b) the total return on
the NASDAQ Stock Market of all domestic issues traded on the NASDAQ's NMS and
Small-Cap Market ("NASDAQ Stock Market Index"). Such yearly percentage has been
measured by dividing (i) the sum of (A) the amount of dividends for the
measurement period, assuming dividend reinvestment, and (B) the difference
between the price per share at the end and at the beginning of the measurement
period, by (ii) the price per share at the
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<PAGE> 15
beginning of the measurement period. The NASDAQ Stock Market Index has been
selected as the required broad equity market index. Because the Company sold its
manufacturing assets in 1995 and is gradually resuming active operations, no
relevant comparison to peer issuers can be made or shall be contained herein.
The price of each investment unit has been set at $100.00 on September 30, 1991
for purposes of preparing this graph.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURNS
Personal Diagnostics, Incorporated
NASDAQ Stock Market (US Companies)
[GRAPHIC]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Personal Diagnostics, Incorporated 100.0 200.0 147.6 52.3 61.2 75.0
NASDAQ Stock Market (US Companies) 100.0 110.7 144.8 145.1 198.1 232.9
</TABLE>
Notes:
A. The lines represent monthly index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighed daily, using the market capitalization on
the previous trading day.
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<PAGE> 16
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on 09/30/91.
Employment Agreement
John H. Michael was employed by the Company pursuant to an Employment
Agreement which extended from April 1, 1990 to March 31, 1996. Between April 1,
1996 and September 25, 1996 Mr. Michael was employed without an agreement at a
salary of $150,000 per year.
On September 25, 1996 the Company and Mr. Michael agreed upon a new
three year employment agreement to September 24, 1999 with the right of the
Employee to extend the Agreement for an additional three years. Pursuant to this
Agreement Mr. Michael will serve as the Company's President and Chief Executive
Officer. Mr. Michael's annual base salary is $175,000 subject to increase upon
review by the Board of Directors of the Company. The Agreement does not require
Mr. Michael to devote a minimum amount of time to the affairs of the Company;
however, it is anticipated that Mr. Michael will devote a majority of his
business time and efforts to the Company. Mr. Michael is also restricted from
disclosing, disseminating or using for his personal benefit or the benefit of
others information deemed "Confidential". The Agreement does not restrict Mr.
Michael's ability to work for any other company. The Agreement also provided for
a bonus of $150,000 payable to Mr. Michael on January 2, 1997. $105,000 of this
bonus will be immediately returned to the Company to pay for exercised stock
options.
Savings and Benefit Plans
The Company had a 401(k) savings/retirement plan under which all the
Company's eligible employees including executive officers were entitled to
benefits. The plan allowed for the employee contributions to be matched by the
Company on a pro-rata basis. Contributions made by the Company amounted to
$37,000, $11,000 and $4,200 for the fiscal years ended September 30, 1994, 1995
and 1996, respectively. Executive officers who qualified were also permitted to
participate in the Company's Stock Option Plans as well as the 401(k) plan.
Executive officers participate in group life and medical plans which are
available generally to all employees. At December 31, 1995 the Company
terminated its 401(k) retirement savings plan.
Directors
The Company's outside Directors are reimbursed for their out-of-pocket
expenses incurred in connection with their attendance at each Board meeting.
16
<PAGE> 17
Stock Option Plan and Warrants
On April 23, 1986 and April 28, 1988, the Board of Directors adopted
Employee Stock Option Plans which were approved by the Company's shareholders.
Under the 1986 Plan, which terminated in 1996, options to purchase no more than
150,000 Common Shares may be granted. Under the 1988 Plan, which terminates in
1998, options to purchase no more than 450,000 Common Shares may be granted. On
September 17, 1990 the Board of Directors adopted the 1990 Stock Option Plan
which terminates in the year 2000, and authorizes the granting of options to
purchase no more than 300,000 common shares. The 1990 Stock Option Plan was
approved by the Company's shareholders at their annual meeting on September 12,
1991. (Hereinafter the 1986, 1988 and 1990 Plans shall be collectively referred
to as the "Plans".)
The Plans authorized the granting of either "incentive stock options,"
as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
"non-qualified stock options" to acquire the Company's Common Shares. On April
28,1988, the Board of Directors amended and restated the Company's 1986 and 1988
Plans such that with the exception of the term of the Plans and the number of
shares that may be granted pursuant to the Plans, the Plans are now essentially
identical. Outstanding options to purchase 150,000 Common Shares were exercised
September 25, 1996 and at September 30, 1996 options were outstanding to
purchase 150,000 shares.
Currently, the Company has one employee and one nonemployee director
eligible to participate in the Plans. The shares available for issuance will be
increased or decreased according to any reclassification, recapitalization,
share split, share dividend or other such subdivision or combination of the
Company's Common Shares. Any moneys received by the Company from the exercise of
options will be used for working capital.
AGGREGATE OPTION EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities unexercised in-
underlying the-money
unexercised options at fiscal
options at fiscal year-end
year-end ($)
(#)
Shares Value
acquired Realized Exercisable/ Exercisable/
Name on ($) Unexercisable Unexercisable
exercise
(#)
<S> <C> <C> <C> <C> <C>
John H. Michael (1) 150,000 $27,500 N/A N/A
</TABLE>
17
<PAGE> 18
(1) On August 8, 1994, 312,500 incentive stock options granted to Mr. Michael
under the Company's 1986 Stock Option Plan and 112,900 incentive stock options
granted to Mr. Michael under the Company's 1989 Stock Option Plan were
surrendered and cancelled in exchange for 300,000 incentive stock options
granted under the Company's 1988 Stock Option Plan, each having an exercise
price of $.70 per share. The new options are exercisable in 100,000 share
increments on each of September 15, 1994, January 1, 1995 and January 1, 1996.
Options were exercised on 150,000 of these shares on September 25, 1996.
(2) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the date of exercise, or through a combination of such
methods. The exercise price equals 110% of the fair market value of the shares
of the Company's Common Stock on the date of grant. The above-market exercise
price of the options at the date of grant is required under the regulations
promulgated under Section 422 of the Internal Revenue Code of 1986, as amended
for the grant of incentive stock options to an optionee owning in excess of 10%
of the Company's voting stock at the date of grant.
Eligibility
Any person who is employed by the Company shall be eligible to receive
incentive stock options under the Plans. The Plans permit non-qualified stock
options to be granted to directors and consultants, as well as employees. Any
employee who already owns 10 percent or more of the total combined voting power
of all classes of the Company's stock shall be eligible to receive incentive
stock options only under certain limited circumstances.
Exercise Price of Options
Options granted pursuant to the Plans must have an exercise price no
less than the fair market value of the Company's Common Shares at the time the
option is granted, except that in the case of an incentive stock option the
price shall be at least 110 percent of the fair market value when the option is
granted to an employee who owns more than 10 percent of the combined voting
power of all classes of the Company's voting stock at the date of grant. Under
the terms of the Plans, the aggregate fair market value of the stock with
respect to which incentive stock options are exercisable for the first time by
such individual during any calendar year shall not exceed $100,000.
Amendments and Discontinuance
The Plans can be amended, suspended, or terminated at any time by
actions of the Company's Board of Directors except that no amendment to the
Plans can be made without prior shareholder approval where such amendment would
(i) increase the total number of shares of stock which may be purchased under
the Plans; (ii) materially modify the eligibility requirements of the Plans; or
(iii) materially increase the benefits accruing to the participants under the
Plans.
Administration
18
<PAGE> 19
The Board of Directors has appointed a Stock Option Committee
consisting of John H. Michael and Dr. Alfonso Espinosa. Mr. Michael is Chairman
of the Stock Option Committee. The Committee determines the individuals who will
be granted options, the number of options each individual will receive, the
option price and the exercise period of each option. Neither Mr. Michael nor Dr.
Espinosa will receive grants during the coming fiscal year.
Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors determined the compensation paid to
executive officers during fiscal 1996. Mr. Michael is the Chairman of the Board
of Directors, Chief Executive Officer, President, Treasurer and Secretary of the
Company. Dr. Espinosa was elected a director of the Company in May 1996.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ, copies of which are required by regulation to be furnished to the
Company.
Based solely on review of the copies of such forms furnished to the
Company, the Company believes that during fiscal 1996 its officers, directors
and ten percent (10%) beneficial owners complied with all Section 16(a) filing
requirements.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Set forth below is information concerning the beneficial ownership of
the Company's Common Stock by each Director, by all Directors and Officers of
the Company as group and by each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of the Company's
Common Stock based upon the number of shares of Common Stock outstanding on
December 15, 1996.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature Percent
Beneficial Owner (1) of Beneficial Ownership of Class
- -------------------- ----------------------- --------
<S> <C> <C>
John H. Michael 3,478,532(2) 67.4%
1810 24th Street N.W.
Washington, D.C.
Dr. Alfonso Espinosa -0- -0-
P.O. Box 53 10
Parsippany, NJ 07054
</TABLE>
- -----------------
19
<PAGE> 20
(1) Unless otherwise indicated each person has sole voting and investment powers
with respect to the shares specified opposite his name.
(2) Includes incentive stock options to purchase 150,000 shares at $.70 per
share which employee has the right to exercise immediately.
Item 13 - Certain Relationships
Mr. Michael, the President of the Company, has provided offices to the
Company through December 1996 at a cost of $2,500 per month.
Subsequent to September 30, 1996, the Company purchased for $817,500,
for the purpose of development and resale, the property owned by Mr. Michael at
1810 24th Street, NW, Washington, D.C.
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The response to this portion of Item 14 is submitted as a
separate section of this Report Commencing page F-1.
(a)(2) Inapplicable
(a)(3) List of Exhibits
<TABLE>
<CAPTION>
Exhibit Location
------- --------
<S> <C> <C>
3.1 Articles of the Corporation Filed Form S-1 October 7, 1983
File No. 2-86991
3.2 Bylaws of the Corporation Filed Form S-1 October 7, 1983
File No. 2-86991
10.1 Employment Agreement between Page E-1
John H. Michael and the Company
dated September 25, 1996
</TABLE>
20
<PAGE> 21
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
Date Filed Transaction Reported
---------- --------------------
<S> <C>
December 4, 1996 Temporary removal of guideline on
percentage of Company assets which
may be at risk to speculative loss;
short sale of S&P Futures Contracts
December 9, 1996 Close of short position on S&P
Futures Contracts
</TABLE>
21
<PAGE> 22
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.
PERSONAL DIAGNOSTICS, INCORPORATED
By: /s/ John H. Michael
---------------------------
John H. Michael
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ John H. Michael Chairman of the Board January 5, 1997
- ------------------- Chief Executive Officer
John H. Michael President, Treasurer and
Secretary
/s/ Alfonso Espinosa
- -------------------- Director January 5, 1997
Alfonso Espinosa
</TABLE>
The Company has not furnished an annual report or proxy materials to
security holders to date, but plans to distribute an annual Report and Proxy
Statement subsequent to the filing of this Form 10-K and the Company will
furnish copies of such material to the Commission when they are sent to security
holders.
22
<PAGE> 23
PERSONAL DIAGNOSTICS, INCORPORATED
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Balance Sheets as of September 30, 1996 and 1995 F-3
Statements of Operations for the Years Ended
September 30, 1996, 1995 and 1994 F-4
Statements of Changes in Stockholders' Equity
for the Years Ended September 30, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994 F-6
Notes to Financial Statements F-7 - F-13
Schedule VIII - Valuation and Qualifying Accounts F-14
</TABLE>
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedules, or
because the information required is included in the financial statements and
notes hereto.
F-1
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
Board of Directors
Personal Diagnostics, Incorporated
We have audited the financial statements of Personal Diagnostics, Incorporated
as of September 30, 1996 and 1995 and for each of the three years in the period
ended September 30, 1996 as listed in the accompanying index. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Personal Diagnostics,
Incorporated at September 30, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for equity securities in 1995.
WISS & COMPANY, LLP
Livingston, New Jersey
December 17, 1996
F-2
<PAGE> 25
PERSONAL DIAGNOSTICS, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
--------------------------------
ASSETS 1996 1995
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 6,910,000 $ 2,794,000
U.S. Treasury Bills - 4,963,000
Property held for development and sale 866,000 -
Due from stockholder (collected January 2, 1997) 105,000 -
Current assets of discontinued operations - 148,000
Other current assets 1,000 16,000
----------- ------------
Total Current Assets $ 7,882,000 $ 7,921,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,000 $ 12,000
Accrued payroll 150,000 143,000
Current liabilities of discontinued operations 150,000 150,000
Other current liabilities 70,000 70,000
----------- ------------
Total Current Liabilities 380,000 375,000
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized,
25,000,000 shares; issued and outstanding,
5,014,000 shares in 1996 and 4,864,000 shares in 1995
50,000 49,000
Capital in excess of par value 1 3,420,000 3,316,000
Accumulated deficit (5,968,000) (5,819,000)
Total Stockholders' Equity 7,502,000 7,546,000
----------- ------------
$ 7,882,000 $ 7,921,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 26
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME:
Interest $ 390,000 $ 317,000 $ 181,000
Trading gains (losses) (82,000) (558,000) 34,000
----------- ----------- -----------
308,000 (241,000) 215,000
EXPENSES:
General and administrative 459,000 125,000 120,000
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (151,000) (366,000) 95,000
PROVISION FOR INCOME TAXES (BENEFIT) (2,000) (14,000) 26,000
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (149,000) (352,000) 69,000
----------- ----------- -----------
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES:
Loss from operations -- (415,000) (1,329,000)
Loss on sale -- (336,000) --
----------- ----------- -----------
-- (751,000) (1,329,000)
----------- ----------- -----------
NET LOSS $ (149,000) $(1,103,000) $(1,260,000)
=========== =========== ===========
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Income (loss) from continuing operations $ (.03) $ (.07) $ .01
Discontinued operations -- (.09) (.27)
Loss on sale -- (.07) --
----------- ----------- -----------
Net loss $ (.03) $ (.23) $ (.26)
=========== =========== ===========
AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 4,866,000 4,864,000 4,864,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 27
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Capital in
------------------------- Excess of Accumulated
Shares Par Value Par Value Deficit
------ --------- --------- -------
<S> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1993 4,864,000 $49,000 $13,316,000 $(3,456,000)
YEAR ENDED SEPTEMBER 30,1994 -
Net loss - - - (1,260,000)
--------- ------- ----------- -----------
BALANCES, SEPTEMBER 30, 1994 4,864,000 49,000 13,316,000 (4,716,000)
YEAR ENDED SEPTEMBER 30, 1995 -
Net loss - - - (1,103,000)
--------- ------- ----------- -----------
BALANCES, SEPTEMBER 30, 1995 4,864,000 49,000 13,316,000 (5,819,000)
YEAR ENDED SEPTEMBER 30, 1996:
Exercise of stock options 150,000 1,000 104,000 -
Net loss - - - (149,000)
--------- ------- ----------- -----------
BALANCES, SEPTEMBER 30, 1996 5,014,000 $50,000 $13,420,000 $(5,968,000)
========= ======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 28
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (149,000) $(1,103,000) $(1,260,000)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation and amortization - 302,000 657,000
Deferred income tax benefit - - (80,000)
Provision (benefit) for losses on accounts
receivable (50,000) - 3,000
Gain on disposal of property
and equipment - (19,000) (122,000)
Loss on sale of discontinued operations - 336,000 -
Gain on investments - - (34,000)
Changes in assets and liabilities:
Trading securities 4,963,000 (3,933,000)
Property held for development and sale (866,000) - -
Accounts receivable - net 198,000 392,000 904,000
Inventories - (70,000) 363,000
Accounts payable and accrued liabilities 5,000 (168,000) (1,478,000)
Other current assets 15,000 558,000 (115,000)
----------- ----------- -----------
Net cash flows from operating activities 4,116,000 (3,705,000) (1,162,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment - - (168,000)
Proceeds from disposal of property
and equipment - 29,000 307,000
Net proceeds from sale of discontinued
operations - 4,562,000 -
Purchases of marketable securities - - (4,723,000)
Proceeds from the sale of marketable securities - - 4,012,000
Other current assets - - (250,000)
----------- ----------- -----------
Net cash flows from investing activities - 4,591,000 (822,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - - 670,000
Principal payments on borrowings - (2,451,000) (198,000)
Principal payments for equipment notes
payable and capital lease obligations - (1,195,000) (572,000)
----------- ----------- -----------
Net cash flows from financing activities - (3,646,000) (100,000)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 4,116,000 (2,760,000) (2,084,000)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 2,794,000 5,554,000 7,638,000
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 6,910,000 $ 2,794,000 $ 5,554,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 29
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF THE BUSINESS - Personal Diagnostics, Incorporated
("the Company") is pursuing various business alternatives
including possible acquisition of an existing business. It is
currently engaged in the acquisition, improvement and resale of
real estate.
In May 1995, the Company discontinued its former operations
which were the production of orthopedic products and assembly of
medical systems.
CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less to
be cash equivalents.
INVESTMENTS - Effective October 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115 (SFAS 115)
"Accounting for Certain Investments in Debt and Equity
Securities." This standard requires that trading securities be
reported at fair value with unrealized gains and losses included
in earnings. The Company considers its investments as trading
securities. There was no effect upon adoption of SFAS 115.
The Company periodically enters into futures contracts for
commodities or stock indexes. The Company considers these
investments to be trading securities.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK - Net income (loss)
per share of common stock is based on the weighted average
number of common shares and common share equivalents outstanding
during each year when the effect is not anti-dilutive. Common
share equivalents consist of outstanding options and warrants
using the treasury stock method.
CONCENTRATION OF CREDIT AND OFF-BALANCE-SHEET RISK - Financial
instruments that are potentially subject to credit risk consist
of cash and equivalents and trading securities. Cash and
equivalents and principally all trading securities are placed
with financial institutions.
At September 30, 1996, the Company had approximately $275,000 of
uninsured money funds at financial institutions.
ESTIMATES AND UNCERTAINTIES - The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results, as
determined at a later date, could differ from those estimates.
F-7
<PAGE> 30
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FINANCIAL INSTRUMENTS - Financial instruments include cash and
equivalents, securities, accounts payable and accrued expenses.
The amounts reported for financial instruments are considered to
be reasonable approximations of their fair values, based on
market information available to management. The use of different
market assumptions and/or estimation methodologies could have an
effect on the estimated fair value amounts.
NOTE 2 - DISCONTINUED OPERATIONS:
On May 15, 1995, the Company completed the sale of certain
assets to EBI Medical Systems, Inc., a subsidiary of Biomet,
Inc. The assets sold consisted of (i) the land, building and
improvements comprising the Company's executive offices and
manufacturing facility located in Parsippany, New Jersey, (ii)
all the Company's manufacturing equipment and machinery, and
(iii) certain office equipment and manufacturing-related items
(collectively, the "Purchased Assets"). The purchase price for
the Purchased Assets was $4,400,000. Certain additional items,
including miscellaneous inventory, were purchased separately.
The sale resulted in a pre-tax loss of $336,000, which included
both a loss on the sale of assets and accruals for other
estimated costs expected to be incurred in connection with the
sale. The results of the Company's manufacturing operations have
been reported separately as a component of discontinued
operations in the Statements of Operations. Prior year
Statements of Operations have been restated to present the
Company's manufacturing operations as a discontinued operation.
Summary operating results of the manufacturing operations for
each of the two fiscal years ended September 30, 1995 follow:
<TABLE>
<CAPTION>
1995 1994
--------------- --------------
<S> <C> <C>
Net sales $1,907,000 $ 6,278,000
Loss before income taxes (415,000) (1,566,000)
Provision for income tax benefit - (237,000)
Net loss (415,000) (1,329,000)
</TABLE>
Assets and liabilities of discontinued operations are comprised
of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS -
Accounts receivable, less allowance for
doubtful accounts of $50,000 in 1995 $ - $148,000
======== ========
CURRENT LIABILITIES -
Other liabilities $150,000 $150,000
======== ========
</TABLE>
F-8
<PAGE> 31
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS:
At September 30, 1996, cash and equivalents include $6,324,000
of U.S. Treasury Bills purchased with maturities of three
months. At September 30, 1995, the Company's investments
consisted of U.S. Treasury Bills purchased with maturities of
more than three months.
For the year ended September 30, 1994, the Company recorded a
$67,000 valuation allowance to reduce the cost of its marketable
securities to market value. For the year ended September 30,
1995, the Company included a credit to earnings of $67,000
representing the change in the net unrealized holding loss on
its trading securities.
NOTE 4 - PROPERTY HELD FOR DEVELOPMENT AND SALE:
On June 13, 1996, the Company purchased the residence of the
late Senator J. William Fulbright which is located in the
embassy section of Washington, D.C. adjacent to Rock Creek Park.
The net purchase price of this property was $855,000 plus
closing costs. The Company is presently evaluating all options
with respect to this property including the possibility of
modest or more extensive improvement prior to resale.
NOTE 5 - INCOME TAXES:
The provision (benefit) for income taxes for continuing
operations consists of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $(2,000) $(14,000) $17,000
State - - 9,000
------- -------- -------
- -
Income tax provision (benefit) $(2,000) $(14,000) $26,000
======= ========= =======
</TABLE>
Deferred income taxes reflect the net effects of temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Principal items
comprising net deferred income tax assets and liabilities are:
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1995
--------- -----------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards $ 290,000 $ 293,000
Net operating loss carryforwards 542,000 453,000
Other items 120,000 57,000
--------- -----------
952,000 803,000
Valuation allowance (952,000) (803,000)
--------- -----------
Net asset $ - $ -
========= ===========
</TABLE>
F-9
<PAGE> 32
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be realized. The
Company has determined, based on the Company's recent net losses, that a full
valuation allowance is appropriate at September 30, 1996 and 1995. During 1996
and 1995 the valuation allowance increased $219,000 and $298,000, respectively.
A reconciliation of the provision (benefit) for income taxes
computed at the federal statutory rate of 34% and the effective tax rate on
income (loss) from continuing operations before income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed tax at federal
statutory rate $(111,000) $(124,000) $32,000
State income taxes, net of federal
income tax benefit - - (6,000)
Net operating loss and tax credit
limitations 109,000 110,000 -
---------- ---------- -------
Provision (benefit) for income taxes $ (2,000) $ (14,000) $26,000
========== ========= ========
</TABLE>
At September 30, 1996, the Company had net operating loss
carryforwards of approximately $1,390,000 for regular tax purposes and
$1,744,000 for alternative minimum tax (AMT) which can be used to offset future
taxable income. The Company also has research and development credits of
approximately $168,000, investment tax credits of approximately $52,000 and AMT
credits of approximately $70,000 which can be used to offset future income taxes
for federal income tax purposes. The net operating loss carryforwards expire, if
not used, as to $1,278,000 in 2009 and $112,000 in 2011. The research and
development and investment tax credits expire, if not used, over the period 1999
to 2002.
The AMT credits are available for an indefinite period.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT CONTRACT - At September 30, 1996, the Company had an
employment contract with an officer which calls for an annual
salary of not less than $175,000 until September 24, 1999 with
the right of the employee to extend the agreement for an
additional 3 year term with annual compensation of not less than
$175,000. The contract also provides for a bonus to the officer
of $150,000 to be paid in January 1997 and the right to borrow
up to $250,000 at the prevailing prime rate up to 9% per annum.
PRODUCT LIABILITY - The Company has continuing potential product
liability exposure for equipment manufactured in prior years.
The Company has maintained product liability insurance and knows
of no present or threatened claim.
F-10
<PAGE> 33
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - STOCK OPTIONS:
Under the Company's 1988 Stock Option Plan, options may be
granted to employees at prices not less than the fair market
value at the dates of grant. The price shall be 110 percent of
the fair market value when the option is granted to an employee
who owned more than ten percent of the Company's common stock at
the date of grant. The Plan authorizes the granting of either
"incentive stock options", as defined in Section 422A of the
Internal Revenue Code of 1986, as amended, or "non-qualified
stock options" to acquire shares of the Company's common stock.
The term of each option is ten years from the date of grant
thereof or such shorter term as may be provided in the stock
option agreements. However, in the case of an incentive stock
option granted to an employee who, immediately before the
incentive stock option is granted, owns stock representing more
than ten percent of the voting power of all classes of stock of
the Company, the term of the incentive stock option shall be
five years from the date of grant thereof or such shorter time
as may be provided in the stock option agreements.
During September 1990, the Board of Directors adopted the 1990
Stock Option Plan. Terms of the 1990 Plan are the same as the
1988 Plan, except that the exercise price of non-qualified
options shall be determined at the discretion of the Board of
Directors.
The Company has made no charge to income in connection with the
grant of options under any plan.
Maximum shares subject to options and plan termination dates are
as follows:
<TABLE>
<CAPTION>
Maximum Shares
Plan Subject to Options Year of Termination
---- ------------------ -------------------
<S> <C> <C>
1988 450,000 1998
1990 300,000 2000
-------
750,000
=======
</TABLE>
Changes in the Company's stock option plans were as follows:
<TABLE>
<CAPTION>
Number of Shares
--------------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding at October 1
($.70-$2.00 per share) 300,000 344,000 542,000
Granted ($.70 per share) - - 300,000
Exercised ($.70 per share) (150,000) - -
Cancelled ($.70-$2.00 per share) - (44,000) (498,000)
-------- -------- --------
Outstanding at September 30, ($.70-
$2.00 per share) 150,000 300,000 344,000
======== ======== ========
</TABLE>
F-11
<PAGE> 34
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - EMPLOYEE BENEFIT PLAN:
The Company had a 401(k) savings/retirement plan for all of its
eligible employees. The plan allowed for employee contributions
to be matched by the Company on a pro-rata basis. Contributions
made by the Company for fiscal 1996, 1995 and 1994 amounted to
$4,200, $11,000 and $37,000, respectively. At December 31, 1995,
the Company terminated its 401(k) savings/retirement plan.
NOTE 9 - STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
Fiscal Years Ended In
-----------------------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Supplemental disclosure of
cash flow information -
Interest paid $ - $ 210,000 $346,000
========= ========= ========
Income taxes refunded $ (15,000) $(126,000) $(97,000)
========= ========= ========
Supplemental schedule of non-
cash investing and financing
activities:
Issuance of common stock in
exchange for receivable $105,000 $ - $ -
========= ========= ========
</TABLE>
NOTE 10 - RELATED PARTY TRANSACTIONS:
On October 2, 1996, the Company's Board of Directors approved
the purchase of real estate owned by the President - Principal
Stockholder for $818,000.
For the year ended September 30, 1996, the Company leased office
space from its President - Principal stockholder for $27,500.
The Company has incurred legal fees from a law firm, a partner
of which was a member of the Company's Board Of Directors. The
Company also has incurred legal fees from another member of its
Board Of Directors. The total of these fees was $19,000,
$107,000 and $22,000 for 1996, 1995 and 1994, respectively.
F-12
<PAGE> 35
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - NEW ACCOUNTING STANDARDS:
Statement of Financial Accounting Standards (SFAS No. 121)
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of", is effective for fiscal
years beginning after December 15, 1995. SFAS 121 requires that
long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company expects
to adopt SFAS 121 for the year ending September 30, 1997. The
adoption is not expected to have any effect on the Company's
financial statements.
Statement of Financial Accounting Standards (SFAS No. 123)
"Accounting for Stock-Based Compensation" is effective for
fiscal years beginning after December 15, 1995. SFAS No. 123
established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee
compensation plans. Under SFAS No. 123, the Company may either
adopt the new fair value-based accounting method or continue the
value-based method established in Accounting Principles Board
Opinion No. 25 and provide pro forma disclosures of net income
and earnings per share as if the accounting provisions of SFAS
No. 123 had been adopted. The Company plans to adopt only the
disclosure requirements of SFAS No. 123. Therefore, such
adoption will have no effect on the Company's financial
condition or results of operations.
F-13
<PAGE> 36
SCHEDULE VIII
PERSONAL DIAGNOSTICS, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Deductions
-------------------------------
Additions
Balance at Charged to Written Balance
Beginning Costs and Off Against Reversed at End
of Year Expenses the Reserve to Income of Year
------- -------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
1996 $ 50,000 $ - $ - $ 50,000 $ -
========= ========= ========== ========= =========
1995 $ 50,000 $ - $ - $ - $ 50,000
========= ========= ========== ========= =========
1994 $ 50,000 $ 3,000 $ 3,000 $ - $ 50,000
========= ========= ========== ========= =========
</TABLE>
F-14
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is dated September 25, 1996, and has been entered into
between Personal Diagnostics, Incorporate, hereinafter called the Employer, and
John H. Michael, hereinafter called the Employee.
In consideration of the mutual covenants set forth herein, the
Employee hereby accepts employment, upon the terms and conditions hereinafter
set forth.
2. TERM: Subject to the provisions for termination as hereinafter
provided, the term of this agreement shall begin on September 25, 1996 and shall
terminate on September 24, 1999 (being three years after the commencement date),
with the right on the part of the Employee to extend this agreement for an
additional term of three years upon written notice to the Employer not less than
two months prior to the expiration of the first three year term.
3. COMPENSATION: For all services rendered by the Employee under this
agreement, the Employer shall pay to the Employee a salary payable in monthly or
quarterly installments as directed by the Employee. Such salary shall be
$175,000 per annum.
In the event that the Employee shall renew this agreement for an
additional three year term, the Employee's salary shall be determined (prior to
the outset of such term) by the Employer but such salary shall in no event be
less than $175,000.
Employee shall also be eligible to receive additional compensation in
the form of an annual bonus in an amount to be set by the Board of Directors in
their sole discretion.
4. DUTIES: The Employee is engaged as President and Chief Executive
Officer of the Employer. His duties shall be consistent with the
responsibilities of such offices. He shall be in full control of the operations
of the Employer, subject only to the directions of the Board of Directors of the
Employer.
5. EXTENT OF SERVICES: The Employee shall devote substantial time,
attention, and energies to the business of the Employer. Employer acknowledges
that Employee will devote some of his time to his other business interests but
he will devote sufficient time to the business of the Employer to fulfill his
responsibilities.
6. WORKING FACILITIES: Employee shall be furnished with a private
office and such other facilities and services as are suitable to his position
and adequate for the performance of his duties.
7. VACATIONS: The Employee shall be entitled each year to reasonable
vacations consistent with his position and office. Employee's compensation shall
be paid in full during such vacations.
E-1
<PAGE> 2
8. INDUCEMENTS TO EMPLOYEE TO ENTER EMPLOYMENT AGREEMENT:
(a) Bonus-Stock Option Exercise. The Company grants to
Employee a cash bonus of $150,000 payable January 2, 1997. Employee agrees to
exercise immediately (September 25, 1996) existing, vested incentive stock
options to purchase 150,000 shares at $.70 per share. The Company advances
$105,000 to Employee to consummate this exercise. Employee will repay this
advance to the Company on January 2, 1997 upon receipt of the bonus.
(b) Loan. In addition to the stock option advance referred to
in Paragraph 8(a) the Employee is granted the right to borrow from the Company
up to $250,000 at the prevailing prime rate up to a maximum of 9%. Interest will
be calculated, accrued and paid at the end of each fiscal year. Any such
borrowing must be repaid within 120 days of the termination of this contract.
(c) Automobile. The Company will provide Employee with the
use of an automobile of a type consistent with his position.
9. TERMINATION:
(a) If the Employee is unable to perform his services by
reason of illness or incapacity for a period exceeding six months, the
compensation otherwise payable to him during the continued period of such
illness or incapacity shall be reduced by 25%. The Employee's full compensation
shall be reinstated upon his return to full employment and the discharge of his
duties hereunder. Notwithstanding anything herein to the contrary, the Employer
may terminate this agreement at any time after the Employee shall be absent from
his employment, for whatever cause, for a continuous period exceeding twelve
months, and all obligations of the Employer hereunder shall cease upon any such
termination.
(b) The Employer shall have the right to terminate this
agreement for cause at any time if and only if the Board of Directors shall have
determined that (i) the Employee has willfully engaged in fraudulent conduct to
the material detriment of the Employer or (ii) the Employee has engaged in
practices which constitute a gross disregard for his responsibilities as an
employee of the Employer after receipt of notice from the Employer.
10. FRINGE BENEFITS: Employee shall be entitled to participate in and
receive any fringe benefits, generally offered to management employees of the
Employer, including, but not limited to, participation in any retirement
benefits, group life insurance and medical benefits. In addition, the Employee
shall be entitled to participate in any profit-sharing plan maintained by the
Employer for its employees. The Employee is entitled to reimbursement for any
medical or dental costs not covered by a plan maintained by the Company.
11. CONFIDENTIAL INFORMATION:
(a) The Employer and the Employee recognize that the Employee
is employed in a capacity which, from time to time, he shall acquire
confidential information concerning the Employer and its business. As used in
this agreement, "Confidential Information" means trade
E-2
<PAGE> 3
secrets, proprietary data, customer lists and any other information disclosed to
or acquired by the Employee in the course of his employment (including
information developed or originated by the Employee himself) that:
(i) is not generally known to the trade or industry
in which the Employer is engaged; and
(ii) concerns any of the following:
(A) the Employer's customers or suppliers,
the actual or anticipated requirements of such customers and suppliers, or the
Employer's actual or anticipated contractual or financial relationships with its
customers or suppliers.
(b) The Employee agrees that both during and after the term
of his employment he shall not disclose, disseminate or use for the benefit of
himself or others any Confidential Information, except (i) as authorized by the
Board of Directors of the Employer or (ii) to the extent that such information
has entered the public domain and ceased to be confidential.
12. SEVERABILITY: If any provision of this agreement, and in
particular any obligation undertaken by the Employee herein, is deemed invalid
in any respect under applicable law, the provision shall, if possible, be
enforced to the extent reasonable under the circumstances. To the extent that
the provision or any part of the provision remains unenforceable, it shall be
deemed not to constitute part of the agreement. In any case, the remaining
provisions of the agreement shall not be affected, and shall remain valid and be
enforced to the fullest extent allowed by law.
13. SPECIFIC ENFORCEMENT:
(a) The Employee acknowledges that his failure to fulfill his
obligations under Sections 11 and 12 of this agreement would substantially and
irreparably jeopardize the value of the Employer's assets, and that the remedies
at law for any breach by him of his obligations would prove inadequate. The
Employee therefore agrees that the Employer shall be entitled to sue in equity
to enjoin any breach or anticipated breach by him of Sections 11 and 12 of this
agreement, and he hereby waives the defense, in any such action or proceeding
brought by the Employer, that an adequate remedy at law exists.
(b) This Section 13 shall not be deemed to limit the
Employer's rights to any remedies to which it may be entitled under law,
including the recovery of monetary damages from the Employee.
14. NOTICES. Any notice required or permitted to be given under this
agreement shall be sufficient if in writing, and if sent by registered mail to
his residence in the case of the Employee, or to its principal office in the
case of the Employer.
E-3
<PAGE> 4
15. WAIVER OF BREACH: The waiver by either party hereto of a breach of
any provision of this agreement by the other party hereto shall not operate or
be construed as a waiver of any subsequent breach by the latter.
16. ASSIGNMENT: The rights and obligations of the Employer under this
agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Employer; provided, however, that no assignment of this
agreement shall relieve the Employer of its obligations hereunder.
17. ENTIRE AGREEMENT: This instrument contains the entire agreement of
the parties. It may not be changed orally, but only by an agreement in writing
signed by the party against whom enforcement, waiver, change, modification,
extension, or discharge is sought.
IN WITNESS WHEREOF, the parties have executed this agreement
on the date first set forth above.
ATTEST: PERSONAL DIAGNOSTICS, INC.
_____________________________ By:_____________________________________
, Secretary
________________________________________
John H. Michael, Employee
E-4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 6,910,000
<SECURITIES> 0
<RECEIVABLES> 105,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,882,000
<PP&E> 866,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,882,000
<CURRENT-LIABILITIES> 380,000
<BONDS> 0
0
0
<COMMON> 50,000
<OTHER-SE> 7,452,000
<TOTAL-LIABILITY-AND-EQUITY> 7,882,000
<SALES> 0
<TOTAL-REVENUES> 308,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 459,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (151,000)
<INCOME-TAX> (2,000)
<INCOME-CONTINUING> (149,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (149,000)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
