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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996........................................
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ............... TO ............................
COMMISSION FILE NUMBER: 33-10943-NY
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PHOTON TECHNOLOGY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2494774
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 DEERPARK DRIVE, SUITE F, SOUTH BRUNSWICK, NJ 08852
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (908) 329-0910
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
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 is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of September 27, 1996, the registrant had 1,153,776 shares of its Common
Stock outstanding. The aggregate market value of the voting stock held by non-
affiliates of the registrant as of that date is $3,461,328.
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PART I
ITEM 1. BUSINESS
GENERAL
Photon Technology International, Inc. (the "Company" or "PTI(R)"), a New
Jersey based corporation, was organized in November 1983. The Company is
engaged in the research, development, manufacturing, marketing and sales of
proprietary electro-optical and light-based instrumentation, which enable
customers in fields of medical research, health care, environmental science
and industrial process control functions to perform advanced analysis
utilizing fluorescence technologies. It is generally believed that all
substances either fluoresce naturally when "excited" by an intense light
source, or that inert markers or fluorescent "tags" can be introduced which
will "attach" exclusively to the compound to be measured. Utilizing this
fluorescence technology allows for measurement of minute quantities of
compounds. The commercialization of the uses of light started in the early
1970's. During the last decade, photonics, or the use of light as a tool for
research and production purposes, has become a preferred technology for many
applications.
The Company has developed propriety instrumentation products that are used
by companies and organizations in medical life sciences, physical sciences and
environmental and industrial markets to detect minute quantities of compounds
for research, diagnostic testing, monitoring or process/quality control
purposes. The Company has pursued a modular and open architecture strategy,
which it believes is unique for the industry. By developing and manufacturing
a series of systems and a range of electro-optical components, called building
blocks, the Company is able to enhance and rapidly develop specific systems
for new applications.
The Company offers a full product line designed to provide the research and
development community with a single source of supply for their electro-optical
instrumentation and component needs. These systems are designed for and sold
to major private and government research institutions, hospitals and
pharmaceutical companies. The Company has adapted its knowledge and experience
in the field of fluorescence technology to commercial applications which
address a broad array of needs and markets.
In June 1987, the Company incorporated a wholly-owned subsidiary, Photon
Technology International (Canada) Inc., located in London, Ontario, Canada
(the "Canadian Subsidiary"). The Canadian Subsidiary's operations include
manufacturing, research and development, engineering and product support
activities. This Canadian plant site continues to be the primary manufacturing
source for the Company.
The Company maintains a sales office in London, England responsible for
sales, service and distribution support in Continental Europe and the former
Eastern Bloc Countries. The Company has appointed several distributors to
support its activities in Europe. These distributors are managed by the London
office. In September 1994, the Company established a subsidiary PhotoMed GmbH,
a German subsidiary (the "German Subsidiary"). The German Subsidiary operates
as a sales and service office to handle Germany, Austria, Finland and the
Scandinavian countries. The German Subsidiary is strategically important to
the Company's overall market penetration, expansion of sales coverage and
sales growth in Europe. In combination with the Company's branch office in the
United Kingdom, the German Subsidiary strengthened direct sales and service
coverage in two of the three major country markets in Europe.
In March 1990, the Company entered into a joint venture with M.L. Technology
Ventures, L.P. ("MLTV"), whereby the joint venture would manufacture and
market some or all of the products developed pursuant to a research and
development agreement between the Company and MLTV. The research agreement was
entered into in April 1987 to develop four different instruments for
fluorescence applications. On December 8, 1995, the Company entered into an
agreement with MLTV whereby the Company issued 1,000,000 shares of common
stock for payment of the technology developed under the joint venture between
the Company and MLTV, and MLTV's joint venture interest (the "December 1995
MLTV Agreement"). The December 1995 MLTV Agreement terminated the joint
venture. The 1,000,000 shares of common stock was in full settlement of the
$627,000 base purchase price option for the technology in addition to
royalties for a five year period.
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The common shares were recorded at market value (bid price) of .875 per share
or $875,000, and this value is recorded in "Paid-in-Capital". The purchase of
the technology represents an intangible asset of $875,000 which was recorded
as an "Other Asset" and will be amortized on a straight-line basis over a five
(5) year period. As of June 30, 1996, $42,000 has been amortized and the
balance represents $833,000.
All four technologies associated with the MLTV joint venture have been
developed. The Company is committed to manufacture and market these products.
The Company completed a prototype of the fourth instrument known as DeltaRam,
and has started a limited first production run. Full commercialization of this
product has been limited due to a need for more available financial resources.
It is the Company's intention to introduce and sell this product into its
markets in fiscal 1997. (See "BUSINESS--Research and Development").
The Company's integrated product line encompasses three major product
groups, (i) subcomponents, such as mirrors, power supplies, lamps and
gratings; (ii) components, such as monochromators, light sources; and
(iii) advanced systems which incorporate the subcomponents and components made
available by the Company and others. These products perform four basic
applications which cover the full range of functions provided by electro-
optical and light-based instrumentation:
(a) The "generation" of light through the use of power supplies and lamps;
(b) The "handling" and directing of light through the use of
monochromators, sample compartments, gratings, choppers and lenses;
(c) The "detection" of light sensitive elements and other matter through
the use of photomultipliers, silicon detectors, and cameras; and
(d) The "analysis" and handling of data through the use of computer
software and hardware.
These functions are fundamental to advancing light-based technology for the
commercial and scientific utilization of light by the research and development
community and within manufacturing processes.
Light has important uses in the pharmaceutical industry for the development,
characterization and production of new drugs. In the energy industry light is
necessary for the enhancement of the efficiency of fuels and development of
new sources of energy and in the communications industry light provides more
efficient transportation of information. In the semiconductor industry light
is used for the production of better quality chips and yields. Light is also
used in the computer industry for better storage and in medicine, for safer
diagnostics through the replacement of more harmful techniques employing
radioactive compounds and X-rays.
The Company believes that light-based instrumentation can offer a more
accurate, sensitive, safer and less costly alternative to previously used
methods. The fluorescence technology measures minute sub-cellular substances
and generally has replaced radioactive analysis in detecting various amino
acids. A number of fluorescent dyes and/or tags have been developed primarily
for use in the detection of calcium ions in living cells. This information is
essential to the understanding of how and why various diseases and drugs
affect the body's intracellular transport system. Such measurements can play
an important role in the life sciences with many new and developing
applications.
The Company has the ability to identify commercial and scientific
applications and, through its technical and design capability, to provide
products which "add value" to the end users and which are responsive to these
needs. This ability is integral to the Company's success. The Company's know-
how which is employed in its design and assembly techniques results in a
competitive product which has high precision, quality and lower costs.
INDUSTRY
The Company operates in what can be broadly defined as the photonics
industry. The photonics industry utilizes light for application in medical
research and testing, pharmaceutical drug development, industrial process
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and quality control, and environmental, research monitoring and control. It is
a relatively new industry, having only emerged in the 1970s.
Light-based instrumentation for industry, medicine, and research is a multi-
billion dollar business. As a result, applications for photonics
instrumentation and techniques for medicine is still emerging. The Company's
industry niche utilizes fluorescence technology to measure samples in small
amounts or quantities, track movement/location, monitor chemical or physical
changes and identify or isolate the sample from surrounding environment. In
medical research applications and drug development, this can be accomplished
without harm or destruction to the sample (i.e. cells). In all applications
the speed, sensitivity and light reaction are important for process, and
quality control, and monitoring.
TECHNOLOGY
The application of light in the fields of industry, medicine, and research
falls into many broad categories. Among these is a phenomenon called
"fluorescence." It is this phenomenon that PTI's instruments are designed to
create and measure.
When light strikes a substance, the light is absorbed and then re-emitted.
If the wavelength of light that is re-emitted is different from that which is
absorbed, then the substance is said to have fluoresced. By stimulating
fluorescence and monitoring its location and intensity, scientists can
identify the concentration and changes of substances. While not all substances
fluoresce, it is possible to create a dye (also called a probe) that will
cause non-fluorescent substances to fluoresce.
While the phenomenon of fluorescence is certainly not new, applications for
the technique are new and emerging. The recent development of fluorescent dyes
has made fluorescence the most exciting tool today. Practical applications for
new dyes and assays are being discovered almost on a daily basis. Fluorescence
is now a multi-billion dollar industry.
Fluorescence is such a powerful and rapidly expanding tool for cellular and
sub-cellular testing because it is:
. MORE SENSITIVE than other means of detection (about a factor of
1,000,000 times more) which means that very small, sub-cellular amounts
of substances can be detected and measured with great accuracy.
. SAFER than other means of detection, because it is non-invasive (does
not physically injure the cell) and non-radioactive (avoids health and
disposal problems).
. FASTER than other means--it can monitor changes in trillionths of a
second, or about 1,000,000 times faster than other techniques.
. A VISUAL PROCESS--microscopic images can be gathered and displayed, for
example, showing changes inside living cells.
. LESS EXPENSIVE than other techniques, which means it can do more work
for less money, while saving time, resources and even lives.
PRODUCTS
The Company's product strategy is to offer a modular product line,
consisting of subcomponents, components and systems, in an open architecture
design format for the marketplace through providing light generating, light
handling, detection and analysis products. The instruments are designed and
offered as compatible components, often referred to as optical building
blocks. Through this open architecture, the Company is able to rapidly respond
to consumer demand by adding or upgrading components, or introducing new
systems. This marketing strategy minimizes product obsolescence, increases the
versatility of its product line, and provides cost-effective and competitive
pricing. The Company has sold over 700 systems in over 35 countries, with
about 60% of systems sales in North America. The Company's product line of
systems and
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building blocks is represented in a number of the most significant research
institutions, research hospitals, laboratories, pharmaceutical companies and
major industrial corporations on a worldwide basis.
The Company has five product groups:
SUBCOMPONENTS
The subcomponents offered by the Company are either incorporated into
finished products that are then sold directly to end-users or are sold to
original equipment manufacturers ("O.E.M.'s"). Many of these subcomponents are
designed and produced by the Company. However, for standard industry needs,
the Company maintains an inventory of subcomponents purchased from
distributors and wholesalers for use by the Company in its systems or for sale
to O.E.M.'s. The subcomponents that are purchased by the Company include
lamps, gratings, photomultiplier tubes, fiber optics, lenses, diffusers,
filters, mirrors, and other component accessories.
The subcomponents that are manufactured, assembled or sub-contracted by the
Company include, among other things, certain key optical components and
machined subassemblies. These subcomponents are primarily designed for and
sold to customers in the industrial and military markets and are used to
collect, focus and direct light. The Company's key optical elements are not
made from glass but rather are machined from aluminum, copper, brass or
stainless steel using technology developed by the Company to eliminate the
expense and fragility associated with traditional glass.
COMPONENTS--OPTICAL BUILDING BLOCKS
The Company's components are distinct products comprised of subcomponents
and subassemblies. Typically, the components are combined by the Company or
its customers to form systems. The Company designs and assembles a variety of
components which are light source, handling, detection and analysis products.
There is a wide range of customers for light source components. Light
sources are required for virtually all light-generating equipment and also
have a variety of uses in the electro-optical industry. Light source equipment
marketed by the Company includes, among other things, high intensity arc
lamps, regulated power supplies, modulators, optical feedback modules,
microscope illuminators, nitrogen and dye lasers, pulsed nanosecond flash
lamps and pulsed xenon strobe lamps.
There are many commercial and scientific uses for light-handling
instruments. Certain of these instruments separate light into timed, pulsed
segments. Other instruments break up light into different wavelengths. The
Company offers a variety of light-handling components such as optical
choppers, monochromators, sample holders and sample compartments.
Light detection components function as process monitors in the production
and quality control applications. These components include such diverse
products as video cameras, photodiodes and photomultipliers. Currently, the
Company designs and assembles photomultipliers which are generally used in
conjunction with other Company components and systems.
Light analysis components are used in a variety of equipment utilized in the
field of electronics and in computer hardware. With respect to computers, the
Company's light analysis components convert signals generated by a detector
into meaningful information that can be displayed on a monitor.
These components are used in every light-related application. For this
reason, the market for such products is very diverse. The Company manufactures
an extensive line of fluorescence instrumentation. The line is further
enhanced by its software which provides the Company with state-of-the-art and
proprietary software for its systems. The Company has a competitive advantage
of making a wide variety of compatible components that are also state-of-the-
art in specifications and competitive in price. The Company is upgrading and
expanding its products to help maintain its competitive advantage.
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SYSTEMS--RATIOMASTER(TM) PRODUCT GROUP
Since 1987, the Company has developed and manufactured ratio fluorescence
and general fluorescence systems. The Company's first system line, the
patented Deltascan(TM) ratio fluorescence instrument, was assembled from
original optical building blocks. The Company believes that it is one of the
few designers and manufacturers of electro-optical instruments that are fully-
automated systems based on the building-block approach. These systems are
future-ready through a modular and open architecture design approach, which
easily accommodates change and stand in sharp contrast to conventional
instrument design. Most competitors' systems are integrated, or closed
architecture.
The RatioMaster(TM) Product Group includes the Deltascan(TM) and other
systems designed for applications using radiometric fluorescent probes to
track location, concentration, and movement in measurement of intracellular
ionic calcium (Ca), sodium (Na), potassium (K), magnesium (Mg), and pH and
other intracellular ions in cell suspension, tissues, single cells or adherent
cells. The three RatioMaster sub-groups, based on dye of measurement, are:
(1) Macro-systems which are sample compartment and cuvette-based for
measuring suspensions, tissues and solids for cell population studies.
(2) Micro-systems which are microscope-based for measuring on the cellular
and sub-cellular level for singular cell studies.
(3) Imaging-systems for photographic-like studies of cells, which allows
quantitative ratio fluorescence as a method to spatially resolve
intracellular ion activity within the cell. These changes in
intracellular ion concentration can be observed both directly and much
more efficiently than with the human eye, and the field of view
embraces a number of cells. The imaging system can be sold as an add-on
to an existing illuminated inverted fluorescence microscope, as a an
independent system, or added to the Micro systems.
This RatioMaster(TM) product group includes the following light sources:
PowerArc(TM) provides a xenon lamp illumination source for applications
involving only emission-shifted probes.
PowerFilter(TM) high speed dual wavelength scanning illuminator for
applications using excitation-shifted probes. This unique light source
provides the best speed criteria without requiring a fluorescence excitation
spectra.
DeltaRam(TM) revolutionary high-speed multi-wavelength illuminator using a
proprietary and patented optical configuration and technique.
Deltascan(TM) high speed dual scanning illuminator using the patented, fast,
computer controlled alternating dual scanning monochromators for applications.
Through the products' open architecture, the customer or user can
economically enhance each system and add capabilities present in the other
sub-groups to their existing purchased system, or in a configuration which
crosses over sub-groups to meet new system requirements.
SYSTEMS--QUANTAMASTER(TM) PRODUCT GROUP
The Company's new and expanded system line, the QuantaMaster(TM) group, is
used primarily to study substances that naturally fluoresce. Fluorescent dyes
are used as well, but they are different from those used with RatioMaster(TM)
systems. This technology of steady state products is proprietary to the
Company. The major advantage of fluorescence as a measurement technique is its
sensitivity, which provides a competitive advantage. Additional system options
and accessories are still being developed to round out this product line.
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The QuantaMaster(TM) series of luminescence spectrometers was developed for
routine measurement of steady state fluorescence, phosphorescence,
chemiluminescence and bioluminescence. Steady state fluorescence is the
foundation of the fluorescence laboratory to meet the requirements for
excitation and emission scans, time-based experiments, and synchronous scans.
Steady state fluorescence measurements are used to detect the amount or change
in the amount of a substance. With the superior sensitivity of this technique,
a fast measurement can detect a lower concentration of the fluorescing
species, or small changes in a sample.
This product group has the same modular and open architecture profile as the
RatioMaster(TM) product group and as a result can be enhanced and expanded for
capabilities.
SYSTEMS--TIMEMASTER(TM) PRODUCT GROUP
TimeMaster(TM) systems are used to determine fluorescence lifetimes, a
technique used to distinguish between similar substances. The fluorescence
lifetime represents the average time that a molecule spends in an excited
state before emitting a photon and returning to the ground state. It is an
important and unique feature of an excited state. Fluorescence lifetimes are
very short. Most fluorescence lifetimes fall within the range of hundreds of
picoseconds to hundreds of nanoseconds. The fluorescence lifetime can function
as a molecular stopwatch to observe a variety of interesting molecular events.
An antibody may rotate slightly within its molecular environment. A protein
can change orientation. A critical binding reaction may occur. Because the
time-scale of these events is similar to the fluorescence lifetime, the
measurement of the fluorescence lifetime allows the researcher to peer into
the molecule and observe these phenomena.
In late fiscal 1994, the Company introduced a revolutionary newly patented
design, and the most economical systems for fluorescence lifetime
measurements, the TimeMaster(TM) fluorescence Lifetime Spectrometers.
These systems revolutionized the fluorescence lifetime techniques by designing
easy-to-use systems which are consistent with the Company's modular and open
architecture strategy for products. Research and development efforts by the
Company during fiscal 1994 and 1995 provided a product line with a unique
strobe technique, a choice of two different lifetime techniques and three
different base system configurations as follows:
StrobeMaster(TM) provides a unique and patented strobe technique for
measuring fluorescence lifetimes which is economical to use. The strobe
technique is intensity dependent and provides accurate measurements at very
high speeds. These characteristics of the strobe technique are very important
in the life sciences area, where samples are not stable over long periods of
time. The StrobeMaster(TM) uses a NanoFlash(TM) illuminator source.
LaserStrobe(TM) is based on the strobe technique for measuring fluorescence
lifetimes and is as unique as the StrobeMaster(TM). With a nitrogen/dye laser
illumination source, the strobe technique provides for measurements of
lifetimes with a precision of below one nanosecond.
The unique strobe technique, through the introduction and sales of the
StrobeMaster(TM) and LaserStrobe(TM), has started to be recognized and
accepted for measuring fluorescence lifetimes as evident by sales of these
systems during fiscal 1996.
SALES AND MARKETING
The Company's sales are primarily for research and development of analytical
measurement applications. The Company will continue to focus on opportunistic
areas in both life sciences and physical sciences areas because of the
diversity of the markets and different user demands.
Buying decisions for the Company's products are generally made by
professionals in corporations, universities, government or private labs and
hospitals. These individuals usually belong to professional organizations,
read and receive professional journals and attend trade conferences and
seminars. Papers that have been published which discuss the Company's
equipment in the research process represent a significant influence on the
peers and affiliated groups of such professionals and their industries. Such
papers are an important marketing tool for the Company.
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In addition to private industry, universities and hospitals, a significant
source of the Company's sales comes from government supported purchases
(except in the U.S. where health care is privatized). The major market for
fluorescence instrumentation is still limited to the developed nations. The
U.S. and Canada are by far the largest markets estimated at 30% of the total
world market. This is followed by Europe, which is roughly equivalent to the
U.S. market size. The Japanese market is around 15% and has local competition
that is successful only in this market area. The remainder of the world
accounts for less than 25%.
The Company enjoys an excellent reputation with its customer base. There
have been numerous multiple-system sales to the same customers, and most of
these systems have been the more expensive "top-of-the-line" models. The
Company has recently introduced its lower-priced systems lines to be
competitive in the mid-market range for both ratio-fluorescence and general
fluorescence. The Company's objective is to create a higher profile and to
become better known in the marketplace.
Although the Company is focused on selling its systems lines, the Company
will continue to sell the Optical Building Block ("OBB") products (i.e., arc
lamps, regulated power supplies, microscope illuminators, nitrogen and dye
lasers, nanosecond flash lamps, pulsed xenon strobe lamps, choppers,
monochromators, sample compartments, photomultipliers, etc.) as they provide a
good source of income. Although the market for OBBs is large, the Company will
regard this product line as secondary to its system lines from a strategic
point of view.
The Company's promotional activities to penetrate the various markets, both
domestically and internationally, take the form of trade shows, direct mail,
research seminars, symposiums and advertising in periodicals. In North
America, sales are handled by direct sales personnel located in Monmouth
Junction, New Jersey; Ashland, Massachusetts; Algonquin, Illinois; McKinney,
Texas; Cary, North Carolina; Indianapolis; Indiana and London, Ontario,
Canada. In Continental Europe, including the former Eastern Bloc countries,
sales responsibilities are shared by the Company's branch office in London,
England, independent distributors PhotoMed GmbH, a wholly owned subsidiary,
and the sales office in Oslo, Norway. Independent distributors and/or agents
service the Far East and other foreign markets.
COMPETITION
The market for the Company's products is highly competitive, and PTI expects
this competition to increase. Many of the Company's competitors have
significantly greater research and development, marketing and financial
resources than the Company, and therefore represent significant competition.
As with all new and emerging markets, there are no dominant players in the
fluorescent instrumentation marketplace (greater than 10% market share). There
are many small companies, many of which companies smaller than PTI. The
Company believes that the primary competitive factors in the market for the
Company's products are product performance, price, breadth of product
offerings and technical support.
With respect to its sub-component and component product lines, the Company
competes with catalog distributors that sell standard items and companies that
manufacture a limited range of competitive sub-components and components.
The Company's systems compete with fluorescence instruments offered by large
corporations such as Perkin Elmer, Hitachi, Kontron, Jasco and Shimadzu. These
corporations have a much higher market profile and significantly greater
marketing and financial resources, with the capacity to offer products at a
lower price. In addition, many other small companies have attempted to enter
the fluorescence market, including SLM, IBH, SPEX, Edinburgh, ISS and
Universal Imaging.
PROPRIETARY RIGHTS
PTI(R) is a registered trademark of the Company. For a description of the
Company's other trademarks see "BUSINESS--Products". The Company endeavors to
maintain its know-how and technologies as trade secrets.
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The Company has one U.S. patent on each of the current Deltascan(TM),
RatioMaster(TM) and the TimeMaster(TM) Fluorescence Lifetime systems, with
expiration dates ranging from 2005 to 2007. The Company also relies on trade
secrets and proprietary know-how. There can be no assurance that the trade
secret or propriety nature of such information will not wrongfully be breached
by employees, consultants, advisors or others, or that the Company's trade
secrets or propriety know-how will not otherwise become known or be
independently developed by competitors in such a manner that the Company has
no practical recourse.
RESEARCH AND DEVELOPMENT
The Company believes that it is important to continue to fund research and
development of new commercial applications utilizing the base technology of
photonics with a focus on ratio and general fluorescence. The Company plans to
also place its energies toward improvements to existing products to reduce
costs and to promote and maintain competitive advantages. Over the past five
(5) years, the Company's spending on research and development for new products
and systems, has been limited due to financial resources. The Company's short-
term strategy has been to repackage and enhance its existing systems and to
promote the "value added" concept of the Company's full line of ratio
fluorescence and general fluorescence products, while working within its
available financial resources.
During fiscal 1995, New Jersey based research and development personnel were
directed and focused on software development which led to the introduction in
April 1995 of FeliX software for ratio and general fluorescence applications.
This software product sold as an integral part of all fluorescence systems.
This software product was written under the Microsoft Windows platform and a
universal program language which allows versatility and ease of product
enhancements for interfacing other software products, adding features and
overall increased functionality. A portion of this software development was
capitalized in accordance with accounting guidelines (See Note J--Notes to
Consolidated Financial Statements). The Canadian research and development team
focused on continued system instrumentation development for the TimeMaster(TM)
fluorescence spectrometer line and the proprietary strobe technique, including
software development. The TimeMaster(TM) was introduced and first shipped in
January 1994. Other engineering projects were directed at cost reduction of
components.
During fiscal 1996, New Jersey based research and development continued to
focus heavily on developing new software products, and modules to add to core
software programs to increase scope and functionality of product systems.
Additionally, the Company increased its hardware development support and
efforts which resulted in the completion of the DeltaRam(TM) prototype, a
revolutionary monochromator which will provide a high speed multi-
wavelength(TM) illumination, and the IC100(TM), an intensified CCD camera, a
low price and very competitive product which provided incremental sales as a
"pull" product for the Company's ImageMaster(TM) product line and as a stand
alone product for varied customer applications. The Canadian research and
development team continued development on system instrumentation for the
TimeMaster(TM) fluorescence spectrometer line to improve component integration
and lower costs, developed a new higher performance and lower cost
photomultiplier housing to be introduced in early fiscal 1997, and began
development of a "state of the art" microprocessor hardware control unit. The
major focus of the Canadian team was cost reduction, integration and update of
component products. In addition to the research and development conducted by
employees of the Company, the Company intends to continue its practice of
utilizing researchers at academic centers of excellence to perform research in
their areas of specialization and outside contract development support of
specific projects. The Company has engaged Dr. Martin Poenie from the
University of Texas for the development of a proprietary product.
Software and hardware development and support will continue in fiscal 1997
for new and targeted existing product lines. In addition to the research and
development conducted by employees of the Company, the Company intends to
continue its practice of utilizing researchers at academic centers of
excellence to perform research in their areas of specialization, and outside
contract development support for specific projects.
On December 8, 1995 the Company reached an agreement with MLTV for the
purchase of the technology and MLTV's joint venture interest (See "BUSINESS--
General"). The final product started under the Company's agreement with MLTV
has been completed. The products completed and manufactured are the
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photometer, microscope illuminator, ImageMaster(TM), DeltaRam(TM), and a
variety of components. The reported sales include the above mentioned products
with exception of the DeltaRam(TM) and several subcomponents of the products
which were funded through the research and development agreement.
In May 1991, the Company entered into a note and warrant purchase agreement
(the "Note Agreement") with MLTV. Pursuant to the Note Agreement, the Company
borrowed from MLTV the principal amount of $500,000, which is subordinated to
all other indebtedness of the Company, including vendor payments.
The subordinated loan was due and payable on May 7, 1994. Interest, at a rate
of 13% per annum, which was due and payable under the subordinated loan
schedule, had been accrued in the amount of $196,000, and added to the
principal by agreement between MLTV and the Company. In fiscal 1993 there was
an additional fee added to the principal amount owing of $75,000 which was
associated with the deferral of interest payments at that time. In
consideration of this loan, the Company issued warrants for 25,000 shares of
Common Stock with an exercise price of $2.00 per share and reduced the price
on all existing warrants held by MLTV representing 500,000 shares of Common
Stock from $3.50 to $2.00 per share. These warrants expired on April 6, 1994.
The full debt of $771,000 has not been paid to date. Since expiration of the
May 7, 1994 due date, MLTV has continued to extend the payment due date and in
an agreement dated September 9, 1994 extended the full debt until October 1,
1995 and without incremental fees and/or interest. This agreement on MLTV's
part was in consideration of the Company's performance and continued progress
in the Company's efforts to raise additional funding. The December 1995 MLTV
Agreement provided for the repayment of the debt. Pursuant to the December
1995 Agreement, the Company agreed to pay the principle amount of $20,000 a
month for a twenty-four (24) month period for a total of $480,000. the balance
of $291,000 is to be paid at the end of the twenty-four (24) month term. As of
June 30, 1996, the Company has paid $140,000 and reduced the total outstanding
balance to $631,000.
BACKLOG
The Company's backlog consists of orders scheduled for delivery within three
months. As of June 30, 1996, the Company backlog was $1,087,000, as compared
with $1,516,000 as of June 30, 1995.
MANUFACTURING, RAW MATERIALS AND SUPPLIERS
Manufacturing of the Company's products involves optical, mechanical and
electronics assembly, including product component and product systems testing
to specifications, in order to provide quality control and quality assurance.
Some of the process manufacturing requires machining and manufacturing of
electronics and optical components.
The Company's manufacturing operations are located within a total of 18,000
square feet which includes production capabilities in two North American
plants. The primary production operation is located in the plant at London,
Ontario, Canada. The secondary production operation is located at the
Corporate headquarters in South Brunswick, New Jersey. These operations
provide the Company the opportunity to produce products-systems, components
and subcomponents where production resources are most economical.
The Company's production network includes sourcing of material, components
and/or subcomponents from outside vendors. There are several "key" outside
vendors for specialty manufacturing and sourcing of optical components. There
are some materials, optics and electronics components, that are "sole" sourced
by the Company. In certain cases, subcontractors are used for machining and
tooling, thereby reducing the need for capital expenditures.
Overall, the supply of materials, components, subcomponents and
subcontracted services have been reliable and consistent. The Company's
reliance on a sole or limited sourcing from some outside supply or service
vendors does present several risks including an inability to obtain an
adequate supply, to negotiate the lowest price and to sustain timely
deliveries of components or services. The Company will continue its efforts to
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negotiate more blanket orders to protect its supply chain and to lower costs.
In the area of sole sourced materials and/or components, the Company will
continue its efforts to identify and engage secondary suppliers and to
consider capital equipment purchases in order to manufacture within the
Company's operations.
RECENT DEVELOPMENTS
Reverse Stock Split
On June 21, 1996, the Company amended its Restated and Amended Certificate
of Incorporation to reflect a reverse split on all authorized common shares of
the Company's common stock and options for common shares of common stock in
the form of one (1) common share for every three (3) common shares (the
"Reverse Split"). As a result of the Reverse Split the total number of
outstanding shares of the Company's common stock was reduced from 3,461,328
shares of common stock to 1,153,776 shares of common stock. The stock
continues to trade on the OTC Bulletin Board at this time.
Loan
On July 26, 1996, the Company entered into a $2,000,000 secured working
capital line of credit with Silicon Valley Bank of California ("Silicon
Valley"). The Company used proceeds from the Silicon Valley line of credit to
pay off the outstanding $1,300,000 credit facility with the Bank of Montreal.
The Silicon Valley line of credit is subject to monthly interest payments at
the rate of prime plus 1.5%. The balance of the loan is due at maturity on
July 1, 1997. The Company intends to use the balance of the Silicon Valley
line of credit to support working capital requirements.
Distribution Agreement
On August 15, 1996, PhotoMed GmbH entered into an agreement to become the
exclusive distributor for Omega Optical/USA for the European Community ("EC")
territories of Germany and Austria. This agreement will provide incremental
products and business for the PhotoMed GmbH sales operation. Omega Optical
products and components are complements to the Company's product lines which
are sold into the same markets and customer base. This business relationship
should provide a source of leads for the Company's system product lines in
addition to incremental sales of Omega products.
HUMAN RESOURCES
As of fiscal year ended June 30, 1996, the Company has 62 full-time
employees, 27 of whom are employed in the United States, 24 of whom are
employed by the Canadian Subsidiary in London, Ontario, Canada, 5 of whom are
employed in the London, England sales office and 6 of whom are employed in the
Wedel, Germany sales/service office. The total employees consist of 22 in
manufacturing/operations, 27 in sales and marketing, 8 in product development
and 5 in administration. None of the Company's employees are covered by
collective bargaining agreements. The Company's success will depend in part on
its continued ability to attract and retain high quality employees. The
Company considers its relations with employees to be good.
ITEM 2. PROPERTIES
The Company leases a total of approximately 18,000 square feet in
manufacturing, administrative, sales and research and development office space
in South Brunswick, New Jersey and London, Ontario. The 9,000 square foot
lease in New Jersey is on a month-to-month basis. The 9,000 square foot lease
in London, Ontario is a three year lease term expiring in 1997. Additionally,
the Company leases sales offices in North Carolina, Norway, England and
Germany. The U.S. based sales office is approximately 350 square feet and is
on an annual lease term. The London, England sales office is approximately
3,000 square feet and has a lease term of five years
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(expiration September 2001), and the Wedel, Germany sales/service office is
approximately 4,000 square feet and has a lease term of seven years
(expiration September 1999). The Norway sales office is approximately
500 square feet and has a lease term of three years (expiration January 1999).
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings involving the Company or any
of its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock commenced trading in the over-the-counter market
under the NASDAQ symbol "PHON" on February 9, 1987. In August 1992, the
Company's common stock was delisted from The NASDAQ Small Cap Market and is
now traded on the OTC Bulletin Board under the symbol "PHON".
QUARTERLY COMMON STOCK PRICE RANGES
<TABLE>
<CAPTION>
FISCAL
FISCAL 1996 1995
----------- ---------
QUARTER HIGH LOW HIGH LOW
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st (Jul. 1--Sep. 30)..................................... 1 3/4 1 1/2 1/2
2nd (Oct. 1--Dec. 31)..................................... 1 1/4 11/16 1 1/2 1/2
3rd (Jan. 1--Mar. 31)..................................... 1 5/8 15/16 1 1/4 1/2
4th (Apr. 1--Jun. 30)..................................... 1 3/4 13/16 1 1/4 3/4
</TABLE>
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markup, mark-down or commission, and may not necessarily represent
actual transactions.
Effective June 21, 1996 the Company amended its Restated and Amended
Certificate of Incorporation to reflect a three for one Reverse Split. (See
BUSINESS--Recent Development.) The prices noted above reflect stock prices
prior to the Reverse Split. As a result of the Reverse Split the Company's
Common Stock will be traded on the OTC Bulletin Board under the symbol "PHTO".
As of June 30, 1996, the approximate number of holders of record of the
common stock of the Company was 192, which does not include those owners who
are registered with the Depository Trust Company.
The Company has never paid any cash dividends in the past and anticipates
that for the foreseeable future all earnings, if any, will be retained to
finance growth and to meet working capital requirements.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
consolidated financial statements of the Company. The data should be read in
conjunction with the consolidated financial statements, related notes and
other financial information included herein. The Net Income (Loss) per share
of Common Stock does not reflect the Reverse Split.
Income Statement Information:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
Net Sales.................................. $5,002 $6,008 $5,388 $7,792 $9,190
Total Revenues............................. 5,231 6,241 5,511 7,848 9,259
Net Income (Loss).......................... (774) 219 202 357 146
Net Income (Loss) per Share of Common
Stock..................................... $ (.34) $ .05 $ .09 $ .16 $ .05
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
JUNE 30
----------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
Balance Sheet Information:
Total Assets................................ $2,707 $2,546 $3,018 $4,822 $7,411
Total Liabilities........................... 2,116 1,882 2,172 3,603 5,233
Long-Term Obligations....................... 597 5 809 1,218 1,938
Working Capital............................. 769 397 1,049 1,026 1,543
Minority Interest........................... -- -- -- 60 --
Shareholders' Equity........................ $ 591 $ 664 $ 846 $1,160 $2,178
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net sales of $9,190,000 in 1996 increased $1,398,000 or 17.9% from
$7,792,000 in 1995. This real growth increase in net sales represented the
continued strength of ratio fluorescence sales on a worldwide basis for
existing products.
Total revenue of $9,259,000 in 1996 increased $1,411,000 in 18.0% from
$7,848,000 in 1995. This change primarily related to increased net sales. The
other income component of total revenue increased $12,000 or 22.1% from
$56,000 in 1995 to $68,000 in 1996, primarily due to rental income on sub-
leased space in the German Subsidiary.
Cost of products sold of $3,656,000 for 1996 increased in dollar terms by
$334,000 or 10.0% in comparison to cost of sales of $3,322,000 in 1995. On a
percentage of net sales basis, cost of products sold decreased from 42.6% to
39.8% for the same comparative periods. The dollar cost increase in cost of
sales related to the increased sales volume. The decrease as a percentage of
net sales in comparison to the prior year reflected (a) a volume-mix impact of
international sales with higher gross margins (b) the impact of component
material cost reductions through re-engineering of specific products (c) the
impact of adding machining capacity with provided incremental production for
some components previously manufactured outside (d) fuller absorption of
overhead costs due to higher production volume throughout to support increased
sales volume.
Selling, general and administrative expenses of $4,126,000 in 1996 increased
$951,000 or 30.0% over $3,175,000 in 1995. This increase reflected (a) the
impact of higher sales volume on variable selling related expenses (b) the
level of international agent commission due to a volume-mix shift from direct
sales to agent sales (c) incremental sales personnel to expand sales territory
coverage worldwide (d) the full year expense effect of the German Subsidiary
sales operation (e) incremental administrative expenses related to financing
activities and support for the German Subsidiary operations for a full year.
On a percentage of sales basis, selling, general and administrative expenses
increased from 40.8% in 1995 to 44.9% in 1996. This increase was primarily due
to the necessary and incremental fixed level of investment in sales and
marketing and higher administrative costs, which were not fully leveraged by
the sales volume increase year to year.
Research and development expenditures of $844,000 or 9.2% of net sales in
1996, increased from $571,000 or 7.3% of net sales in 1995, an increase of
$274,000 or 48.0%. The increase in these expenses reflected the Company's
continued commitment to research and development expenses and was primarily
due to increased personnel for both software and hardware development, and
increased contract engineering support in Germany to satisfy the requirements
of certifying the Company's products for sales into the EC in accordance with
regulatory guidelines. These expenses are net of software expense
capitalization of $250,000 in 1996 in comparison to $255,000 in 1995. Active
research and development expenditures, including software expenses
capitalized, was $1.1 million or 11.9% of sales in 1996 in comparison to
$826,000 or 10.6% in 1995 on the
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same basis. Research and development activities were heavily focused on new
product development--hardware and software, and cost reduction. The Company's
goal is to target at least 10% of its net sales for this strategic area and
will continue to allocate financial resources to the best extent possible
while seeking additional financial resources in order to increase investment.
Interest expenses increased by $158,000 or 130% from $122,000 in 1995 to
$280,000 in 1996. This increase primarily relates to interest on incremental
short term borrowings on the credit facilities with the Company's lenders and
interest payments related to the 12% subordinated debt issue with Covington
Capital Corporation as part of a financing agreement.
Depreciation and amortization increased from $148,000 in 1995 to $150,000 in
1996. New equipment purchased and related depreciation was mostly offset by
lower amortization on equipment under capital lease pursuant to the sale-
leaseback agreement for lab equipment, which was purchased for one (1) dollar
in the fourth quarter of fiscal year 1996.
Goodwill amortization increased by $47,000 or 44.7% from $106,000 in 1995 to
$153,000 in 1996. This increase represents the full year incremental effect of
the formation and capitalized start-up expenses of the German Subsidiary in
September 1994 in fiscal 1995. The total amount of goodwill represents
$801,000 and is amortized using a straight line method over five (5) years.
The balance of goodwill recorded in "other assets" at June 30, 1996 was
$542,000. Foreign exchange gain of $34,000 in 1996 was lower in comparison to
the $81,000 foreign exchange gain in 1995. Foreign exchange gain and losses
are primarily related to the level of cash transactions denominated in foreign
currency and the fluctuation of foreign currency in comparison to the
U.S. dollar. The lower exchange in this fiscal year, in comparison to the
prior year, relates to lower cash transactional activity overall and a non-
repetitive single bank transaction involving a re-financing between Midlantic
National and Bank of Montreal in fiscal 1995.
Deferred tax benefit of $63,000 in 1996 represents a partial reversal of a
deferred tax expense recorded in 1995. Deferred taxes arise from a temporary
difference between book and tax income, as a result of the capitalization of
the excess of liabilities over acquired assets. In 1995 this deferred tax
expense related to the formation and start-up of the German Subsidiary, which
at that time was 51% owned and fully controlled by the Company. In 1996, this
deferred tax was reversed due to an increase in the net deferred tax asset
(reduction of valuation allowance) related to Canadian net operation loss
carryforwards from prior years, which based on past experience, will have
greater than a fifty percent probability of being realized. (See Note F).
In fiscal 1995 the Company recorded minority interest of $42,000 as an
adjustment to consolidated income of the Company in order to exclude the 49%
minority ownership position of the shareholders of German Subsidiary. In this
fiscal year 1996, on July 5, 1995, the Company acquired the remaining 49% of
the German Subsidiary for 150,000 shares of treasure stock a value of $1.00
per common share or $150,000. As a result of this transaction, German
Subsidiary became a wholly-owned subsidiary of the Company and there was no
longer any adjustments or exclusions to income for minority interest.
As a result of the foregoing, the Company reported net income for fiscal
1996 of $146,000 in comparison to net income of $357,000, a decrease of
$212,000 or 59.3% from the prior year.
As a result of this net income performance, earnings per share based on
weighted average number of common shares outstanding was fourteen cents
($0.14) in comparison to forty-seven cents ($0.47) per share in 1995. The
earnings per share were impacted by the dilution effect of one cent ($.01) per
share due to the impact on the average common stock outstanding of the
1,000,000 shares of common stock issued December 8, 1995 to MLTV to purchase
the technology rights and related joint venture interest. On a fully diluted
basis (which gives consideration to all non-exercised and issued employee
options, and options issued to Covington Capital Corporation as part of the
subordinated debt financing agreement) the earnings per share was ten cents
($0.10). The prior years have been restated on the same basis to reflect the
Reverse Split and fully diluted earnings per share for comparative purposes
only.
15
<PAGE>
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Net sales of $7,792,000 in 1995 increased $2,404,000 or 44.6% from
$5,388,000 in 1994. This increase primarily reflected increased sales in the
ratio-fluorescence product group and increased sales from all the Company's
domestic and international operations.
Total revenue of $7,848,000 in 1995 increased $2,337,000 or 42.4% from
$5,511,000 in 1994. This change directly related to the increased net sales
and was partially offset by decreased nonrecurring research revenues in
comparison to the same period in the prior year. Research contract revenues
had been fully recognized in fiscal 1994 pursuant to the expenditures schedule
entered under the research and development agreement with MLTV in 1987. The
"other income" component of total revenue increased by $10,000 or 22.2% over
1994 as a result of funding from the Canadian government for direct labor
training support programs.
Cost of products sold of $3,322,000 for fiscal 1995 increased in dollars
terms by $954,000 or 40.3% in comparison to cost of sales of $2,368,000 in
fiscal 1994. On a percentage of net sales basis, cost of products sold
decreased from 43.9% to 42.6% for the comparative periods. This dollar cost
increase in cost of sales related to the increased sales volume. The decrease
as a percentage of net sales in comparison to the prior year reflected (a) the
impact of component material cost reductions through re-engineering of
specific products and material sourcing and (b) fuller absorption of overhead
costs due to efficiency and higher production volume throughput to support
increased sales volumes.
Selling, general and administrative expenses $3,175,000 in fiscal 1995
increased $811,000 or 34.3% over fiscal 1994. This increase reflected (a) the
impact of higher sales volume on variable selling related expenses, (b) the
addition of sales personnel associated with the German Subsidiary sales
office, (c) the addition of sales personnel in North America to expand
territory coverage and (d) executive administrative support expenses
associated with the German Subsidiary and sales office. On a percentage of net
sales basis, selling, general and administrative expenses decreased 43.9% in
fiscal 1994 to 40.7% in 1995, as the dollar increase in such expenses was
offset by increased net sales.
Research and development expenditures, $571,000 or 7.3% in fiscal 1995,
compared to $308,000 or 5.7% of net sales in fiscal 1994, an increase of
$263,000 or 85.4% of net sales. The fiscal 1994 expenses included research
contract expenses of $73,000 reimbursed under the MLTV research and
development agreement, while fiscal 1995 expenses did not as a result of these
expenses having been fully recognized in fiscal 1994. This increase primarily
related to additional personnel for software development and maintenance
support and outside contract engineering support for new product development.
In addition, the Company had capitalized a portion of software development
costs in the amount of $255,000. This capitalization was done in accordance
with generally accepted accounting practices (FASB Statement No. 86
"Accounting for Software Costs"), as a result of obtaining technical
feasibility for the software product called "Felix", which was completed and
released in April 1995. In terms of gross dollars spent with the addition of
capitalized software costs, the actual research and development expenditures
were $826,000 or 10.6% of net sales for fiscal year 1995, which was higher
than the prior year due to these strategic product development activities. The
Company's goal is to target at least 10% of its net sales to research and
development. The percentage over the last three prior years has been in the 8%
of net sales range. It has been difficult to maintain this target level of
spending due to allocation of financial resources. The Company continues to
seek additional financial resources in order to increase investment in this
strategic area.
Interest expenses were $122,000 in fiscal 1995 compared to $88,000 in the
prior year, which represented an increase of $34,000 or 39.1%. This increase
primarily related to interest expenses of $41,000 incurred by the German
Subsidiary, which were related to interest charges on both its 500,000 German
mark line of credit with the bank, and a loan for 400,000 German marks by an
individual. Additionally, interest expenses of $17,000 related to the ODC
fixed term loan which was incremental year to year. This increase was
partially offset by lower interest expense related to the Company's other
credit facilities.
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<PAGE>
Depreciation and amortization expenses were $148,000 in fiscal 1995 which
represented an increase of $60,000 or 68.1% from $88,000 in 1994. This was
primarily due to the impact of depreciation on capital equipment expenditures
completed during fiscal 1994 for the Canadian's plant operation.
Goodwill amortization of $106,000, which is an incremental expense in
comparison to the prior year, is related to the formation and start-up of the
German Subsidiary. The total amount of goodwill represents $686,000, and is
amortized using a straight line method over a five year period.
Foreign exchange was a gain of $81,000 in fiscal 1995 compared to a loss of
$20,000 in fiscal 1994. Foreign exchange gains and losses are primarily
related to the level of cash transactions denominated in foreign currency and
the fluctuation of this foreign currency in comparison to the U.S. dollar.
There was an increase in cash transactional activity involving all
international locations and the U.S. parent company in fiscal 1995. The most
significant transaction was the transfer of funds (292,000 US$) from Canada to
pay in full the outstanding balance with Midlantic Bank as part of the
agreement with the Bank of Montreal.
Deferred tax expense of $86,000 related to a timing difference between book
and tax income, as a result of the capitalization of the excess of liabilities
over acquired assets in the formation and start-up of the German Subsidiary.
This subsidiary was 51% owned and fully controlled by the Company as of June
30, 1995. This deferred tax was recorded in accordance with generally accepted
tax accounting principles. (See Note F).
Minority interest of $42,000 represents an adjustment to consolidated net
income of the Company in order to exclude the 49% minority ownership position
of the shareholders of the German Subsidiary. As a result, only 51% of the net
income of the German Subsidiary is reflected in the reported consolidated
income. The minority interest was cleared in July 1995 of fiscal year 1996 as
a result of the acquisition by the Company of the 49% minority ownership. (See
Note L).
As a result of the foregoing, the Company reported net income for fiscal
1995 of $357,000 in comparison to net income of $202,000 in fiscal 1994, an
increase of $155,000 or 77% over the prior year.
As a result of this net income performance, earnings per share based on
average common shares outstanding represented sixteen cents ($0.16) for 1995
in comparison to nine cents ($0.09) per share for 1994, before consideration
of the Reverse Split.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company believes that results of operations in any period could be
impacted by factors such as delays in the shipments or lack of market
acceptance of new products, a slower growth rate in the Company's target
markets, order deferrals in anticipation of new product releases, increased
competition, adverse changes in general economic conditions in any of the
countries in which the Company does business, or reduction or delay of private
sector and government spending on research activities.
LIQUIDITY AND CAPITAL RESOURCES
The working capital of the Company at June 30, 1996 was $1,543,000 as
compared to $1,026,000 at June 30, 1995, an increase of $517,000 or 50.3%.
Current assets of $4,661,000 increased $1,250,000 or 36.6% in comparison to
the prior year. This change primarily reflects increases in (a) cash of
$233,000, (b) trade accounts receivable of $811,000 or 57.3% and (c) inventory
of $253,000 or 15.4%. The net increase in cash was primarily due to financing
activities which mostly covered the cash used in operations and investing
activities. The dollar increase in trade receivables reflected the impact of
$1.1 million in sales for the year end month of June 1996. The accounts
receivable balance of $2.2 million represented 2.8 months of sales in
comparison to 1.9 months of sales in the prior year. The increase in months of
sales reflected the impact of the June 1996 sales volume and a slower turn on
international receivables, which represented 38% of total receivables.
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The inventory balance of $1.9 million represents 5.3 months of sales in
inventory based on anticipated sales volume and compares to 4.9 months of
sales in the prior year. The change in inventory primarily reflected a
production build of product inventory based on the anticipated volume of sales
in the last half of the fiscal year, which did not reach projected levels.
Current liabilities of $3,118,000 increased $733,000 or 30.8% in comparison
to the prior year. This increase was primarily due to: (a) net increased bank
indebtedness on short term credit facilities of $500,000 or 48.8% for working
capital requirements and (b) increase in trade accounts payable of $209,000 or
27.0% primarily related to open vendor payables at PhotoMed, which were on
extended terms due to cash flow considerations.
The increment ($500,000) in bank indebtedness is related to the Bank of
Montreal line of credit with an outstanding balance of $1.3 million ($1.7
million Canadian dollars) at June 30, 1996. The Company used a portion of the
Silicon Valley credit facility to pay off the Bank of Montreal credit facility
subsequent to June 30, 1996.
Bank indebtedness includes the line of credit with the German Stadtparkasse
Bank to support the German Subsidiary operations. The outstanding balance as
of June 30, 1996 was $246,000 (375,000 DM) which was lower than the prior year
by 96,000 or 28.0%. The authorized line of credit is 500,000 DM (US$362,000)
which was established in September 1994 at the time of formation of the German
Subsidiary. The German Stadtparkasse line of credit was renewed for fiscal
1997 under the same terms and conditions.
On November 20, 1989, the Company entered into a sale/leaseback agreement
with a leasing company. At that time the Company sold certain demonstration
inventory used by the sales and marketing departments for $299,950 resulting
in a $176,750 gain, which has been recognized over the lease term using the
effective interest rate method. The balance of the gain in the amount of
$3,000 was recognized in fiscal year 1995. Under the terms of the agreement,
the Company agreed to lease back the equipment under a noncancelable five year
term. At the end of the lease term in December 1994, the Company had the
option to purchase the equipment at fair market value or extend the lease for
a one-year period. The Company negotiated a renewed lease for $35,000 to be
paid over eighteen (18) months at an interest rate of 10.25%. Payments under
the original capital lease obligation had an effective interest rate of 11.8%.
The renewed capital lease contained a bargain purchase option and on June 11,
1996, the Company exercised this bargain purchase option and purchased the
equipment for one (1) dollar.
The Company entered into an agreement with New Court Credit Corporation of
Toronto, Canada in March 1996 to finance the purchase of a CNC milling machine
for the Canadian plant machine shop. The term loan amount was for $90,000
Canadian dollars ($66,000 US). Interest payments for fiscal 1996 were
$2,000 Canadian dollars ($1,500 US). The balance of the debt at June 30, 1996
was $85,000 Canadian dollars ($62,000 US) with $10,000 classified as the
current portion of the long term debt. The term of the financing is 5.5 years
at an annual interest rate of 10.4%, and a purchase option of $9,000 at the
end of the fifth year.
As of June 30, 1995 the Company had a notes payable balance of $44,000 with
Brooks Air Force Base, which was a current liability under the current portion
of long term debt. This amount was paid in full by June 1996. This debt arose
from a duplicate payment and installment payment agreement between Brooks Air
Force and the Company for the principal amount of $90,155 in March 1994.
The December 1995 MLTV Agreement provided for repayment of subordinated debt
in the amount of $771,000, the purchase by the Company of the technology
developed under the Joint Venture and the acquisition of MLTV's interest in
the Joint Venture, thereby dissolving the Joint Venture. As it relates to the
subordinated debt the Company agreed to pay the principle amount of $20,000 a
month for a twenty-four (24) month period for a total of $480,000. The balance
of $291,000 is due at the end of the two year term. As of June 30, 1996, the
Company has paid $140,000 and reduced the total outstanding balance to
$631,000. The Company is not required to pay any additional interest on the
outstanding balance under this agreement unless the Company makes a late
payment or an event of default under the terms of the agreement occurs. On
June 21, 1996, MLTV agreed to
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defer four payments from June 1996 through September 1996. The deferred amount
will be subject to interest in accordance with the agreement. The Company
purchased the technology and the joint venture interest by issuing to MLTV
1,000,000 shares of the Company's common stock. The stock is unregistered and
restricted. As of December 8, 1995, the 1,000,000 shares have been recorded in
paid-in-capital at the fair market value of .875 per share based on the market
bid price. This $875,000 value has been assigned to the technology as an
intangible asset under the "other assets" classification and will be amortized
over a five (5) year period. As of June 30, 1996, the asset balance was
$831,000, net of amortization of $44,000 during the fiscal year. This was a
strategic agreement for the Company in that the Company now owned the
technology rights and there was no future liability for royalties.
On October 31, 1995, the Company entered into a Debenture agreement for $1.5
million Canadian dollars ($1.1 million US) through C.I.-C.P.A Business
Ventures Fund, Inc. a venture capital fund of Covington Capital Corporation
("Covington Capital") (the "Covington Agreement"). This subordinated debt has
a term of five (5) years at an interest rate of 12% per annum. Interest
payments are payable only in the first twelve (12) months. As of June 30,
1996, the Company had made interest payments totaling approximately $119,000
Canadian dollars ($87,000 US). This Covington Agreement includes a fist option
to purchase 250,000 shares of the Company's common stock at a purchase price
of $1.25 per share for a term of five (5) years and a second option to
purchase 400,000 shares of the Company's common stock at purchase price of
$2.50 per share until October 1996. After October 31, 1996 the purchase price
increases to $3.25 per share. The Option terminates on October 1, 1997. This
debt is classified primarily as long term debt with principal payments of
$31,500 due in fiscal 1997 recorded as current debt. The balance outstanding
as of June 30, 1996 was $1,100,000 ($1.5 million Canadian dollars). Payments
of principal will commence on November 30, 1996 in the amount of $6,250
Canadian dollars ($4,500 US) per month for a period of forty-eight (48) months
with the balance due at the end of the term. This financing was an important
source of funds during fiscal 1996 which provided for investment to expand
sales territory coverage through addition of personnel, increase marketing
support, and continue research and development efforts in both hardware and
software for new products and product cost reductions. There has been no
exercise of options through June 30, 1996.
Long term debt also includes a 400,000 DM loan ($291,000 US) by a private
individual (who is also an investor in the subsidiary) to the Company's wholly
owned German subsidiary, German Subsidiary. The loan was made to the
subsidiary on October 1, 1994. The Company began making payments of principal
and interest of 10,000 german marks per month at the end of April 1995.
Interest accrues from October 1 through the start date of the payments at an
interest rate of 5.25% plus the prevailing German bank discount rate (i.e.
4.5%). The loan has clauses which would allow both slower and/or faster
payments contingent upon the cash flow of the German Subsidiary operations. As
of June 30, 1996, the principal amount of $353,000 German marks ($231,000 US)
was outstanding. A portion of this outstanding amount ($47,000 US) has been
classified as a current liability and represents an estimated twelve payments
of principal. The balance ($184,000 US) has been reported as a long term debt.
Payments on a monthly basis are contingent upon cash flow considerations and
upon agreement with the individual.
In July 1994, documents were fully executed between the Ontario Development
Corporation ("ODC") and the Company for a term loan facility in the amount of
$500,000 Canadian dollars. The loan credit facility was established to allow
advance requests for equipment, inventory and training expenditures associated
with moving the production operation from the New Jersey plant to the London,
Ontario, Canadian plant. This loan was a "carve out" from the original ODC
credit facility of $900,000 Canadian dollar limit, prior to the full payment
of the outstanding balance from the Bank of Montreal credit facility in May
1995. The balance outstanding as of June 30, 1996 on the ODC fixed loan was
$415,000 Canadian dollars ($304,000 US) based on specific advance requests
approved through this date. Payment of principal was scheduled to start August
15, 1995 (of fiscal 1996) in that full disbursement had not occurred by June
30, 1995. The Company had been granted an extension by ODC until June 30, 1996
with principal payments in the amount of $11,597 Canadian dollars ($8,500 US)
having started on July 15, 1996. The term of repayment is forty (40) months
and includes an interest rate of 6.75%. Interest has been charged on a monthly
basis since the first disbursements made on July 1994, and interest paid
19
<PAGE>
amounted to $19,000 this fiscal year. The Company may not draw additional
funds on the facility for capital equipment up to $500,000, the original
facility amount, due to Ontario government budgetary constraints. This term
loan is classified as a long term debt with a current portion equal to twelve
months of principal payments.
On July 5, 1995 the Company acquired control of the German Subsidiary by
issuing 150,000 shares of the Company's treasure stock. The stock was valued
at a fair market value of $1 per share. (See "BUSINESS--General") As a result
of this transaction, the German Subsidiary became a wholly-owned subsidiary of
the Company. The German Subsidiary operation was financed through the
utilization of a 400,000 DM ($290,000 US) shareholder long-term loan, 500,000
DM ($362,000 US) bank revolving line of credit, and cash provided by
operations. The cash start-up expenses were approximately $1,000,000, which
had a major impact on working capital requirements and are non-recurring
expenses going forward. In fiscal 1996 there were some additional assumption
of liabilities in the amount of $83,000 at the time of acquisition of the 49%.
Overall, the amount of cash provided by financing activities allowed the
Company to meet working capital requirements, which included support of all
operating and investing activities, and payments on debt obligations.
In the area of operating activities, the Company's sales growth and
continued reduction in cost of sales (on a percentage of sales basis) provided
a strong contribution to operating income. The contribution along with
financing activity supported (a) investments in sales, marketing, research and
development (b) meeting regulatory obligations to sell into the EC (c) payment
of fees, interest and principal, where applicable, related to financing
agreements.
The investments in the operating areas of sales, marketing and research and
development are strategic to future growth and had an impact on current year
income results due to the time that is required for these investments to be
leveraged or provide a contribution.
The expenses associated with meeting regulatory requirements for our
products are necessary to be able to sell into the EC and the Company will
incur additional expenses going forward to complete certification of its
current product line and to certify our new products at time of introduction
to the marketplace. This could provide a competitive advantage if our
competitors have not or cannot comply. If the Company does not comply there
could be risks to the Company's ability to sell in the EC and a potential
competitive disadvantage.
The payment of interest, payment and fees have been increasing as the
Company completes new financing agreements and maximizes the use of the
available short term credit lines to support working capital requirements. The
Company's financing to date has been primarily short term debt through
operating lines of credit, term loans and subordinated debt. The Company's
bank lines of credit, which are supported by sales generated trade accounts
receivable, have limited borrowing capacity at this time because these lines
of credit are close to the maximum qualified borrowing levels. The term loans,
which had deferred principal payments are now under a scheduled payment
agreement. The subordinated debt--MLTV ($600,000) and Covington Capital ($1.1
million)--totals $1.7 million, and will require payments of $400,000 on an
annual basis (with interest and principal as applicable) until the end of the
respective term and a balloon payment comes due--MLTV in December 1997 (fiscal
year 1998) and Covington Capital in October 2000 (fiscal year 2001).
During fiscal 1996, working capital enabled the Company to grow sales 18%,
expand sales territory coverage, continue and increase software development
efforts and increase hardware development which resulted in several new
products, and certify approximately 60% of our product systems for sales into
the EC. These efforts put pressure on the bottom line income and operating
cash flow in that our investment exceeded the sales growth contribution for
the twelve (12) months of this fiscal year. These investments were necessary
and are important to the future performance of the Company and must continue
at a level which our financial resources can support.
The Company will continue to manage within its financial resources and
attempt to balance its working capital needs with cash flow generated from
operations and available current financing. The Company will not
20
<PAGE>
consider any incremental long term debt and work with current operating lines
of credit. The Company will consider additional financing through the form of
equity to accelerate and support growth in sales and to increase the
investment levels in research and development for new products and for
continued cost reduction to improve sales margin contribution. The Company
cannot be certain that it will be successful in efforts to raise additional
funds.
INFLATION
The Company believes that there has not been a significant impact from
inflation on the Company's operations during the past three fiscal years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, Notes to Consolidated
Financial Statements and the report of Ernst & Young, independent auditors,
with respect thereto, referred to in the Index to Financial Statements and
Supplemental Schedules of the Company contained in Item 14(d) below, appear on
pages F-1 through F-21 of this form 10-K and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning executive officers and
directors of the Company, including their ages and positions with the Company
as of September 1, 1996.
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles G. Marianik.................... 50 Chairman of the Board, President,
Chief Executive Officer and Director
Ronald Kovach.......................... 55 Senior Vice President,
Secretary and Director
William D. Looney...................... 44 Vice President,
Controller, and Treasurer
Louis Balogh........................... 49 Director
M. Grant Brown......................... 47 Director
Robert E. Curry........................ 49 Director
Franklin J. Iris....................... 66 Director
James F. Mrazek........................ 55 Director
</TABLE>
Charles G. Marianik has acted as Chairman of the Board and Chief Executive
Officer of the Company since the Company was formed in 1983. Mr. Marianik held
the office of President from November 1983 until December 1991, and was re-
elected President in December of 1992. Mr. Marianik received a B.Sc. degree in
1971 and an M.B.A. in 1976 from the University of Western Ontario.
Ronald J. Kovach has served as Senior Vice President of the Company since
joining the Company in 1985. Mr. Kovach has been the Secretary and a member of
the Board of the Company since 1988. Mr. Kovach received his diploma in
Engineering Technology from the Western Ontario Institute of Technology in
1966.
William D. Looney joined the Company as Vice President of Planning and
Control in September 1988. Mr. Looney was appointed Vice President,
Controller, and Treasurer of the Company in 1991. From 1986 to 1988, Mr.
Looney held the position of Corporate Controller for Syncsort, Inc. Mr. Looney
received his B.S. Degree in Business Administration/Finance from Seton Hall
University in 1973 and an M.B.A. degree in Management from Fairleigh Dickinson
University in 1983.
Louis Balogh is a self-employed practicing physician specializing in
pediatrics. He became a director of the Company in 1989. Dr. Balogh was the
chief of Pediatrics of York County Hospital in New Market, Ontario, Canada
from 1989 to 1994 and the Chairman of the Board of the Blue Hill Academy,
Children's Mental Health Center from 1984 to 1992. Dr. Balogh was the Director
of the Children's Aid Society from 1981 to 1987, Director of York County
Hospital from 1986 to 1987, and President of Medical Staff of York County
Hospital from 1985 to 1987. Dr. Balogh received his degree in Medicine from
the University of Western Ontario in 1972 and a specialist degree in
pediatrics from McMaster University in 1978.
M. Grant Brown became a director of the Company in December 1995. Mr.
Brown's appointment as director satisfied a condition of the financing
agreement between Covington Capital Corporation and the Company. Mr. Brown was
the founding partner of Covington Capital Corporation, a venture capital
company, since 1994 and Manager of the C.I. Covington Fund Inc. He was Vice
Chairman of Canadian Corporation Funding LTC, a merchant bank from 1984 to
1994. Mr. Brown received an Engineering degree in 1971 and an M.B.A. degree in
1979 from McMaster University.
22
<PAGE>
Robert E. Curry, Ph.D. was appointed Director in April 1996. Dr. Curry had
previously served on the Board from December 1991 to July 1992, but had to
resign due to conflicting professional obligations at that time. Dr. Curry has
been a General Partner of the Sprout Group, a venture capital company, since
1991 and responsible for MLTV. Dr. Curry was President of Merrill Lynch R&D
Management Inc. and President of Merrill Lynch Venture Capital, Inc., an
investor in the Company, from 1990 to 1991. Dr. Curry also serves on the
Boards of Biocircuits, Connective Therapeutics and Diatide, Inc. Dr. Curry
received a B.S. degree from the University of Illinois in 1968 and a Masters
degree in 1972 and a Ph.D. in 1974 from Purdue University.
Franklin J. Iris became a member of the Board in 1987 and has been the
President of Iris and Associates since 1986. His firm provides investment
consulting services for venture capital and emerging growth companies in the
medical industry. He was a group president of the clinical laboratory business
of Becton Dickinson and Company from 1973 to 1985 and was the Chairman and CEO
of Emzamatics, a medical diagnostics company from 1994 to 1995. He currently
serves on the board of Cytyc. Mr. Iris received his B.S. degree from Fairfield
University in 1953.
James F. Mrazek became a member of the Board of Directors in 1986. Mr.
Mrazek has been President of Carnegie Venture Resources, a consulting and
venture capital firm, since 1990. Mr. Mrazek was a general partner of Edison
Partners, L.P. from 1986 to 1990. He became a director of the Company in 1986.
Mr. Mrazek serves on the board of Sepracor Inc. Mr. Mrazek received a B.A.
degree in Government from St. Lawrence University in 1962 and an M.B.A. degree
from Cornell University in 1964.
The Bylaws of the Company provide for a Board with a minimum of six
directors and a maximum of nine directors. The Board is divided into three
classes. On April 4, 1996 the Board of Directors approved an increase in the
number of Board members from six (6) to seven (7). The one (1) class I
director, James F. Mrazek was elected at the 1994 meeting for a term to expire
in 1997. The three (3) class II directors, Ronald J. Kovach, Charles G.
Marianik and Louis Balogh, were elected at the 1995 annual meeting for terms
expiring in 1998. The three (3) class III directors which include Frank Iris,
M. Grant Brown, and Robert Curry, will be nominated for election by the
shareholders of the Company at the 1996 annual meeting for terms expiring in
1999.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership
and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than ten-percent
beneficial owners are required by SEC regulation to furnish the Company with
copies of all Section 16(a) reports they file.
Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that there was compliance for the fiscal year ended June 30,
1996 with all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than ten-percent beneficial owners.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth, for fiscal years ending June 30, 1996, 1995
and 1994, certain information regarding the compensation earned by the
Company's Chief Executive Officer and each of the Company's most highly
compensated executive officers whose aggregate annual salary and bonus for
fiscal 1996 exceeded $100,000, (the "Named Executive Officers") with respect
to services rendered by such persons to the Company and its subsidiaries. No
individual who would otherwise have been included in such table on the basis
of salary and bonus for the 1996 fiscal year resigned or terminated employment
during that year:
23
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------ ------------------------------
SECURITIES
OTHER UNDERLYING
NAME AND PRINCIPAL FISCAL SALARY BONUS ANNUAL OPTIONS ALL OTHER
POSITION YEAR ($)(1)(2) ($)(3) COMPENSATION(4) (#)(5) COMPENSATION(6)
- ------------------ ------ --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles G. Marianik..... 1996 $180,927 -- $32,548 41,164 $35,983
Chairman, Chief 1995 $167,497 $10,000 $20,856 24,412 $21,734
Executive Officer and 1994 $162,750 ($10,000) $37,043 -- $ 4,825
President
Ronald J. Kovach........ 1996 $118,279 -- $ 8,961 17,528 $ 5,819
Secretary and 1995 $108,063 $10,000 $ 6,914 17,325 $ 4,224
Senior Vice President-- 1994 $105,000 ($10,000) $ 6,435 -- $ 650
Technology
William D. Looney....... 1996 $112,365 -- $11,252 16,637 $ 5,776
Vice President, 1995 $102,649 $10,000 $11,897 16,459 $ 5,570
Controller and Treasurer 1994 $ 99,750 ($10,000) $14,264 -- $ 1,225
</TABLE>
- --------
(1) The amount reported includes compensation accrued and/or paid in a given
fiscal year. Mr. Marianik's fiscal 1996 compensation excludes $48,825
which was accrued and reported in fiscal 1995. This amount represents a
deferred base pay from fiscal year 1995 due to cash flow considerations.
(2) On May 15, 1996 certain executive officers of the Company agreed to a
reduction in annual base salary as follows: Mr. Marianik 20% or $38,491,
Mr. Kovach 10% or $12,416 and Mr. Looney 10% or $11,795. These salary
reductions were done to reduce costs and to conserve cash. The impact on
salary compensation for fiscal 1996 was $4,811 for Mr. Marianik, $1,552
for Mr. Kovach and $1,474 for Mr. Looney.
(3) There were no cash bonuses paid in fiscal 1996 due to cash flow
considerations. On October 28, 1994, the Company issued to Mr. Marianik,
Mr. Kovach and Mr. Looney, treasury stock in lieu of a cash bonus approved
for fiscal 1994. Mr. Marianik, Mr. Kovach and Mr. Looney, each received
8,000 fully vested shares of common stock at $1.25 per share. The stock
price represented fair market value on the date of issuance. The aggregate
amount of stock holdings are as follows: Mr. Marianik 846,718 shares, Mr.
Kovach 77,000 shares and Mr. Looney 36,654 shares. These numbers do not
reflect the Company's recent Reverse Split.
(4) These amounts reflect personal benefits received by each Named Executive
Officer during the 1996 fiscal year. These personal benefits include
payments made on behalf of those individuals for (a) use of automobiles,
which include $950 for Mr. Marianik, $2,717 for Mr. Kovach and $4,078 for
Mr. Looney (b) disability insurance premiums, which include $1,666 for Mr.
Marianik, $1,365 for Mr. Kovach and $1,077 for Mr. Looney (c) medical
expenses not otherwise covered by the group plan, which include $2,994 for
Mr. Marianik and $214 for Mr. Looney and (d) all income taxes attributed
to these and paid by the Company as a result of their receipt of these
personal benefits, which include $26,938 for Mr. Marianik, $4,879 for Mr.
Kovak and $5,883 for Mr. Looney.
(5) On December 8, 1995, the Compensation Committee of the Board of Directors
granted options to purchase shares of common stock of the Company pursuant
to the Company's Stock Option Plan to each Named Executive Officer based
on 15% of gross annual base pay on that date. These numbers do not reflect
the Company's recent Reverse Split.
(6) These amounts reflect supplemental term life insurance premiums for each
Named Executive Officer which includes for the 1996 fiscal year a premium
of $2,946 for Mr. Marianik, $703 for Mr. Kovach and $1,320 for Mr. Looney.
For Mr. Marianik, these amounts also include the premiums of $33,037 for
the 1996 fiscal year paid on a permanent-whole life insurance policy,
having an accumulated cash value of $93,973 June 30, 1996. For Mr. Kovach,
these amounts also include a premium of $5,116 for a permanent-whole life
policy with an accumulated cash value of $5,264. For Mr. Looney, these
amounts include a premium of $4,456 for a permanent-whole life policy with
an accumulated cash value of $2,585.
24
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers for the fiscal year ended June
30, 1996. No stock appreciation rights were granted to these individuals
during such year. These numbers do not reflect the Reverse Split.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES ANNUAL RATES OF STOCK
UNDERLYING % OF TOTAL PRICE APPRECIATION
OPTIONS OPTIONS GRANTED EXERCISE FOR OPTION TERM(3)
GRANTED TO EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME (#)(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
- ---- ---------- --------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Charles G. Marianik..... 41,164 55% $1.17 12/07/00 13,306 29,403
Ronald J. Kovach........ 17,528 23% $1.06 12/07/05 11,685 29,611
William D. Looney....... 16,637 22% $1.06 12/07/05 11,091 28,106
</TABLE>
- --------
(1) All options granted to Named Executive Officers are incentive stock
options under the federal tax laws and were granted on December 8, 1995.
Pursuant to the option agreement evidencing these options, the options
were to become exercisable in three (3) successive equal annual
installments upon the optionee's completion of each year of service with
the Company over the three (3)-year period measured from the grant date.
However, the purchase by MLTV of 1,000,000 shares (pre-Reverse Split) of
the Company's common stock on December 8, 1995 caused a change in the
ownership of more than twenty percent (20%) of the Company's outstanding
voting securities, and as a result, each option became fully exercisable
for all of the option shares under the terms of each option agreement. The
options granted to Messrs. Kovach and Looney each have a maximum term of
ten (10) years, subject to earlier termination in the event of the
optionee's cessation of employment with the Company. The option granted to
Mr. Marianik has a maximum term of five (5) years.
(2) The exercise price may be paid in cash or in shares of the Company's
common stock. Alternatively, the option may be exercised through a same-
day sale program with no cash outlay required of the optionee.
(3) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the 5-year or 10-year option term will be at the assumed
5% or 10% annual rates of compounded stock price appreciation or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
option grants made to the executive officers.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the number and value of
unexercised options held by each of the Named Executive Officers as of June
30, 1996. None of the Named Executive Officers exercised any stock options in
1996. No stock appreciation rights were exercised during such year or were
outstanding at the end of that year. These numbers do not reflect the Reverse
Split.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
JUNE 30, 1996 JUNE 30, 1996(2)
---------------------------- -------------------------
EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles G. Marianik...... 105,576 -0- $-0- $-0-
Ronald J. Kovach......... 74,853 -0- $-0- $-0-
William D. Looney........ 93,096 -0- $-0- $-0-
</TABLE>
- --------
(1) As a result of the purchase by MLTV of 1,000,000 shares of common stock on
December 8, 1995, each of the options became fully exercisable for all of
the shares subject to each such option.
(2) Equal to the fair market value of securities underlying the option at
fiscal year end ($1.00 per share) minus the exercise price payable for
those securities.
25
<PAGE>
DIRECTOR REMUNERATION
Directors have not been paid a fee for serving on the Board or any
committees of the Board with the exception of Mr. Brown who receives a per
meeting fee of $750 (Canadian Dollars) as part of the financing agreement with
Covington Capital Corporation. Directors are reimbursed for expenses related
to attending Board or committee meetings and annually are granted non-
qualified stock options to purchase the Company's common stock under the
automatic option grant provision of the Company's Stock Option Plan, as
amended (the "Plan"). In the fiscal year ended June 30, 1996 the Company paid
an aggregate of $2,700 for director traveling expenses. In addition, each non-
employee director received an option grant to purchase 10,000 shares of Common
Stock on December 8, 1995 at an option price of $1.06 per share under the
Automatic Option Grant Program in effect for non-employee directors under the
Company's Stock Option Plan. Each option has a maximum term of ten (10) years
measured from the grant date, subject to earlier termination following the
optionee's cessation of Board service. Each option is immediately exercisable
for all of the option shares; however, any shares purchased under the option
will be subject to repurchase by the Company, at the option exercise price
paid per share, upon the optionee's cessation of Board service prior to
vesting in those shares. The shares subject to each grant will vest in three
successive equal annual installments upon the optionee's completion of each
year of Board service over the three-year period measured from the grant date.
However, the option shares will immediately vest in full upon certain changes
in control or ownership of the Company or upon the optionee's death or
disability while serving as a Board member.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
AGREEMENTS
On June 30, 1996, the employment agreement between the Company and Mr.
Marianik was automatically extended for one year in accordance with the terms
of the contract. This employment agreement entitles Mr. Marianik to a base
salary of $192,452 in 1997 but Mr. Marianik agreed to a 20% reduction in his
base compensation to $153,961 for cost reduction and cash flow considerations.
Under such agreement, Mr. Marianik is to be employed by the Company in an
executive capacity as Chairman of the Board, Chief Executive Officer and
President, or in a position substantially similar thereto. In the case of (i)
a change in control, sale or merger of the Company, (ii) the termination of
his employment without cause, or (iii) a substantial change in his position
with the Company, Mr. Marianik will be entitled to receive a minimum of two
years of salary continuation (including bonuses), as well as to retain certain
employee benefits, including an automobile and a life insurance policy, paid
in full by the Company. There are no other employment agreements with any
other Named Executive Officer.
Pursuant to the express provisions of the Stock Option Plan, the outstanding
options under the Plan held by the Chief Executive Officer and the Company's
other executive officers will immediately accelerate in full and become
exercisable for all of the shares at the time subject to that option in the
event the Company is acquired by merger, consolidation or asset sale, unless
the option is to be assumed by the successor corporation or otherwise replaced
with a comparable option to purchase the shares of such successor corporation.
Pursuant to the terms of the agreements evidencing the outstanding options
Certain outstanding options, the options will also accelerate and become
immediately exercisable for all of the shares at the time subject to those
options, should there occur certain changes in the ownership of more than
twenty percent (20%) of the Company's outstanding voting securities or in the
event there is a change in the majority of the Board members as a result of
any tender for the Company's outstanding voting securities, merger or other
business combination, or proxy contest for the election of Board members. On
December 8, 1995, MLTV purchased 1,000,000 shares of the Company's common
stock resulting in a change in ownership of more than 20% of the Company's
outstanding securities and the acceleration of the exercisability all of the
then outstanding options.
No executive officer of the Company served on the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
26
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 1, 1996, information with
respect to (a) each person (including any "group" as that term is used in
section 13(d)(3) of the Securities Exchange Act of 1934) who is known to the
Company to be the beneficial owner of more than five percent (5%) of the
outstanding common stock of Company and (b) the number and percentage of the
Company's common stock owned by (i) each of the directors and the executive
officers named on the Summary Compensation Table above and (ii) all directors
and executive officers of the Company as a group. The Company believes that,
unless otherwise indicated, each of the shareholders has sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
POST-
PRE- REVERSE SPLIT
REVERSE SPLIT JUNE 21, 1996 PERCENT
NUMBER OF NUMBER OF OF CLASS
NAME OF BENEFICIAL OWNER(1) SHARES OWNED SHARES OWNED OUTSTANDING
- --------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
M.L. Technology Ventures, L.P......... 1,190,476 396,476 34.4%
3000 Sand Hill Road
Building 3, Suite 245
Menlo Park, CA 94025
Charles G. Marianik(2)................ 952,294 317,431 26.7%
Princeton Corporate Plaza
1 Deerpark Drive, Suite F
South Brunswick, NJ 08852
Covington Capital Corporation......... 650,000 216,667 15.8%
1 First Canadian Place
100 King Street West
Suite 2620, P.O. Box 165
Toronto, Ontario M5X 1C9
Edison Venture Fund, L.P.............. 337,000 112,333 9.7%
Princeton Pike Corporation Center
997 Lenox Drive #3
Lawrenceville, NJ 08648
Michael Winderbaum.................... 240,000 80,000 6.9%
120 North LaSalle St., Ste 2900
Chicago, IL 60602
Ronald Kovach(3)...................... 151,853 50,618 4.3%
William D. Looney(4).................. 129,950 43,317 3.7%
Franklin J. Iris(5)................... 82,047 27,349 2.3%
Louis Balogh(6)....................... 64,100 21,367 1.8%
James F. Mrazek(7).................... 66,000 22,000 1.9%
All Directors and Executive Officers
as a Group (6 persons)(8)............ 1,446,244 482,081 36.9%
</TABLE>
- --------
(1) For purposes of this table, a beneficial owner is one who, directly or
indirectly, has or shares with others (a) the power to vote or direct the
voting of the common stock or (b) investment power with respect to the
common stock which includes the power to dispose or direct the disposition
of the common stock.
27
<PAGE>
(2) Includes 105,576 shares which may be acquired within sixty days of
September 27, 1996 pursuant to the exercise of stock options.
(3) Includes 74,853 shares which may be acquired within sixty days of
September 27, 1996 pursuant to the exercise of stock options.
(4) Includes 93,096 shares which may be acquired within sixty days of
September 27, 1996 pursuant to the exercise of stock options.
(5) Includes 63,000 shares which may be acquired within sixty days of
September 27, 1996 pursuant to the exercise of stock options.
(6) Includes 63,000 shares which may be acquired within sixty days of
September 27, 1996 pursuant to the exercise of stock options.
(7) Includes 55,000 shares which may be acquired within sixty days of
September 27, 1996 pursuant to the exercise of stock options.
(8) Includes 454,525 shares which may be acquired within sixty days of
September 27, 1996 pursuant to the exercise of stock options.
There are no arrangements known to the Company the operation of which may,
at a subsequent date, result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of the start-up financing for the German Subsidiary, Mr. Oliver
Clasas, a private individual, former shareholder of the German Subsidiary, and
currently a minority shareholder of the Company, gave the Company a four (4)
year term loan for 400,000 DM (US $291,000). (See "BUSINESS--General")
As part of the Covington Agreement Mr. Grant Brown was appointed to the
Board of Directors of the Company on December 8, 1995. (See "MANAGEMENTS
DISCUSSION AND ANALYSIS--FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994--
Liquidity and Capital Resources")
On April 4, 1996, Dr. Robert Curry, a General Partner of the Sprout Group
and President of MLTV, was appointed to the Board of Directors of the Company.
(See "BUSINESS--General")
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
1. and 2. The financial statements and supplemental schedules filed as part
of this report are listed separately in the Index to Financial Statements
and Financial Statement Schedules located on page F2 of this report.
3. Exhibits--See Item 14(c). Each management contract or compensatory plan
or arrangement required to be filed as an exhibit hereto is listed in
Exhibit Nos. 4(b), 4(c), 4(d) and 10(a)(1) of Item 14(c).
(b) No reports on Form 8-K were filed by the Company during the last quarter
of fiscal 1995.
(c) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
Exhibit 3(a) Restated and Amended Certificate of Incorporation of the
Company.
Exhibit 3(b) Restated and Amended Bylaws of the Company, incorporated by
reference to the Company's Registration Statement on Form S-18
(Registration No. 33-10943-NY).
Exhibit 4(a)(1) Common Stock Purchase Warrant related to MLTV purchase of
warrants for 475,000 shares incorporated by reference from
the Company's Annual Report on Form 10-K for year ended
June 30, 1988.
Exhibit 4(a)(2) Agreement to advance balance of research and development
funding for consideration by the Company to drop the price
on the warrants from $4.50 per share to $3.50 per share.
Incorporated by reference from the Company's Form 10-Q for
quarter ended December 31, 1989.
Exhibit 4(a)(3) Note and warrant purchase agreement with MLTV. MLTV issued
$500,000 in the form of a subordinated promissory note for
consideration by the Company to drop the warrant price from
$3.50 to $2.00 per share. Incorporated by reference from the
Company's Form 10-K for the year ended June 30, 1991.
Exhibit 4(a)(4) MLTV letter dated September 9, 1994 extending its
subordinated promissory note until October 1, 1995 under
specified conditions. Incorporated by reference from the
Company's quarterly report on Form 10-Q for the quarter
ended September 30, 1994.
Exhibit 4(b) Stock Option Plan as amended and restated December 10, 1987
incorporated by reference from the Company's by Annual
Report on Form 10-K for the year ended June 30, 1988.
Exhibit 4(c) Form of Incentive Stock Option, incorporated by reference
from the Company's Annual Report on Form 10-K for year
ended June 30, 1989.
Exhibit 4(d) Form of Non-Qualified Option, incorporated by reference
from the Company's Annual Report on Form 10-K for year
ended June 30, 1989.
Exhibit 10(a)(1) Employment Agreement between Charles G. Marianik and the
Company dated June 30, 1990, incorporated by reference from
the Company's Annual Report on Form 10-K for year ended
June 30, 1990.
Exhibit 10(d) Exclusive Licensing Agreement for Deltascan software
program, incorporated by reference to the Company's
Registration Statement on Form S-18 (Registration No. 33-
10943-NY).
Exhibit 10(e)(1) Renewal $500,000 revolving note with Midlantic National
Bank. Incorporated by reference from the Company's Form 10-
Q for quarter ended March 31, 1990.
</TABLE>
29
<PAGE>
<TABLE>
<S> <C>
Exhibit 10(e)(2) Second Amendment to Amended and Restated Credit and Security
Agreement dated May 18, 1994, incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
June 30, 1994.
Exhibit 10(f) Stockholders' Agreement, incorporated by reference to the
Company's Registration Statement on Form S-18 (Registration No.
33-10943-NY).
Exhibit 10(g) Lease of premises in South Brunswick, New Jersey,
incorporated by reference to the Company's Registration
Statement on Form S-18 (Registration No. 33-10943-NY).
Exhibit 10(h) Master Agreement between the Company and MLTV, incorporated
by reference from the Company's Annual Report on Form 10-K
for the year ended June 30, 1988.
Exhibit 10(i) Technology Agreement between the Company and MLTV,
incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended June 30, 1988.
Exhibit 10(j) Development Agreement between the Company and MLTV,
incorporated by reference from the Company's Annual Report
on Form 10-K for year ended June 30, 1988.
Exhibit 10(k) Joint Venture and Purchase Option Agreement between the
Company and MLTV, incorporated by reference from the
Company's Annual Report on Form 10-K for year ended June
30, 1988.
Exhibit 10(l) Executed Joint Venture Agreement between the Company and
MLTV, incorporated by reference from the Company's Annual
Report on Form 10-K for year ended June 30, 1988.
Exhibit 10(m) Warrant Purchase Agreement between the Company and MLTV,
incorporated by reference from the Company's Annual Report
on Form 10-K for year ended June 30, 1988.
Exhibit 10(p) Sale/Leaseback Agreement with Equitable Lomas. Incorporated
by reference from Form 10- Q for quarter ended December 31,
1989.
Exhibit 10(q)(1) Ontario Development Corporation offer of loan (900,000
Canadian Dollars). Incorporated by reference from the
Company's Form 10-Q for quarter ended March 31, 1990.
Exhibit 10(q)(2) Ontario Development Corporation Notice of Change #2 to
Export Support Loan Program. Incorporated by reference from
the Company's Form 10-Q for the quarter ended September 30,
1992.
Exhibit 10(q)(3) First Amendment to Intercreditor Agreement dated May 18,
1994, incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994.
Exhibit 10(q)(4) Ontario Development Corporation Loan Agreement, March 16,
1994, incorporated by reference to the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 1994.
Exhibit 10(v) Stock Purchase Agreement, September 25, 1990, between the
Company Purchasers identified therein. Incorporated by
reference from the Company's Form 10-Q for the quarter
ended September 30, 1990.
Exhibit 10(w) Purchase Agreement dated as of December 8, 1995, by and
between Photon Technology International, Inc. and MLTV with
all exhibits, incorporated by reference from the Company's
Form 10-Q for the quarter ended December 31, 1995.
Exhibit 10(x) Debenture Agreement dated October 31, 1995, by and between
Photon Technology International, Inc. and CI. CPA. Business
Venture Fund, Inc., incorporated by reference from the Company's
Form 10-Q for the quarter ended December 31, 1995.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
Exhibit 10(y) Option Agreement dated October 31, 1995, by and between
Photon Technology International, Inc. and C.I. CPA.
Business Venture Fund, Inc., incorporated by reference from
the Company's Form 10-Q for the quarter ended December 31,
1995.
Exhibit 10(z) Loan and Security Agreement dated June 26, 1996, by and
between Silicon Valley Bank and Photon Technology
International, Inc., with Exhibits.
Exhibit 21 Subsidiaries, incorporated by reference from the Company's
Annual Report on Form 10-K for year ended June 30, 1988.
Exhibit 27 Financial Data Schedule.
Exhibit 99(a) 401(K) Plan, incorporated by reference from the Company's
Annual Report on Form 10-K for year ended June 30, 1989.
Exhibit 99(b) Notarial Record No. 1040/1991R CB/9414 from the transfer of
27% of the German Distributor to Photon Technology
International, Inc. on July 11, 1991 incorporated by
reference from the Company's Annual Report on Form 10-K for
the year ended June 30, 1991.
</TABLE>
31
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
PHOTON TECHNOLOGY INTERNATIONAL, INC.
Date: September 27, 1996 By: /s/ Charles G. Marianik
---------------------------------
Charles G. Marianik
Chairman of the Board,
Chief Executive Officer,
President and Principal Executive
Officer
Date: September 27, 1996 By: /s/ William D. Looney
---------------------------------
William D. Looney
Vice President, Controller,
Treasurer, and Chief Accounting
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 and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Charles G. Marianik Chairman of the Board and September 27, 1996
----------------------- Chief Executive Officer,
Charles G. Marianik and President
(Principal Executive Officer)
By: /s/ Ronald J. Kovach Senior Vice President, September 27, 1996
----------------------- Corporate Secretary and Director
Ronald J. Kovach
By: /s/ William D. Looney Vice President, Controller September 27, 1996
----------------------- (Chief Accounting Officer)
William D. Looney
By: /s/ Franklin J. Iris Director September 27, 1996
-----------------------
Franklin J. Iris
By: /s/ Louis Balogh Director September 27, 1996
-----------------------
Louis Balogh
By: /s/ James F. Mrazek Director September 27, 1996
-----------------------
James F. Mrazek
By: /s/ Robert E. Curry Director September 27, 1996
-----------------------
Robert E. Curry
By: /s/ M. Grant Brown Director September 27, 1996
-----------------------
M. Grant Brown
</TABLE>
32
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PHOTON TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARIES
The following Consolidated Financial Statements of Photon Technology
International, Inc. and subsidiaries are included in Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors......................................... F-2
Consolidated balance sheets--June 30, 1996 and 1995.................... F-3
Consolidated statements of operations--Years ended June 30, 1996, 1995
and 1994.............................................................. F-4
Consolidated statements of shareholders' equity--Years ended June 30,
1996, 1995 and 1994................................................... F-5
Consolidated statements of cash flows--Years ended June 30, 1996, 1995
and 1994.............................................................. F-6
Notes to Consolidated Financial Statements--June 30, 1996.............. F-7
The following financial statement schedule is included herein:
Schedule II--Valuation and Qualifying Accounts......................... F-21
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors of
Photon Technology International, Inc.
We have audited the accompanying consolidated balance sheets of Photon
Technology International, Inc. as of June 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years ended June 30, 1996. Our audits also included the
financial statement schedule listed in the index at item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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 Photon Technology
International, Inc. and subsidiaries as of June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
then ended June 30, 1996 in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
London, Canada Ernst & Young
August 20, 1996 Chartered Accountants
F-2
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, (IN U.S.$)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................. $ 279,041 $ 46,364
Trade accounts receivable, less allowances of $3,280
($3,568 for 1995).................................... 2,224,355 1,413,779
Inventory
Finished Goods ...................................... 788,139 775,609
Work in process...................................... 534,750 401,738
Raw materials........................................ 570,450 462,863
---------- ----------
1,893,339 1,640,210
Receivables from employees............................ 20,005 28,834
Prepaid expenses and other current assets............. 243,957 281,598
---------- ----------
TOTAL CURRENT ASSETS................................. 4,660,697 3,410,785
PROPERTY AND EQUIPMENT
Furniture and fixtures............................... 143,663 160,151
Machinery and equipment.............................. 1,810,678 1,546,227
---------- ----------
1,954,341 1,706,378
LESS: Accumulated depreciation........................ (1,415,221) (1,278,313)
---------- ----------
539,120 428,065
DEFERRED INCOME TAX ASSET (Note F).................... 153,452 --
OTHER ASSETS (Note J)................................. 2,057,240 983,498
---------- ----------
$7,410,509 $4,822,348
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness (Note D)
Accounts payable...................................... $1,522,397 $1,022,689
Deferred income....................................... 984,159 774,923
Accrued liabilities (Note K).......................... 49,755 42,024
Capital lease obligation--(Note I).................... 171,355 247,948
Current portion of long term debt (Note E)............ 9,624 21,715
TOTAL CURRENT LIABILITIES............................ 380,781 275,407
---------- ----------
3,118,071 2,384,706
DEFERRED INCOME TAX LIABILITY (Note F)................ 176,452 86,000
LONG TERM DEBT (Note E)............................... 1,938,370 1,131,960
MINORITY INTEREST--German Subsidiary.................. -- 59,926
COMMITMENTS (Note I)
SHAREHOLDERS' EQUITY (Note G and Note H)
Preferred stock, $1,000 par value: Authorized 500
shares, no shares issued or outstanding Common Stock,
no par value: Authorized 3,333,333 shares; issued
1,209,067 shares including 55,291 shares in treasury
in 1996 and issued 925,734 including 105,291 shares.. 26,272 26,272
in treasury in 1995................................... 6,252,846 5,278,879
Additional paid-in capital............................ (3,710,312) (3,855,815)
Accumulated deficit................................... (56,433) (107,466)
Treasury stock, at cost............................... (334,757) (182,114)
----------
Cumulative foreign currency translation adjustment
TOTAL SHAREHOLDERS' EQUITY........................... 2,177,616 1,159,756
---------- ----------
$7,410,509 $4,822,348
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, (IN U.S.$)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Net Sales................................... $9,190,227 $7,791,905 $5,388,192
Research contract revenue (Note B).......... -- -- 77,000
Other income................................ 68,573 56,149 45,933
---------- ---------- ----------
9,258,800 7,848,054 5,511,125
COSTS AND EXPENSES
Cost of products sold....................... 3,655,910 3,322,043 2,367,959
Research contract expense................... -- -- 73,335
Selling, general, and administrative........ 4,126,412 3,175,272 2,364,197
Research & development...................... 844,403 570,603 307,639
Interest expense............................ 280,364 121,890 87,649
Depreciation and amortization 150,370 148,072 88,104
Goodwill amortization....................... 153,131 105,825 --
Foreign exchange (gain) loss................ (34,293) (81,344) 20,139
---------- ---------- ----------
9,176,297 7,362,361 5,309,072
Income before income tax and minority inter-
est........................................ 82,503 485,693 202,053
Provision (benefit) for income taxes (Note
F)......................................... (63,000) 86,000 --
---------- ---------- ----------
Income before minority interest............. 145,503 399,693 202,053
Minority interest's share of subsidiary's
net income................................. -- (42,198) --
---------- ---------- ----------
Net income.................................. $ 145,503 $ 357,495 $ 202,053
========== ========== ==========
Net income per common share................. $ .14 $ .47 $ .27
========== ========== ==========
Net income per common share on a fully di-
luted basis................................ $ .09 $ .34 $ .20
========== ========== ==========
Weighted average number of common shares
outstanding................................ 1,008,620 766,328 760,311
========== ========== ==========
Weighted average number of common shares
outstanding on a fully diluted basis....... 1,553,086 1,042,508 1,023,820
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIODS FROM JULY 1, 1993 TO JUNE 30, 1996 (IN US$)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TREASURY
COMMON PAID-IN EARNINGS STOCK FOREIGN
STOCK CAPITAL (DEFICIT) AT COST EXCHANGE TOTAL
------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993. $26,272 $5,252,823 $(4,415,363) $(117,806) $ (81,819) $ 664,107
Net Income.............. $ 202,053 $ 202,053
Foreign currency
translation adjustment. $ (20,347) $ (20,347)
------- ---------- ----------- --------- ---------- ----------
Balance at June 30,
1994................... $26,272 $5,252,823 $(4,213,310) $(117,806) $ (102,166) $ 845,813
30,396 shares issued
from treasury stock.... $ 26,056 $ 10,340 $ 36,396
Net Income.............. $ 357,495 $ 357,495
Foreign currency
translation adjustment. $ (79,948) $ (79,948)
------- ---------- ----------- --------- ---------- ----------
Balance at June 30,
1995................... $26,272 $5,278,879 $(3,855,815) $(107,466) $ (182,114) $1,159,756
1,000,000 shares issued
for purchase of
technology from MLTV... 875,000 875,000
Purchase 49% PhotoMed
GmbH subsidiary--with
150,000 shares from
Treasury stock......... 98,967 51,033 150,000
Net Income.............. 145,503 145,503
Foreign Currency
translation adjustment. $ (152,643) $ (152,643)
------- ---------- ----------- --------- ---------- ----------
Balance at June 30,
1996................... $26,272 $6,252,846 $(3,710,312) $ (56,433) $ (334,757) $2,177,616
======= ========== =========== ========= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR END JUNE 30, (IN US$)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.................................. $ 145,503 $ 357,495 $ 202,053
Adjustment to Reconcile Net Income to Net
Cash used in operating activities:
Depreciation................................ 136,908 134,199 88,104
Other amortization.......................... 302,967 185,357 3,800
Deferred interest accrued on subordinated
debt....................................... -- -- 54,166
Deferred fees related to subordinated debt.. -- -- --
Minority interest's share of subsidiary net
income..................................... -- 42,198 --
Deferred income tax benefit expense......... (63,000) 86,000 --
Changes in operating assets and liabilities:
Increase in trade accounts receivable....... (810,576) (440,973) (118,651)
Increase in inventory....................... (235,055) (211,554) (126,247)
Decrease (increase) in receivable from em-
ployees.................................... 8,829 (27,210) (1,424)
Increase in prepared expenses and other cur-
rent assets................................ 37,641 (118,577) (22,702)
Increase (decrease) in accounts payable and
accrued expenses........................... 90,222 (88,312) 2,844
Increase (decrease) in deferred income...... 7,731 11,419 (69,458)
--------- --------- ---------
Net cash (used in) provided by operating ac-
tivities..................................... (378,830) (69,958) 12,485
INVESTING ACTIVITIES:
Purchase of property and equipment.......... (181,898) (81,419) (239,636)
Reduction (investment in) certificates of
deposit.................................... -- 25,120 (760)
Investment in capital of subsidiary......... -- (18,452) --
Capitalized software........................ (249,750) (255,036) (183,121)
--------- --------- ---------
Net cash in investing activities.............. (431,648) (329,787) (423,517)
FINANCING ACTIVITIES:
Financing costs incurred.................... (136,393) -- --
Increase in bank indebtedness............... 499,708 679,733 95,000
Repayment of bank indebtedness.............. -- (734,128) --
Increase in long-term debt.................. 1,101,859 591,581 243,191
Repayment of long-term debt................. (242,888) (49,225) --
Payment of capital lease obligation......... (25,343) (15,599) (11,697)
Minority interest's investment in subsidi-
ary........................................ -- 17,728 --
Investments in patents...................... (1,145) -- --
--------- --------- ---------
Net cash provided by financing activities..... 1,195,798 490,090 326,494
Effect of exchange rate changes on cash....... (152,643) (79,948) 1,035
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS........................................ 232,677 10,397 (83,503)
CASH AND CASH EQUIVALENTS--BEGINNING.......... 46,364 35,967 119,470
--------- --------- ---------
CASH AND CASH EQUIVALENTS--ENDING............. $ 279,041 $ 46,364 $ 35,967
--------- --------- ---------
INTEREST PAID................................. $ 271,642 $ 107,418 $ 22,060
--------- --------- ---------
TAXES PAID, SUBSIDIARY........................ $ 27,761 -- --
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)
JUNE 30, 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Photon Technology International, Inc. (the "Company") is engaged in
research, development, manufacturing, sales and marketing of proprietary
electro-optical systems which enable customers in health care, environmental
science and industrial process control to perform advanced analysis utilizing
light. The Company's major products are electro-optical and light-based
instrumentation which utilizes fluorescence technology. The primary markets
are medical life sciences, physical sciences, environmental and industrial.
The Company operates in one principal industry segment, the photonics
industry. The Company's products are sold on a worldwide basis to
universities, research hospitals, pharmaceutical companies, bio-tech
companies, federal and state government institutions, environmental companies
and commercial businesses, all of which are primarily engaged in research
activities.
The following is a summary of the significant accounting policies followed
in the preparation of the consolidated financial statements of the Company.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
Photon Technology International, Inc., its wholly owned subsidiaries in Canada
and in Germany (see Note L), and a domestic joint venture in which the Company
had a controlling interest through December 8, 1996 (see Note B). All
significant intercompany transactions and balances are eliminated in
consolidation.
2. FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's international operations are
translated into U.S. dollars using year-end exchange rates. Income and expense
accounts are translated into U.S. dollars at average rates of exchange
prevailing during the year. The resulting translation adjustments are recorded
as a separate component of the shareholders' equity. Gains and losses from
foreign currency transactions are reported in income.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of temporary money market instruments with
an original maturity of 3 months or less, and are stated at cost plus accrued
interest which approximates market.
4. INVENTORY
Inventory is stated at the lower of cost or net realizable value for work in
process and finished goods and at the lower of cost or replacement cost for
raw materials. The cost of inventory is determined using the first in, first
out method.
5. PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful life of the assets, which
range from three to ten years. At the time of disposal of assets, both the
cost and accumulated depreciation related to the particular assets are removed
from the appropriate accounts and any gains or losses are included in income.
Major renewals and betterment of assets are capitalized.
F-7
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
6. OTHER ASSETS
Software development costs are capitalized in accordance with the guidance
of FASB Statement No. 86 "Accounting for Software Costs", which provides for
the capitalization of costs incurred from the point of establishing
technological feasibility until the general release of the software.
Amortization of software product development costs is computed using the
straight-line method over the estimated economic life of the products, which
is approximately five years. Software is an integrated component and included
with each product system sale.
Goodwill, which represents the difference between the purchase price of an
acquired business (German Subsidiary), and the related value of net assets
acquired or net liabilities assumed, is reported net of amortization, and is
amortized using the straightline method over a five year period.
Technology rights acquired through issuance of the Company's shares of
common stock is valued at the bid price of the stock at the date of
transaction. These technology rights will be amortized on a straight line
basis over a ten (10) year term.
Direct costs related to financing are deferred and amortized on a straight
line basis over the term of the related financing agreement.
On an ongoing basis, management assesses the carrying value of its
intangible assets to determine if there is an impairment in value by comparing
expected undiscounted cash flow to the carrying value and reviewing other
relevant factors that may affect carrying value.
7. REVENUE RECOGNITION
Revenue is recognized when the risks and benefits inherent in ownership are
transferred, which normally occurs at the time of shipment of products.
Revenue under extended warranty and maintenance contracts is deferred and
recognized in income as the related services are performed.
Research contract revenue is recognized as earned, based on expenses
incurred plus a 5% profit as provided by an agreement with Merrill Lynch
Technology Venture, L.P. ("MLTV"). Research contract payments which relate to
future performance are deferred and taken into income as earned over a
specified future performance. Research contract costs are expenses as
incurred. Research revenue and research contract expense are applicable to
fiscal 1994 and prior years.
8. INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and
liabilities that are expected to reverse.
9. NET INCOME PER COMMON SHARE
Net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. The
weighted average number of common shares outstanding during the year has been
computed on a post-Reverse Split basis and fully diluted basis. The fully
diluted share number includes all share options issued in a financing
agreement with Covington Capital, to non-employee directors, to executive
management and to employees.
F-8
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
10. LEASES
Leases are classified as capital or operating leases. Leases which transfer
substantially all of the benefits and risks incident to ownership of property
are accounted for as capital leases. Assets required under capital leases are
amortized on a straight-line method using rates based on the estimated life of
the asset or based on the lease term as appropriate. All other leases are
accounted for as operating leases and the related lease payments are charged
to expense as incurred.
NOTE B--RESEARCH AND DEVELOPMENT AGREEMENT
On April 6, 1987, the Company entered into a research and development
agreement with MLTV, a related party. The agreement provided that MLTV pay the
Company $3,133,000 to develop new photonic technologies with applications in
the medical field. MLTV would own all the technology rights to the products
developed under the terms of the agreement. The agreement provided for the
development of four products ("MLTV Products") and the fourth product was
completed to a prototype stage during fiscal 1996.
In March of 1990, upon the sale of the first MLTV Product, the Company
entered into a partnership and joint venture agreement with MLTV to market all
of the MLTV Products.
On December 8, 1995, the Company entered into an agreement with MLTV whereby
the Company issued 1,000,000 shares of common stock (333,333 on a post split
basis--See Note G) to purchase the technology rights and related joint venture
interest in the product developed under the Research and Development Agreement
between the Company and MLTV. The 1,000,000 shares of common stock is in full
settlement of all obligations of the Company related to the technology rights
and joint venture interest. The technology rights were valued at $875,000,
using the bid price of the Company's shares at $0.875 per share on the day of
transaction, which in management's opinion is the most objective measure of
the value of the technology rights. As a result of this agreement, the joint
venture between the Company and MLTV terminated.
F-9
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
NOTE C--INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
Geographical financial information for the periods ended June 30, are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales to unaffiliated customers:
North America..................................... $4,818 $4,119 $3,629
Europe............................................ 2,859 3,049 1,258
Other International............................... 1,513 624 501
------ ------ ------
Total Net Sales................................... $9,190 $7,792 $5,388
====== ====== ======
Transfers between geographic areas (eliminated in
consolidation)
North America..................................... $4,422 $3,060 $1,747
Europe............................................ 227 972 355
Other International............................... -- -- --
------ ------ ------
Total Transfers................................... $4,649 $4,032 $2,102
====== ====== ======
Operation income:
North America..................................... $ 94 $ 380 $ 330
Europe............................................ 82 95 (60)
Other International............................... 176 47 20
------ ------ ------
Total Operation Income............................ $ 363 $ 522 $ 290
====== ====== ======
Identifiable Assets:
North America..................................... $7,641 $4,342 $4,783
Europe............................................ 2,020 1,646 385
Other International............................... 664 59 10
Elimination....................................... (2,914) (1,225) (2,160)
------ ------ ------
Total Identifiable Assets......................... $7,411 $4,822 $3,018
====== ====== ======
</TABLE>
Net sales to unaffiliated customers is based on the location of the selling
organization. Transfers between geographic areas are recorded at amounts above
costs and on a consistent historical basis. Operation income consists of
income before income tax provision and the adding back of interest expense,
after determining minority interest. Identifiable assets of geographic areas
are those assets used and/or are directly related to the activities of the
Company's specific operations in each of the locations, and intercompany
assets are eliminated in consolidation.
NOTE D--BANK INDEBTEDNESS
Bank indebtedness consists of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Indebtedness denominated in Canadian dollars--Bank of
Montreal............................................. $1,276,328 $ 679,733
Indebtedness denominated in German deutsche marks--
Stadparkasse Bank.................................... 246,069 342,956
---------- ----------
$1,522,397 $1,022,689
========== ==========
</TABLE>
F-10
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
In May 1995, the Company executed an agreement with the Bank of Montreal
Innovation and Technology Center (the "Bank") for a $1.5 million Canadian
dollars and/or Canadian dollar equivalent (in US dollars $1.1 million), credit
facility in the form of a revolving line which is payable on demand. The
availability of funds on this facility were subject to margin requirements.
On March 5, 1996, the Company renewed its credit facility with the Bank of
Montreal for $2.0 million Canadian dollars ($1.5 million equivalent in US
dollars). The terms and conditions of the facility were the same with the
exception of changing the covenants to exclude Total Debt to Tangible Net
Worth Ratio, which became an interest rate tierred pricing incentive. Interest
was charged at Canadian prime rate plus 2.25%. The purpose of this facility
was to provide incremental working capital to the Company.
On July 26, 1996 the Company secured a new working capital line of credit
facility with Silicon Valley Bank of California for $2,000,000 (U.S.) and
repaid the Bank of Montreal credit facility in full. This credit facility has
a one (1) year term (expiring June 30, 1996) and carries interest rate change
of prime rate plus 1.5% (approximately 8.75%). Interest is due and payable
monthly, and the principal is due at maturity. The collateral for the line
represents a perfected first security interest in all assets of the Company,
its wholly-owned Canadian subsidiary and United Kingdom branch office. The
Company will retain ownership of intellectual property and is restricted on
the pledge of this property to any other party. The advance rate is based on
75% against eligible domestic and Canadian receivables within 90 days from
invoice date and 90% against incurred or letter of credit backed foreign
receivables. There is no clean-up period required during the term. The
securities related to the Covington Capital debenture and the MLTV note are
subordinated to the bank debt. The outstanding balance of $1.3 million
represents the amount used to repay the Bank of Montreal facility. The Company
has not borrowed additional amounts on this line at this point.
Bank indebtedness also includes the outstanding balance of $246,069 US
(375,000 DM) drawn on a credit facility with the Stadparkasse Bank of Wedel,
Germany. The total line of credit available is 500,000 DM, which was
established in conjunction with the formation of the German Subsidiary (See
Note L). Interest is charged on a quarterly basis at the German Federal Bank's
discount rate plus two points. The weighted average interest rate on short
term borrowings outstanding during the year is 9.25% (1995: 9.36%).
NOTE E--LONG TERM DEBT
Details of long-term debts are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<C> <S> <C> <C>
a) 13% Subordinated promissory note payable to a
shareholder (MLTV), denominated in U.S.
dollars...................................... $ 630,761 $ 770,761
b) Fixed term loan from the Ontario Development
Corporation ("ODC"), at 6.75%, denominated in
Canadian dollars ($415,000 Cdn).............. 304,320 302,411
c) Term loan due to a minority shareholder
denominated in German marks (352,600 DM)..... 231,307 289,440
d) 12% subordinated promissory note payable to
Covington Capital Corporation, denominated in
Canadian dollars ($1,500,000 CDN)............ 1,099,950 --
e) Capital lease obligations denominated in
Canadian dollars (85,145 CDN), (Note I)...... 62,437 21,715
f) Others........................................ -- 44,755
---------- ----------
Total......................................... 2,328,775 1,429,082
Less: current portion long term debt.......... (380,781) (275,407)
Less: current portion capital lease
obligation................................... ( 9,624) ( 21,715)
---------- ----------
Long-term debt................................ $1,938,370 $1,131,960
========== ==========
</TABLE>
F-11
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
In connection with the Company's research and development efforts, MLTV had
previously provided the Company with subordinated debt of $770,761, which was
used to fund the continuing development of the MLTV products (see note B).
On September 20, 1995, the Company entered into an agreement with MLTV.
Under this agreement, the Company was to repay the existing $770,761
subordinated debt, without interest charged or accruing over a two year
period, commencing October 1995. The repayment is in the amount of $20,000 per
month, with the remaining balance to be paid in full at the end of this term.
As of June 30, 1996, the Company has repaid $140,000 and reduced the balance
outstanding to $630,761. MLTV agreed to defer payments for a four month period
from June 1996 through September 1996 in consideration of the Company's sales
and marketing plans. The Company will pay interest on the deferred amounts at
a rate of 12% per annum during the four month period. Interest paid during
fiscal 1996 was $200. The Company granted a security interest in all of the
Company's right, title and interest in all amounts and proceeds. This
collateral is subordinated to the bank debt.
On February 3, 1994 the Company received from ODC an "offer of loan" for a
$500,000 Canadian dollar fixed term loan at an interest rate of 6.75% for a
term of 4.5 years. This term loan was originally part of a ODC credit facility
of $900,000 Canadian dollars under the Export Loan Program. The loan was based
on specific advance requests for equipment, inventory, and training
expenditures to finance the relocation of production operations from the New
Jersey plant to the London, Ontario, Canadian plant.
Payment of principal was originally scheduled to start on the earlier of
full disbursement or August 15, 1995. Since the full disbursement had not
occurred by June 30, 1995, the Company was granted an extension by ODC until
June 30, 1996. Principal payments began on July 15, 1996 for an amended period
of 40 months at a rate of $11,597 Canadian dollars ($8,500 US) per month which
includes principal plus interest. Interest has been charged on a monthly basis
at a stated rate of 6.75% effective since July 1994. Interest paid during
fiscal 1996 was $19,000 and the principal balance at June 30, 1996 was
$415,000 Canadian dollars ($304,000 US). The Company provided a security
interest in all chattel owned and acquired under this loan program. ODC waived
a floating charge on all assets in subordination to the bank debt.
Long term debt also includes a four (4) year term loan of US$ 291,000
(400,000 DM) by a private individual, former shareholder of German Subsidiary
and current minority shareholder of the Company. The loan was made to the
subsidiary on October 1, 1994 and with a repayment of principal and interest
to start at the end of April 1995. Interest was at a base rate of 5.25% plus
the prevailing German bank discount rate. Related party interest expense
incurred on this loan in 1996 amounts to $22,000 (34,000 DM). A portion of
this outstanding amount ((US$ 59,000) has been classified as a current
liability and represents an estimated twelve payments of principal. There were
principal payments of $58,000 during 1996 leaving a balance of $231,000 at
June 30, 1996. The lender did not require a security interest or collateral.
On October 31, 1995, the Company completed a $1,500,000 Canadian dollar
($1.1 million US$) financing in the form of subordinated debt with C.I. C.P.A.
Business Ventures Fund, Inc., a venture capital fund of Covington Capital
Corporation. This subordinated debt has a term of five (5) years and an
interest rate of 12% per year, compounded monthly with interest payments only
in the first twelve (12) months. Principal payments of $6,250 Canadian dollars
will begin November 1996 through September 2000. This agreement includes a
first option for 250,000 shares of common stock at $1.25 per share for a term
of five (5) years, and a second option of 400,000 shares of common stock at
$2.50 per share until October 1996 and then at $3.25 per share until October
1997. The number of shares disclosed does not give effect to the Reverse Split
(Note G). Interest payments during fiscal 1996 amounted to $119,000 Canadian
dollars ($86,000 US). As of June 30, 1996, $37,000 has been classified as
short term debt and $1,063,000 as long term debt. The Company granted a
security interest in all of the Company's right, title and interest in all
accounts and proceeds. This collateral is subordinated to the bank debt.
F-12
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
The Company entered into an agreement with New Court Credit Corporation in
March 1996 to finance a purchase of a CNC milling machine for the Canadian
plant machine shop. The term loan amount was for $90,000 Canadian dollars
($66,000 US) for a period of 5.5 years and at an interest rate of 10.4%
Payment on principal through June 30, 1996 was $5,000 Canadian ($4,000 US).
Interest payments for fiscal 1996 were $2,000 Canadian dollars. The balance of
debt at June 30, 1996 was $85,000 Canadian dollars ($62,000 US) with $10,000
classified as the current portion of the long term debt.
Details of estimated long-term debt repayment schedule are as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 390,405
1998.......................................................... 680,000
1999.......................................................... 219,400
2000.......................................................... 122,000
2001.......................................................... 69,000
Thereafter.................................................... $ 847,970
----------
$2,328,775
----------
</TABLE>
NOTE F--INCOME TAXES
At June 30, 1996 the Company has net operating loss carryforwards of
approximately $3,100,000 and $490,000 for U.S. federal and Canadian tax
reporting purposes, respectively, which expire in varying amounts through 2011
and 1999, respectively. In addition, the Company has approximately $161,000 of
net operating loss carryforwards for German tax reporting purposes and these
loss carryforwards do not have an expiration date. The Company also has a June
30, 1996, unused tax credits of approximately $116,000 and $71,000 for U.S.
federal and Canadian tax reporting, respectively, which expire in varying
amounts through 2003 and 1999, respectively, to offset future income taxes.
the tax credits primarily relate to research and development. As a result of
certain transactions involving issuance of the Company's common stock and
options to purchase stock, an "ownership" change occurred in 1988 under
Section 382 of the Internal Revenue Code of 1986. Consequently, future
utilization of the Company's U.S. net operating loss carry forwards and tax
credit carryforwards attributable to periods before the ownership change will
restrict the utilization of the loss carryforwards and tax credit
carryforwards in a particular year.
The provision (benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Current................................................... $ -- $ --
Deferred.................................................. $ -- 86,000
Tax benefit of net operating loss carryforward............ (63,000) --
-------- -------
Total Tax expense (benefit)............................... $(63,000) $86,000
-------- -------
</TABLE>
All tax provisions (benefits) relate to the Company's international
operations. No provision has been made for the Company's domestic operations.
F-13
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
U.S. OPERATIONS
---------------------
NON-
CURRENT CURRENT TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Accruals/Reserves........................ $ 76,988 $ 76,988
Deferred Income.......................... 16,917 16,917
NOL carryforward......................... $1,054,303 1,054,303
Tax credits.............................. 116,763 116,763
Other.................................... 18,058 4,503 22,561
--------- ---------- ----------
Gross Deferred Tax Asset................. $ 111,963 $1,175,568 $1,287,531
DEFERRED TAX LIABILITIES
Capitalized software..................... (177,229) (177,229)
Other.................................... 0 (10,308) (10,308)
--------- ---------- ----------
Gross Deferred Tax Liability............. 0 $ (187,537) $ (187,537)
--------- ---------- ----------
Net Deferred Tax Asset................... $ 111,963 $ 988,031 $1,099,994
Valuation allowance for deferred tax as-
sets.................................... (111,963) (988,031) (1,099,994)
--------- ---------- ----------
Net Deferred Taxes....................... $ 0 $ 0 $ 0
--------- ---------- ----------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of June 30, 1996 are as follows--Continued:
<TABLE>
<CAPTION>
CANADIAN OPERATIONS
-------------------
CURRENT NON-CURRENT TOTAL
------- ----------- ---------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
NOL carryforward............................. $ 182,200 $ 182,200
Tax credits.................................. $ 0 71,050 71,050
--- --------- ---------
Net Deferred Tax Assets...................... $ 0 $ 253,250 $ 253,250
Valuation allowance for deferred tax assets.. 0 $ (99,798) $ (99,798)
--- --------- ---------
Net Deferred Taxes........................... $ 0 $ 153,452 $ 153,452
--- --------- ---------
<CAPTION>
GERMAN OPERATIONS
-------------------
CURRENT NON-CURRENT TOTAL
------- ----------- ---------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
NOL Carryforward............................. $ 0 $ 80,711 $ 80,711
DEFERRED TAX LIABILITY
Goodwill related to start-up of the German
subsidiary.................................. $ 0 $(257,163) $(257,163)
--- --------- ---------
Net Deferred Tax Liability................... $ 0 $(176,452) $(176,452)
--- --------- ---------
</TABLE>
The change in valuation allowance for the deferred tax asset is a decrease of
$123,083, $10,326, and $57,880 for 1996, 1995, and 1994, respectively.
F-14
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
U.S. and foreign income (loss) from operations before income taxes and
minority interest includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- --------- ---------
<S> <C> <C> <C>
U.S............................................ $13,176 $(204,284) $(103,642)
Foreign........................................ 69,327 689,977 305,695
------- --------- ---------
$82,503 $ 485,693 $ 202,053
======= ========= =========
</TABLE>
The U.S. statutory rate of 34% can be reconciled to the effective tax rate
as follows:
<TABLE>
<CAPTION>
LIABILITY METHOD
------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Pre-tax income (loss)....................... $ 82,503 $ 485,693 $202,053
========= ========= ========
Provision for taxes at statutory rate....... 28,051 165,136
Canadian net operating loss carryforward.... (23,164) (150,204)
Canadian corporate minimum and capital tax-
es......................................... 8,138
Canadian research tax credit................ -- (71,050) --
Goodwill related to start-up of German oper-
ations..................................... (33,137) 290,300
German net operating loss carryforward...... -- (204,300) --
Non-deductible meals and entertainment ex-
pense...................................... 10,100 10,000 5,000
Change in beginning of year valuation allow-
ance....................................... (123,083) (10,326) (57,880)
Foreign tax rates in excess of U.S. Statu-
tory rate.................................. 45,168 24,342
Other....................................... 24,927 32,102 (15,818)
--------- --------- --------
Provision (benefit) for income taxes........ $ (63,000) $ 86,000 $ 0
========= ========= ========
</TABLE>
The Company paid no corporate income taxes in 1996, 1995 or 1994. The
Company's subsidiary, Photon Technology International (Canada) Inc., paid
income taxes of $27,761 in 1996 related to Canadian corporation minimum tax
and capital tax in accordance with the tax regulation for the Province of
Ontario, Canada.
NOTE G--STOCK AND STOCK OPTIONS
On June 21, 1996, prior to the Company's fiscal year end, the Company
amended its Restated and Amended Certificate of Incorporation to reflect a
reverse stock split whereby one (1) share of common stock was exchanged for
three (3) shares of common stock. This Reverse Split will impact all
authorized common stock and stock options including treasury shares, employee
and non-employee stock options. The weighted average shares outstanding are
computed on a Reverse Split and fully diluted basis.
The Company adopted a Stock Option Plan ("Plan") in 1987 to provide
incentive and non-qualified common stock options for officers, key employees
and directors of the Company. The amount of authorized shares in the option
pool is 233,333 at June 30, 1996, (700,000 shares in 1995 on a pre-Reverse
Split basis).
During the year, the Company granted 35,110 options (105,329 on a pre-
Reverse Split basis), of this amount 25,110 stock options were issued to
executive officers and 10,000 stock options to directors. There were no
options exercised or canceled in fiscal 1996.
Of the 233,333 authorized shares in the option pool, 207,000 options or 89%
have been granted and are outstanding as of June 30, 1996, of which all
207,000 are vested and exercisable, 83,333 or 40% are non-qualified options
and 123,667 or 60% are incentive stock options. The exercise price of the
common stock
F-15
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
options range from $2.63 per share to $4.50 per share, and on a weighted
average basis approximately $3.63 per share. The granted and outstanding
options have expiration dates, for varying amounts, ranging from 1998 to 2006.
NOTE H--TREASURY STOCK
On June 18, 1993, the Company issued 28,769 shares of treasury stock to two
executives in settlement of accrued vacation not taken to that date. The
treasury stock shares were issued at a fair market value of $36,000 or $1.25
per share.
In October 1994, the Company issued 8,000 shares of treasury stock to all
three executives in lieu of paying an earned 1994 cash bonus. The stock was
issued at a fair market value of $30,000 or $1.25 per share.
On March 20, 1995 the Company issued a total of 6,396 shares of treasury
stock in lieu of entitled vacation pay to two key Canadian employees. The
stock was issued at a fair market value of $1.00 per share.
On July 5, 1995, the Company acquired the remaining 49% ownership of German
Subsidiary from its minority shareholders. The Company issued 150,000 common
shares from treasury stock, at a fair market value of $1 per share. As a
result of this transaction, German Subsidiary became a wholly-owned subsidiary
of the Company. The transaction is accounted for as a business combination
(step-by-step acquisition) using the purchase method of accounting.
As a result of acquiring the remaining 49% ownership of German Subsidiary
for treasury stock, the number of shares in treasury stock decreased from
315,872 shares to 165,872 as of July 5, 1995. The number of shares in treasury
on a pre-Reverse Split basis remained at 165,872 at June 30, 1996. On a
Reverse Split Basis there are 55,291 shares of common stock in treasury at
June 30, 1996.
NOTE I--LEASES AND COMMITMENTS
On November 20, 1989, the Company entered into a sale/leaseback agreement
with a leasing company. The Company sold certain demonstration inventory used
by the sales and marketing departments for $299,950 resulting in a $176,750
gain, which has been recognized over the lease term using the effective
interest rate method. The balance of the gain in the amount of $3,000 was
recognized in fiscal 1995. Under the terms of the agreement, the Company had
agreed to lease back the equipment under a noncancelable five year term.
At the end of the lease term in December 1994, the Company had the option to
purchase the equipment at fair market value or extend the lease for a one-year
period. The Company negotiated a renewed lease for $35,000 to be paid over
eighteen (18) months at an interest rate of 10.25%. Payments under the
original capital lease obligation had an effective interest rate of 11.8
percent. The renewed capital lease contains a bargain purchase option and on
June 11, 1996, the Company exercised this bargain purchase option and
purchased the equipment for one (1) dollar.
The Company entered into an agreement with New Court Credit Corporation in
March 1996 to finance a purchase of CNC milling machine for the Canadian plant
machine shop. The term loan amount was for $90,000 Canadian dollars ($66,000
US) for a period of 5.5 years and at an interest rate of 10.4%. This agreement
includes a purchase option for $9,000 Canadian dollars at the end of the fifth
year. Payment on principal through June 30, 1996 was $5,000 Canadian ($4,000
US). Interest payments for fiscal 1996 were $2,000 Canadian dollars.
The balance of debt at June 30, 1996 was $85,000 Canadian dollars ($62,000 US)
with $10,000 classified as the current portion of the long term debt.
F-16
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
Future minimum annual rental commitments under the capital lease and non-
cancelable operating leases at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
------- ---------
<S> <C> <C>
1997....................................................... $15,667 $167,943
1998....................................................... 15,667 119,798
1999....................................................... 15,667 81,955
2000....................................................... 15,667 52,920
2001 and thereafter........................................ 18,289 46,620
------- --------
Total minimum lease payments............................... $80,957 $469,236
--------
Less interest.............................................. 18,520
-------
Present value of net minimum lease payments................ $62,437
-------
</TABLE>
Equipment under capital lease and accumulated amortization amounted to
$100,465 and $22,280, respectively, in 1996 and $34,400 and $9,342,
respectively, in 1995. Rental expense for operating leases was $278,780,
$207,609, and $199,895 for 1996, 1995 and 1994, respectively.
NOTE J--OTHER ASSETS
Other assets include the following as of June 30:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Goodwill, net of accumulated amortization of $258,956
(1995: $105,825) (see Note L).......................... $ 541,870 $580,580
Capitalized software development costs, net of accumu-
lated amortization of $136,257 (1995: $49,386)......... 547,844 384,965
Patents, net of write down of $30,140 (1995: $30,140)... 19,098 17,953
Purchase of technology rights and related joint venture
interest (see Note B), net of accumulated amortization
of $43,750 (1995: $0).................................. 831,250 --
Deferred financing costs net of accumulated amortization
of $19,215 (1995: $0).................................. 117,178 --
---------- --------
$2,057,240 $983,498
========== ========
</TABLE>
The Company capitalized approximately $250,000 of software development costs
during fiscal 1996 ($255,000 in 1995). Amortization of capitalized software
development costs were $87,000 for 1996, $49,000 for 1995, and $3,800 for
1994. These costs have been recorded in Cost of Products Sold.
Financing costs primarily related to the Covington Capital and MLTV
financing agreements have been capitalized and will be amortized over the term
of the agreements (See Note E).
NOTE K--ACCRUED LIABILITIES
Accrued liabilities include the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Employee compensation and other employee benefits......... $117,308 $116,239
Warranty and installation................................. 47,781 25,570
Other..................................................... 6,266 106,139
-------- --------
$171,355 $247,948
======== ========
</TABLE>
F-17
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
NOTE L--GERMAN SUBSIDIARY
On September 30, 1994, the Company established a new subsidiary (Photo Med
GmbH) in Hamburg, Germany. The Company owned 51% of the subsidiary at that
time, and three individual investors owned the remaining 49%. Subsequent to
the formation, the German Subsidiary entered into an agreement with the
Stadtparkasse Bank of Wedel, Germany. Under this agreement, the German
Subsidiary acquired certain inventory and fixed assets through the bank from
the Company's German distributor. In addition, the German Subsidiary agreed to
assume certain outstanding liabilities of the previous German distributor,
including outstanding payables to various vendors, unpaid compensation and
social costs of certain employees.
This series of transactions was accounted for as a business combination
using the purchase method of accounting. Accordingly, the acquired assets and
liabilities were recorded at their estimated fair value at the date of
acquisition. The excess of purchase price over the net liabilities acquired
has been capitalized as goodwill, and will be amortized on a straight-line
basis over a five year period. The unamortized balance of goodwill is included
in "other assets".
The purchase price of the 51% ownership, which comprised the assumption of
liabilities, was allocated as follows:
<TABLE>
<S> <C>
Inventory......................................................... $ 216,000
Fixed assets...................................................... 67,500
Goodwill.......................................................... 686,400
Deferred tax assets............................................... 343,200
Deferred tax liability............................................ (343,200)
---------
Total............................................................. 969,900
Less: liabilities assumed:
Bank indebtedness................................................ (499,700)
Trade payable.................................................... (470,200)
---------
$ 0
---------
</TABLE>
The operating results in fiscal 1995 of the German Subsidiary, subsequent to
September 30, 1994, were included in the Company's result of operations. The
minority interest's 49% share of the German Subsidiary's income was excluded
from the determination of net income of the Company in 1995.
In fiscal 1996, the Company assumed an additional $43,000 of liabilities
with respect to the 51% acquisition of the German Subsidiary. This amount was
added to the goodwill balance.
On July 5, 1995 of this fiscal year, the Company acquired the remaining 49%
ownership of the German Subsidiary from its minority shareholders. The Company
issued 150,000 common shares from treasury stock, at a value of $1 per share.
As a result of this transaction, the German Subsidiary became a wholly-owned
subsidiary of the Company. The transaction is accounted for as a business
combination (step-by-step acquisition) using the purchase method of
accounting.
The purchase price for the remaining 49% ownership was allocated as follows:
<TABLE>
<S> <C>
Goodwill on acquisition............................................ $ 72,000
Net assets acquired from minority interest......................... 78,000
--------
$150,000
--------
</TABLE>
F-18
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
The operating results of German Subsidiary for fiscal 1996 were fully
included as a wholly-owned subsidiary.
NOTE M--RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long Lived
Assets and Assets to be Disposed Of" and No. 123 "Accounting for Stock-Based
Compensation". SFAS 107, 119, 121 and 123 are effective for the Company's June
30, 1997 year end.
In addition, in fiscal 1996, the Company assessed the carrying value of its
significant intangible assets by estimating the expected future cash flows
related to such assets and comparing their cash flows to respective carrying
values, as required by SFAS 121. The Company has not determined the impact of
adopting SFAS 123.
NOTE N--COMPARATIVE AMOUNTS
Certain comparative amounts in the prior years have been reclassified to
conform with the presentation adopted in the current fiscal year.
NOTE O--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair market
values of the Company's financial instruments at June 30, 1996:
<TABLE>
<CAPTION>
1996 ($000)
-----------
BOOK FAIR
VALUE VALUE
----- -----
<S> <C> <C>
Financial Assets:
Cash and cash equivalents....................................... 279 279
Trade accounts receivable....................................... 2,224 2,224
Receivables from employees...................................... 20 20
Financial Liabilities:
Accounts payable................................................ 984 984
Bank indebtedness............................................... 1,522 1,522
Accrued liabilities............................................. 171 171
Capital lease obligations....................................... 7 7
Long Term Debt: (Note E)
Subordinated debt--Covington Capital........................... 1,100 995
Subordinated debt--MLTV........................................ 631 563
Other term debt................................................ 598 550
</TABLE>
The carrying amounts of cash and cash equivalents, accounts receivable,
receivable from employees, bank indebtedness, accounts payable and accrued
liabilities, capital lease obligations and certain long term debt are
considered to be representative of their respective fair values.
The fair value of the Company's long-term debt with MLTV, which is non-
interest bearing, is estimated by discounting expected cash flows at the
Company's incremental borrowing rate of 13% for debt of the same remaining
maturities.
F-19
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN US$)--(CONTINUED)
The Company is exposed to credit losses in the event of non-performance by
the counter-parties to its financial assets, however, the Company does not
anticipate non-performance of such parties. There is no off-balance sheet
credit risk of accounting loss.
Concentrations of credit risk could arise since a number of the Company's
customers are government agencies or academic institutions worldwide. However,
the Company does not foresee a credit risk associated with its receivables
primarily due to the fact that these customers are funded prior to the
purchase of products and overall the Company historically has had no material
bad debts. The allowance for doubtful accounts is adequate to provide for
normal credit losses.
NOTE P--SIGNIFICANT RISKS AND UNCERTAINTIES
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles (GAAP) 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 periods ended June 30.
Management does not anticipate a significant change in the estimates that
may affect the carrying amount of assets or liabilities or the disclosure of
loss contingencies in the near term.
The Company's major products are electro-optical and light-based
instrumentation which utilizes fluorescence technology. The primary-market
served are medical life sciences, physical sciences, environmental and
industrial. The Company markets its products worldwide. Markets of particular
concentration include North America, Europe, South America and the Pacific
Rim. The Company's products are primarily used in research, diagnostics
testing, monitoring or process/quality control. The Company's customer base
includes universities, pharmaceutical companies, hospitals, biotechnology
companies and industrial companies. The Company has been in business and
serving these markets with products since 1983 and have established a solid
customer base which provide repeat and/or referral business. The products are
proprietary and patented. The products are very competitive and accepted due
to the technical properties of fluorescence such as sensitivity, which allows
detection of very small-subcellular amounts of substance with accuracy, non-
invasive and non-radioactive characteristic for safety, speed in monitoring
changes, visualization of images to monitor changes and relatively low cost.
Although there are competing technologies and competition in existing markets
for fluorescence technology, the Company does not appear to be materially
impacted or limited by this competition.
With a solid customer base, a proven technology, markets which are growing,
a demonstrated need for the Company's products, and the ability to reduce
product costs, the Company does not feel there is a significant risk to future
sales growth. The Company intends to continue to invest in research and
development for new products and new product accessories. The Company intends
to continue to seek financing opportunities to meet these goals. However,
there can be no assurances that the Company will obtain the financing
opportunities and have the financial resources to support development effort,
sales and marketing of products and the proper internal management structure
worldwide.
F-20
<PAGE>
SCHEDULE II--VALUATION AND QUALIFICATION ACCOUNTS
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COSTS AND ENDING
DESCRIPTION BALANCE EXPENSES (DECREASE) BALANCE
- ----------- ------------- ---------- --------- -------------
JUNE 30, 1993 JUNE 30, 1994
------------- -------------
<S> <C> <C> <C> <C>
1. Allowance for Doubtful Ac-
counts.................... 18,498 970 (15,498) 3,970
2. Allowance for Inventory... 68,696 1,365 -- 70,061
3. Valuation Allowance--De-
ferred Income Taxes....... 1,391,081 (57,880) -- 1,333,201
<CAPTION>
JUNE 30, 1994 JUNE 30, 1995
------------- -------------
<S> <C> <C> <C> <C>
1. Allowance for Doubtful Ac-
counts.................... 3,970 -- (402) 3,568
2. Allowance for Inventory... 70,061 15,146 -- 85,207
3. Valuation Allowance--De-
ferred Income Taxes....... 1,333,201 (10,326) -- 1,322,875
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C> <C> <C>
1. Allowance for Doubtful Ac-
counts.................... 3,568 -- (268) 3,280
2. Allowance for Inventory... 85,207 30,000 -- 115,207
3. Valuation Allowance--De-
ferred Income Taxes....... 1,322,875 (123,083) -- 1,199,792
</TABLE>
F-21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
<S> <C> <C>
3 (a) Restated and Amended Certificate of Incorporation
of the Company
3 (b) Restated and Amended Bylaws of the Company,
incorporated by reference to the Company's
Registration Statement on Form S-18 (Registration
No. 33-10943-NY).
4 (a) (1) Common Stock Purchase Warrant related to MLTV
purchase of warrants for 475,000 shares incorporated
by reference from the Company's Annual Report on
Form 10-K for year ended June 30, 1988.
4 (a) (2) Agreement to advance balance of research and
development funding for consideration by the
Company to drop the price on the warrants from
$4.50 per share to $3.50 per share. Incorporated by
reference from the Company's Form 10-Q for
quarter ended December 31, 1989.
4 (a) (3) Note and warrant purchase agreement with MLTV.
MLTV issued $500,000 in the form of a
subordinated promissory note for consideration by
the Company to drop the warrant price from $3.50
to $2.00 per share. Incorporated by reference from
the Company's Form 10-K for the year ended June
30, 1991.
4 (a) (4) MLTV letter dated September 9, 1994 extending its
subordinated promissory note until October 1, 1995 under
specified conditions. Incorporated by reference from the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1995.
4 (b) Stock Option Plan as amended and restated
December 10, 1987 incorporated by reference from
the Company's by Annual Report on Form 10-K for
the year ended June 30, 1988.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
<S> <C> <C>
4 (c) Form of Incentive Stock Option, incorporated by
reference from the Company's Annual Report on
Form 10-K for year ended June 30, 1989.
Exhibit 4 (d) Form of Non-Qualified Option, incorporated by
reference from the Company's Annual Report on
Form 10-K for year ended June 30, 1989.
10 (a) (1) Employment Agreement between Charles G.
Marianik and the Company dated June 30, 1990,
incorporated by reference from the Company's
Annual Report on Form 10-K for year ended
June 30, 1990.
10 (d) Exclusive Licensing Agreement for Deltascan(TM)
software program, incorporated by reference to the
Company's Registration Statement on Form S-18
(Registration No. 33-10943-NY).
10 (e) (1) Renewal $500,000 revolving note with Midlantic
National Bank. Incorporated by reference from the
Company's Form 10-Q for quarter ended March 31,
1990.
10 (e) (2) Second Amendment to Amended and Restated Credit and Security
Agreement dated May 18, 1994, incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
June 30, 1994.
10 (f) Stockholders' Agreement, incorporated by reference
to the Company's Registration Statement on Form S-
18 (Registration No. 33-10943-NY).
10 (g) Lease of premises in South Brunswick, New Jersey,
incorporated by reference to the Company's
Registration Statement on Form S-18 (Registration
No. 33-10943-NY).
10 (h) Master Agreement between the Company and
MLTV, incorporated by reference from the
Company's Annual Report on Form 10-K for the
year ended June 30, 1988.
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
<S> <C> <C>
10 (i) Technology Agreement between the Company and
MLTV, incorporated by reference from the
Company's Annual Report on Form 10-K for the
year ended June 30, 1988.
10 (j) Development Agreement between the Company and
MLTV, incorporated by reference from the
Company's Annual Report on Form 10-K for year
ended June 30, 1988.
10 (k) Joint Venture and Purchase Option Agreement
between the Company and MLTV, incorporated by
reference from the Company's Annual Report on
Form 10-K for year ended June 30, 1988.
10 (l) Executed Joint Venture Agreement between the
Company and MLTV, incorporated by reference
from the Company's Annual Report on Form 10-K
for year ended June 30, 1988.
10 (m) Warrant Purchase Agreement between the Company
and MLTV, incorporated by reference from the
Company's Annual Report on Form 10-K for year
ended June 30, 1988.
10 (p) Sale/Leaseback Agreement with Equitable Lomas.
Incorporated by reference from Form 10-Q for
quarter ended December 31, 1989.
10 (q) (1) Ontario Development Corporation offer of loan
(900,000 Canadian Dollars). Incorporated by
reference from the Company's Form 10-Q for
quarter ended March 31, 1990.
10 (q) (2) Ontario Development Corporation Notice of Change
#2 to Export Support Loan Program. Incorporated
by reference from the Company's Form 10-Q for the
quarter ended September 30, 1992.
10 (q) (3) First Amendment to Intercreditor Agreement dated May 18,
1994, incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994.
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
<S> <C> <C>
10(q) (4) Ontario Development Corporation Loan Agreement,
March 16, 1994, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1994.
10(v) Stock Purchase Agreement, September 25, 1990,
between the Company Purchasers identified therein.
Incorporated by reference from the Company's Form
10-Q for the quarter ended September 30, 1990.
10(w) Purchase Agreement dated as of December 8, 1995,
by and between Photon Technology International,
Inc. and MLTV with all exhibits, incorporated by
reference from the Company's Form 10-Q for the
quarter ended December 31, 1995.
10(x) Debenture Agreement dated October 31, 1995, by
and between Photon Technology International, Inc.
and CI. CPA. Business Venture Fund, Inc.,
incorporated by reference from the Company's
Form 10-Q for the quarter ended December 31,
1995.
Exhibit 10(y) Option Agreement dated October 31, 1995, by and
between Photon Technology International, Inc. and
C.I. CPA. Business Venture Fund, Inc., incorporated
by reference from the Company's Form 10-Q for the
quarter ended December 31, 1995.
10(z) Loan and Security Agreement dated June 26, 1996,
by and between Silicon Valley Bank and Photon
Technology International, Inc., with Exhibits.
21 Subsidiaries, incorporated by reference from the
Company's Annual Report on Form 10-K for year
ended June 30, 1988.
99 (a) 401(K) Plan, incorporated by reference from the
Company's Annual Report on Form 10-K for year
ended June 30, 1989.
99 (b) Notarial Record No. 1040/1991R CB/9414 from the
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
<S> <C> <C>
transfer of 27% of the German Distributor to Photon
Technology International, Inc. on July 11, 1991
incorporated by reference from the Company's
Annual Report on Form 10-K for the year ended
June 30, 1991.
27 Financial Data Schedule
</TABLE>
-5-
<PAGE>
EXHIBIT 3.(a)
CERTIFICATE OF AMENDMENT TO THE
RESTATED AND AMENDED CERTIFICATE OF INCORPORATION
OF
PHOTON TECHNOLOGY INTERNATIONAL, INC.
Pursuant to the provisions of the New Jersey Business Corporation Act, the
undersigned Corporation executes the following Certificate of Amendment to its
Restated And Amended Certificate of Incorporation:
1. The name of the Corporation is PHOTON TECHNOLOGY INTERNATIONAL, INC.
(the "Corporation").
2. Each of the Ten Million (10,000,000) authorized common shares of the
Corporation shall be converted into one-third (1/3) of one (1) share and the
aggregate number of common shares which the corporation shall have authority to
issue will decrease from Ten Million (10,000,000) to Three Million Three Hundred
Thirty-Three Thousand Three Hundred Thirty-Three (3,333,333) shares without par
value.
3. To accomplish the foregoing, Article Fourth of the Amended and
Restated Certificate of Incorporation is hereby amended to read as follows:
"FOURTH: The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is Three Million Three
Hundred Thirty-Three Thousand Eight Hundred Thirty-Three (3,333,833)
shares of stock, of which Three Million Three Hundred Thirty-Three
Thousand Three Hundred Thirty-Three (3,333,333) shares shall consist
of common stock, without par value, and Five Hundred (500) shares
shall consist of preferred stock with a par value of One Thousand
Dollars ($1,000) per share. The preferred shares shall be non-voting
and shall entitle each holder thereof to receive out of the surplus of
the Corporation a noncumulative dividend at the rate of Seven Percent
(7%) per annum, payable annually, before any dividend shall be set
apart or paid on the common stock for such year, and the remainder of
the surplus or net earnings applicable to the payment of dividends
shall be distributed as dividends among the holders of the common
stock, as and when the Board of Directors determines.
In the case of liquidation, dissolution, or distribution of assets of
the Corporation, the holders of preferred stock shall be paid the par
amount of such preferred stock before any amount shall be payable to
the holders of the common stock; and after the
1
<PAGE>
payment of the par amount of such preferred stock to the holders
thereof, the balance of the assets and funds of the Corporation shall
be distributed wholly among the holders of the common stock.
The Corporation shall have the right to redeem its preferred stock, or
any number of shares thereof, issued and outstanding, at any time by
paying to the holders thereof the sum of One Thousand Fifty Dollars
($1,050) per share. The Corporation shall also have the right at any
time to purchase all or any part of its preferred stock issued and
outstanding by paying to the respective holders thereof the sum of One
Thousand Fifty ($1,050) for each share of such preferred stock
redeemed together with the amount of such accrued dividends as may
have accumulated thereon at the time of redemption."
4. The foregoing amendment to the Restated and Amended Certificate of
Incorporation was approved and adopted by the directors of the Corporation on
May 2, 1996.
5. The foregoing amendment to the Restated and Amended Certificate of
Incorporation will not adversely affect the relative rights and preferences of
the holders of outstanding common and preferred shares of the Corporation and
the percentage of authorized shares of the Corporation that remain unissued
after the share combination will not exceed the percentage of authorized shares
of the Corporation that were unissued prior to the share combination.
This Certificate of Amendment has been executed on behalf of the
Corporation by its Vice President, Controller and Treasurer this 2nd day of May
1996.
/s/ William D. Looney
--------------------------------------
William D. Looney
Vice President, Controller and
Treasurer
2
<PAGE>
EXHIBIT 10.(z)
LOAN AND SECURITY AGREEMENT
By and Between
SILICON VALLEY BANK
and
PHOTON TECHNOLOGY INTERNATIONAL, INC.
Dated as of
June 26, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. DEFINITIONS AND CONSTRUCTION................................ 1
1.1 Definitions.......................................... 1
1.2 Accounting Terms..................................... 10
2. LOAN AND TERMS OF PAYMENT................................... 10
2.1 Advances............................................. 10
2.2 Overadvances......................................... 11
2.3 Interest Rates, Payments, and Calculations........... 11
2.4 Crediting Payments................................... 12
2.5 Fees................................................. 12
2.6 Additional Costs..................................... 13
2.7 Term................................................. 13
3. CONDITIONS OF LOANS......................................... 14
3.1 Conditions Precedent to Initial Advance.............. 14
3.2 Conditions Precedent to all Advances................. 15
4. CREATION OF SECURITY INTEREST............................... 15
4.1 Grant of Security Interest........................... 15
4.2 Delivery of Additional Documentation Required........ 15
4.3 Right to Inspect..................................... 15
5. REPRESENTATIONS AND WARRANTIES.............................. 16
5.1 Due Organization and Qualification................... 16
5.2 Due Authorization; No Conflict....................... 16
5.3 No Prior Encumbrances................................ 16
5.4 Bona Fide Eligible Accounts.......................... 16
5.5 Merchantable Inventory............................... 16
5.6 Name; Location of Chief Executive Office............. 16
5.7 Litigation........................................... 16
5.8 No Material Adverse Change in Financial Statements... 17
5.9 Solvency............................................. 17
5.10 Regulatory Compliance................................ 17
5.11 Environmental Condition.............................. 17
5.12 Taxes................................................ 17
5.13 Subsidiaries......................................... 18
5.14 Government Consents.................................. 18
5.15 Full Disclosure...................................... 18
6. AFFIRMATIVE COVENANTS....................................... 18
6.1 Good Standing........................................ 18
6.2 Government Compliance................................ 18
6.3 Financial Statements, Reports, Certificates.......... 18
6.4 Inventory; Returns................................... 19
</TABLE>
<PAGE>
-ii-
<TABLE>
<S> <C>
6.5 Taxes................................................ 19
6.6 Insurance............................................ 20
6.7 Depository........................................... 20
6.8 Quick Ratio.......................................... 20
6.9 Debt-Net Worth Ratio................................. 20
6.10 Tangible Net Worth................................... 20
6.11 Profitability........................................ 21
6.12 Capital Expenditures................................. 21
6.13 Further Assurances................................... 21
7. NEGATIVE COVENANTS.......................................... 21
7.1 Dispositions......................................... 21
7.2 Change in Business................................... 21
7.3 Mergers or Acquisitions.............................. 21
7.4 Indebtedness......................................... 21
7.5 Encumbrances......................................... 22
7.6 Distributions........................................ 22
7.7 Investments.......................................... 22
7.8 Transactions with Affiliates......................... 22
7.9 Subordinated Debt.................................... 22
7.10 Inventory............................................ 22
7.11 Compliance........................................... 22
8. EVENTS OF DEFAULT........................................... 23
8.1 Payment Default...................................... 23
8.2 Covenant Default..................................... 23
8.3 Material Adverse Change.............................. 23
8.4 Attachment........................................... 23
8.5 Insolvency........................................... 24
8.6 Other Agreements..................................... 24
8.7 Subordinated Debt.................................... 24
8.8 Judgments............................................ 24
8.9 Misrepresentations................................... 24
8.10 Subsidiary Agreement................................. 24
9. BANK'S RIGHTS AND REMEDIES.................................. 24
9.1 Rights and Remedies.................................. 24
9.2 Power of Attorney.................................... 26
9.3 Accounts Collection.................................. 26
9.4 Bank Expenses........................................ 26
9.5 Bank's Liability for Collateral...................... 27
9.6 Remedies Cumulative.................................. 27
9.7 Demand; Protest...................................... 27
</TABLE>
<PAGE>
-iii-
<TABLE>
<S> <C>
10. NOTICES..................................................... 27
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.................. 28
12. GENERAL PROVISIONS.......................................... 29
12.1 Successors and Assigns............................... 29
12.2 Indemnification...................................... 29
12.3 Time of Essence...................................... 29
12.4 Severability of Provisions........................... 29
12.5 Amendments in Writing, Integration................... 29
12.6 Counterparts......................................... 29
12.7 Survival............................................. 30
12.8 Confidentiality...................................... 30
12.9 Countersignature..................................... 30
</TABLE>
Exhibits and Schedules
- ----------------------
Exhibits
--------
A - Description of Collateral
B - Loan Payment/Advance Telephone Request Form
C - Borrowing Base Certificate
D - Compliance Certificate
E - Promissory Note
F - Pledge Agreement
G - Subsidiary Agreement
Schedules
---------
A - Disclosure Schedule
<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of June 26, 1996, by
and between SILICON VALLEY BANK ("Bank"), a California-chartered bank with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054
with a loan production office located at 40 William Street, Wellesley,
Massachusetts 02181 doing business under the name "Silicon Valley East", and
PHOTON TECHNOLOGY INTERNATIONAL, INC., a New Jersey corporation (the
"Borrower").
--------
RECITALS
--------
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms
-----------
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means an Advance under the Committed Revolving
Line.
"Affiliate" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan
<PAGE>
-2-
Documents, whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1 hereof.
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of California or The Commonwealth of
Massachusetts are authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
---------
hereto.
"Committed Revolving Line" means Two Million Dollars ($2,000,000).
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to (i)
any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided, however, that the term "Contingent
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that such
amount shall not in any event exceed the maximum amount of the obligations under
the guarantee or other support arrangement.
"Current Liabilities" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, as at such date,
plus, to the extent not already included therein, all outstanding Advances made
under this Agreement, including all Indebtedness that is payable upon demand or
within one year from the date of determination thereof unless
<PAGE>
-3-
such Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations owed at the end of
a given day.
"Deferred Revenues" means revenues that are deferred in accordance
with GAAP.
"Eligible Domestic Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
--------
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Domestic Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within ninety
(90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent (50%)
of whose Accounts the account debtor has failed to pay within ninety (90) days
of invoice date;
(c) Accounts with respect to which the account debtor is an officer,
employee, or agent of Borrower;
(d) Accounts with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the account debtor may be conditional;
(e) Accounts with respect to which the account debtor is an Affiliate
(other than by virtue of being directly or indirectly under common ownership or
control with Borrower) of Borrower;
(f) Accounts with respect to which the account debtor does not have
its principal place of business in the United States or Canada, except for
Eligible Foreign Accounts, and Accounts arising from products shipped to or
services provided to branches or offices located in the United States or Canada
of any account debtor that does not have its principal place of business in the
United States or Canada;
(g) Accounts with respect to which the account debtor is a federal,
state, or local governmental entity or any department, agency, or
instrumentality thereof, provided that, if the account debtor is the U.S.
federal government or a department, agency or instrumentally thereof, any such
Account shall be included if the amount of
<PAGE>
-4-
such Account together with the aggregate amount of all other such Accounts does
not exceed $250,000, provided further an Account beyond the aforementioned
dollar ceiling shall be included if (i) the Bank has consented to the inclusion
of such account, or (ii) the Borrower's right to payment thereunder has been
assigned to the Bank in compliance with the Assignment of Claims Act of 1940, as
amended.
(h) Accounts with respect to which Borrower is liable to the account
debtor for goods sold or services rendered by the account debtor to Borrower,
but only to the extent of any amounts owing to the account debtor against
amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-
five percent (25%) of all Accounts, to the extent such obligations exceed the
aforementioned percentage, except as approved in writing by Bank;
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably determines to be
doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which the
account debtor does not have its principal place of business in the United
States or Canada and that are: (1) covered by credit insurance in form and
amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one or
more letters of credit in favor of Bank as beneficiary, in an amount and of a
tenor, and issued by a financial institution, acceptable to Bank; or (3) that
Bank approves on a case-by-case basis.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in effect
from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred
<PAGE>
-5-
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy Code,
as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products intended for sale
or lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as is
temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above, and Borrower's Books relating to any of
the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Revolving Maturity Date" means June 25, 1997.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title,
<PAGE>
-6-
and chattel paper, and Borrower's Books relating to any of the foregoing.
"Note" means that certain promissory note of the Borrower the form of
which is attached hereto as Exhibit E.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.
"Payment Date" means the twenty-fifth calendar day of each month.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in the
Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course
of business;
(e) extensions, renewals and refinancings of the Indebtedness of the
Borrower or any of its Subsidiaries of the type referred to in clauses (b) and
(c) above, provided that the principal amount of such Indebtedness being
--------
extended, renewed or refinanced does not increase, the rate of interest thereon
does not increase and such Indebtedness does not impose obligations or
restrictions that are materially more burdensome on the Borrower;
(f) Indebtedness of the Borrower and its Subsidiaries under capital
leases in the aggregate principal amount not to exceed $200,000 at any time
outstanding;
(g) Indebtedness consisting of guarantees resulting from endorsement
of negotiable instruments for collection by the Borrower or any such Subsidiary
in the
<PAGE>
-7-
ordinary course of business;
(h) Indebtedness of the Borrower to any of its Subsidiaries or of any
of its Subsidiaries to another Subsidiary or the Borrower, in each case in the
ordinary course of indebtedness;
(i) guarantees by the Borrower of any Indebtedness of its
Subsidiaries to the extent permitted hereunder; and
(j) additional Indebtedness of the Borrower's German Subsidiary,
PhotoMed GmbH, in an aggregate principal amount not to exceed DM300,000 at any
time outstanding, and additional Indebtedness of the Borrower incurred in
respect of its U.K. operations not to exceed L50,000 at any time outstanding.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank;
(c) loans to employees, officers and directors for the purpose of
purchasing equity securities of the Borrower not exceeding $100,000 in any year;
(d) travel advances other employee loans and advances in the ordinary
course of business not to exceed $25,000 at any time outstanding;
(e) extensions of credit by the Borrower to any of its Subsidiaries
or by any of its Subsidiaries to another Subsidiary or the Borrower, in each
case in the ordinary course of business, provided, however, in no event shall
the aggregate dollar amount of any such outstanding extensions of credit (other
than indebtedness in the ordinary course of business) to PhotoMed GmbH exceed
$500,000 in the aggregate at any time; and
(f) extensions of trade credit to customers, in each case in the
ordinary course of business.
<PAGE>
-8-
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by appropriate
proceedings, provided the same have no priority over any of Bank's security
--------
interests;
(c) Liens (i) upon or in any equipment acquired or held by Borrower
or any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment, or (ii) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
--------
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
--------
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase;
(e) security interests in favor of Bank of Montreal being terminated
substantially concurrently with this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or other
similar liens arising in the ordinary course of business and security
obligations which are not delinquent;
(g) Liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods;
(h) Liens which constitute rights of set-off of a customary nature or
banker's liens on amounts on deposit, whether arising by contract or by
operation of law, in connection with arrangements entered into with depository
institutions in the ordinary course of business;
(i) any judgment, attachment or similar Lien in connection with any
event or circumstance described in Section 8.4 that is not an Event of Default
hereunder.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
<PAGE>
-9-
"Pledge Agreement" means that certain agreement between the Borrower
and the Bank, the form of which is attached hereto as Exhibit F.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"PTI - Canada" means Photon Technology International (CANADA), Inc., a
corporation organized under the laws of the Province of Ontario, Canada and a
wholly-owned subsidiary of the Borrower.
"Quick Assets" means, at any date as of which the amount thereof shall
be determined, the consolidated cash, cash-equivalents, accounts receivable and
investments, with maturities not to exceed 90 days, of Borrower determined in
accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer, the
Chief Financial Officer (if any) and the Controller/Treasurer of Borrower.
"Schedule" means the schedule of exceptions attached hereto.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i) any
general partnership interest or (ii) more than 50% of the stock of which by the
terms thereof ordinary voting power to elect the Board of Directors, managers or
trustees of the entity shall, at the time as of which any determination is being
made, be owned by Borrower, either directly or through an Affiliate.
"Subsidiary Agreement" means that certain agreement between the Bank
and PTI - Canada, the form of which is attached hereto as Exhibit G.
"Tangible Net Worth" means at any date as of which the amount thereof
shall be determined, the consolidated total assets of Borrower and its
Subsidiaries, plus the aggregate outstanding principal amount of Subordinated
----
Debt of the Borrower and its Subsidiaries, minus, without duplication, (i) the
-----
sum of any amounts attributable to (a) goodwill, (b) intangible items such as
unamortized debt discount and expense, patents, trade and service marks and
names, copyrights and research and development expenses except prepaid expenses,
and (c) all reserves not already deducted from assets, and (ii) Total
---
Liabilities.
"Total Liabilities" means at any date as of which the amount thereof
shall be
<PAGE>
-10-
determined, all obligations that should, in accordance with GAAP be classified
as liabilities on the consolidated balance sheet of Borrower, including in any
event all Indebtedness, but specifically excluding Subordinated Debt.
1.2 Accounting Terms. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Advances. Subject to and upon the terms and conditions of this
--------
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed (i) the Committed Revolving Line or the Borrowing Base, whichever is
less, minus (ii) the face amount of all outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit). For purposes of this Agreement,
"Borrowing Base" shall mean an amount equal to seventy-five percent (75%) of
Eligible Domestic Accounts and ninety percent (90%) of Eligible Foreign
Accounts. Subject to the terms and conditions of this Agreement, amounts
borrowed pursuant to this Section may be repaid and reborrowed at any time
during the term of this Agreement.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the
Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
- ---------
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank
will credit the amount of Advances made under this Section to Borrower's
deposit account.
The Committed Revolving Line shall terminate on the Revolving Maturity
Date, at which time all Advances under this Section and other amounts due under
this Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.
2.1.1 Letters of Credit.
-----------------
(a) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued letters of credit for the account of
Borrower in an aggregate face amount not to exceed (i) the lesser of the
Committed Revolving Line or the Borrowing Base minus (ii) the then
outstanding principal balance of the Advances provided that the face amount
of outstanding Letters of Credit (including
<PAGE>
-11-
drawn but unreimbursed Letters of Credit) shall not in any case exceed One
Million Dollars ($1,000,000). Each such letter of credit shall have an
expiration date no later than the Revolving Maturity Date provided that
Borrower's letter of credit reimbursement obligation shall be secured by
cash on terms acceptable to Bank at any time after the Revolving Maturity
Date if the term of this Agreement is not extended by Bank. All such
letters of credit shall be, in form and substance, acceptable to Bank in
its sole discretion and shall be subject to the terms and conditions of
Bank's form of application and letter of credit agreement.
(b) The Obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms
of this Agreement and such Letters of Credit, under all circumstances
whatsoever. Borrower shall indemnify, defend and hold Bank harmless from
any loss, cost, expense or liability, including, without limitation,
reasonable attorneys' fees, arising out of or in connection with any
letters of credit.
2.1.2 Letter of Credit Reimbursement; Reserve.
---------------------------------------
(a) Borrower may request that Bank issue a letter of credit payable
in a currency other than United States Dollars. If a demand for payment is
made under any such letter of credit, Bank shall treat such demand as an
advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange
in San Francisco, California, for sales of that other currency for cable
transfer to the country of which it is the currency.
(b) Upon the issuance of any letter of credit payable in a currency
other than United States Dollars, Bank shall create a reserve under the
Committed Revolving Line for letters of credit against fluctuations in
currency exchange rates, in an amount equal to twenty percent (20%) of the
face amount of such letter of credit. The amount of such reserve may be
amended by Bank from time to time to account for fluctuations in the
exchange rate. The availability of funds under the Committed Revolving Line
shall be reduced by the amount of such reserve for so long as such letter
of credit remains outstanding.
2.2 Overadvances. If, at any time or for any reason, the amount of
------------
Obligations owed by Borrower to Bank pursuant to Section 2.1 of this Agreement
is greater than the lesser of (i) the Committed Revolving Line or (ii) the
Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of
such excess.
2.3 Interest Rates, Payments, and Calculations.
------------------------------------------
(a) Interest Rate. Except as set forth in Section 2.3(b), any
-------------
Advances shall bear interest, on the average Daily Balance, at a rate equal
to one and one half (1-1/2)
<PAGE>
-12-
percentage points above the Prime Rate. Any amounts prepaid shall be
subject to a Prepayment Penalty, payable on the date of prepayment (the
"Prepayment Date").
(b) Default Rate. All Obligations shall bear interest, from and
------------
after the occurrence of an Event of Default, at a rate equal to four (4)
percentage points above the interest rate applicable immediately prior to
the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on the
--------
Payment Date of each month during the term hereof. Borrower hereby
authorizes Bank to debit any accounts with Bank, including, without
limitation, Account Number 3300031037 for payments of principal and
interest due on the Obligations and any other amounts owing by Borrower to
Bank. Bank will notify Borrower of all debits which Bank makes against
Borrower's accounts. Any such debits against Borrower's accounts in no way
shall be deemed a set-off. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from time
-----------
to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate
is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis
of a three hundred sixty (360) day year for the actual number of days
elapsed.
2.4 Crediting Payments. Prior to the occurrence and continuance of
------------------
an Event of Default, Bank shall credit a wire transfer of funds, check or other
item of payment to such deposit account or Obligation as Borrower specifies.
After the occurrence and during the continuance of an Event of Default, the
receipt by Bank of any wire transfer of funds, check, or other item of payment
shall be immediately applied to conditionally reduce Obligations, but shall not
be considered a payment on account unless such payment is of immediately
available federal funds or unless and until such check or other item of payment
is honored when presented for payment. Notwithstanding anything to the contrary
contained herein, any wire transfer or payment received by Bank after 12:00 noon
Pacific time shall be deemed to have been received by Bank as of the opening of
business on the immediately following Business Day. Whenever any payment to
Bank under the Loan Documents would otherwise be due (except by reason of
acceleration) on a date that is not a Business Day, such payment shall instead
be due on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
----
(a) Facility Fee. A Facility Fee equal to Twenty Thousand Dollars
------------
($20,000), which fee shall be due on the Closing Date and shall be fully
earned and
<PAGE>
-13-
non-refundable to which shall be applied the Borrower's prior good faith
deposit of $10,000;
(b) Financial Examination and Appraisal Fees. Bank's customary fees
----------------------------------------
and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and
for each appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon demand from Bank, including, without
-------------
limitation, upon the date hereof, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and expenses, and, after
the date hereof, all Bank Expenses, including reasonable attorneys' fees
and expenses, as and when they become due.
2.6 Additional Costs. In case any law, regulation, treaty or
----------------
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of principal or
interest or any other amounts payable hereunder by Borrower or otherwise
with respect to the transactions contemplated hereby (except for taxes on
the overall net income of Bank imposed by the United States of America or
any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 Term. Except as otherwise set forth herein, this Agreement shall
----
become effective on the Closing Date and, subject to Section , shall continue in
full force and effect for a term ending on the Revolving Maturity Date.
Notwithstanding the
<PAGE>
-14-
foregoing, Bank shall have the right to terminate its obligation to make
Advances under this Agreement immediately and without notice upon the occurrence
and during the continuance of an Event of Default. Notwithstanding termination,
Bank's Lien on the Collateral shall remain in effect for so long as any
Obligations are outstanding.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Advance. The obligation of Bank
---------------------------------------
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) the Note and any other Loan Documents;
(c) the Pledge Agreement together with stock certificates
representing shares approximately 66 1/2% but in no event equal to or in
excess of 66 2/3% of the outstanding number of shares of PTI - Canada
together with stock powers duly executed in blank;
(d) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(e) subordination agreements by certain Persons;
(f) an opinion of Borrower's counsel;
(g) financing statements (Forms UCC-1);
(h) documentation establishing a floating charge in favor of the Bank
on all the assets of the Borrower located in the United Kingdom;
(i) the Subsidiary Agreement between the Bank and PTI - Canada;
(j) insurance certificate;
(k) evidence of updated and currently effective insurance for
Eligible Foreign Accounts;
(l) payment of the fees and Bank Expenses then due specified in
Section hereof; and
(m) such other documents, and completion of such other matters, as
Bank
<PAGE>
-15-
may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of Bank to
------------------------------------
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1; and
(b) the representations and warranties contained in Section shall be
true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though
made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Advance. The making
of each Advance shall be deemed to be a representation and warranty by
Borrower on the date of such Advance as to the accuracy of the facts
referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants and pledges to Bank
--------------------------
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Borrower acknowledges that Bank may place a "hold" on any Deposit Account
pledged as Collateral to secure the Obligations.
4.2 Delivery of Additional Documentation Required. Borrower shall
---------------------------------------------
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees,
----------------
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
<PAGE>
-16-
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary
----------------------------------
is a corporation duly existing and in good standing under the laws of its state
or province of incorporation and qualified and licensed to do business in, and
is in good standing in, any state or province in which the conduct of its
business or its ownership of property requires that it be so qualified, except
to the extent that failure to so qualify as a foreign corporation would not have
a Material Adverse Effect on the Borrower.
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title
---------------------
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Domestic Accounts and
---------------------------
Eligible Foreign Accounts are bona fide existing obligations. The property
giving rise to such Eligible Domestic Accounts and Eligible Foreign Accounts has
been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Domestic Account or an Eligible Foreign Account.
5.5 Merchantable Inventory. All Inventory is in all material
----------------------
respects of good and marketable quality, free from all material defects.
5.6 Name; Location of Chief Executive Office. Except as disclosed in
----------------------------------------
the Perfection Certificate, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there are no
----------
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
<PAGE>
-17-
5.8 No Material Adverse Change in Financial Statements. All
--------------------------------------------------
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency. Borrower is solvent and able to pay its debts
--------
(including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act, and Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, noncompliance with which or violation of
which could have a Material Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any Subsidiary's
-----------------------
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the releasing, or otherwise
disposing of hazardous waste or hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused to be
-----
filed all tax returns required to be filed, and has paid all taxes reflected
therein, except for taxes the amount or validity of which the Borrower is
contesting in good faith by appropriate proceedings and with respect to which
the Borrower has taken adequate reserves in
<PAGE>
-18-
accordance with GAAP.
5.13 Subsidiaries. Borrower does not own any stock, partnership
------------
interest or other equity securities of any Person, except for its ownership of
all the outstanding capital stock of PTI - Canada, PhotoMed GmbH and Permitted
Investments.
5.14 Government Consents. Borrower and each Subsidiary has obtained
-------------------
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.15 Full Disclosure. No representation, warranty or other statement
---------------
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause
---------------------
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
-------------------------------------------
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each month (except for the last month of the Borrower's
fiscal year), a company prepared consolidated and consolidating balance sheet
and income statement covering Borrower's consolidated operations during such
period, certified by an officer of Borrower reasonably acceptable to Bank; (b)
as soon as available, but in any event within ninety (90) days after
<PAGE>
-19-
the end of Borrower's fiscal year, audited consolidated and consolidating
financial statements of Borrower prepared in accordance with GAAP, consistently
applied, together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank; (c)
within five (5) days of filing, copies of all statements, reports and notices
sent or made available generally by Borrower to its security holders or to any
holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission; (d) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower or
any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (e) such
budgets, sales projections, operating plans or other financial information as
Bank may reasonably request from time to time.
Within 15 days after the last day of each month, Borrower shall deliver to
Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
---------
accounts receivable and accounts payable.
Within 30 days after the last day of each month, Borrower shall deliver to
Bank with the monthly financial statements a Compliance Certificate signed by a
Responsible Officer in substantially the form of Exhibit D hereto.
---------
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good
------------------
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement.
Borrower shall promptly notify Bank of all returns and recoveries and of all
disputes and claims, where the return, recovery, dispute or claim involves more
than Fifty Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
-----
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent
<PAGE>
-20-
required by GAAP) by Borrower.
6.6 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the
Collateral in amounts and of a type that are customary to businesses
similar to Borrower's, provided, however, nothing in this Section 6.6(a)
shall be construed as requiring the Borrower to maintain credit insurance,
except to the extent necessary for the eligibility of an Eligible Foreign
Account.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional
loss payee thereof and all liability insurance policies shall show the Bank
as an additional insured, and shall specify that the insurer must give at
least twenty (20) days notice to Bank before canceling its policy for any
reason. Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All
proceeds payable under any such policy shall, at the option of Bank, be
payable to Bank to be applied on account of the Obligations.
6.7 Depository. Borrower shall maintain a depository account with
----------
Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last day of
-----------
each fiscal quarter, a ratio of Quick Assets to Current Liabilities less
Deferred Revenues of at least (i) 0.75 to 1.0, for the quarters ending March 31,
and June 30, 1996; and (ii) 1.0 to 1, for the quarter ending September 30, 1996
and each quarter thereafter.
6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the last
--------------------
day of each fiscal quarter, a ratio of Total Liabilities less Subordinated Debt
less Deferred Revenues to Tangible Net Worth plus Subordinated Debt of not more
than (i) 1.5 to 1.0, for the quarters ending March 31, 1996 and June 30, 1996;
and (ii) 1.4 to 1 for the quarter ending September 30, 1996; (iii) 1.25 to 1.0
for the quarters ending December 31, 1996 and March 31, 1997; and (iv) 1.0 to
1.0 for the quarter ending June 30, 1997 and each quarter thereafter.
6.10 Tangible Net Worth. Borrower shall maintain, as of the last day
------------------
of each fiscal quarter, Tangible Net Worth of not less than (i) Two Million Four
Hundred Thousand Dollars ($2,200,000) (the "Base Amount") for the quarter ending
-----------
March 31, 1996; and (ii) for the quarter ending June 30, 1996 and each quarter
thereafter, the Base Amount,
<PAGE>
-21-
plus (a) 100% of the Net Income (with no offsets for quarterly Net Losses)
earned, and 100% of the cash proceeds of any shares of capital stock of the
Company issued by the Borrower, in each case after March 31, 1996.
6.11 Profitability. Borrower shall have, as of the last day of each
-------------
fiscal quarter, a minimum profit of (i) One Dollar ($1.00), for the quarter
ending March 31, 1996; (ii) One Hundred Fifty Thousand Dollars ($150,000), for
the quarter ending June 30, 1996; (iii) One Dollar ($1.00), for the quarter
ending September 30, 1996; and (iv) One Hundred Fifty Thousand Dollars
($150,000), for the quarter ending December 31, 1996 and each quarter
thereafter.
6.12 Capital Expenditures. Borrower's maximum capital expenditures
--------------------
shall not exceed $500,000 in any fiscal year, without Bank's consent.
6.13 Further Assurances. At any time and from time to time Borrower
------------------
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until payment in full of the outstanding Obligations or for so
long as Bank may have any commitment to make any Advances, Borrower will not do
any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise
------------
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any of
------------------
its Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership,
management or directors. Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of
-----------------------
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
<PAGE>
-22-
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
------------
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution
-------------
or payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into
----------------------------
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
-----------------
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman, or
---------
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" controlled by an
----------
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act or violate any law or regulation,
which violation could have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral, or
permit any of its Subsidiaries to do any of the foregoing.
<PAGE>
-23-
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
---------------
Obligations.
8.2 Covenant Default.
----------------
(a) If Borrower fails to perform any obligation under Sections ,
through or violates any of the covenants contained in Section of this
Agreement, or
(b) If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained
in this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured,
has failed to cure such default within twenty (20) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof;
provided, however, that if the default cannot by its nature be cured within
the twenty (20) day period or cannot after diligent attempts by Borrower be
cured within such twenty (20) day period, and such default is likely to be
cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the
failure to have cured such default shall not be deemed an Event of Default
(provided that no Advances will be required to be made during such cure
period);
8.3 Material Adverse Change. If there (i) occurs a material adverse
-----------------------
change in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
----------
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof,
<PAGE>
-24-
provided that none of the foregoing shall constitute an Event of Default where
such action or event is stayed or an adequate bond has been posted pending a
good faith contest by Borrower (provided that no Advances will be required to be
made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within thirty (30) days
(provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
----------------
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money
---------
in an amount, individually or in the aggregate, the uninsured portion of which
is at least Fifty Thousand Dollars ($50,000), shall be rendered against
Borrower and shall remain unsatisfied and unstayed for a period of thirty (30)
days (provided that no Advances will be made prior to the satisfaction or stay
of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
------------------
material misstatement on or as of the date made exists now or hereafter in any
warranty or representation set forth (a) in this Agreement or in any certificate
delivered to Bank by any Responsible Officer pursuant to this Agreement or to
induce Bank to enter into this Agreement or any other Loan Document, or (b) in
the Subsidiary Agreement.
8.10 Subsidiary Agreement. If PTI-Canada breaches any covenant set
--------------------
forth in the Subsidiary Agreement and such breach shall continue for a period of
ten (10) days.
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the
-------------------
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in
Section all Obligations shall become immediately due and payable without
any action by Bank);
<PAGE>
-25-
(b) Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank in an amount
equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such
Letters of Credit, and Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be
paid or payable over the remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(e) Without notice to or demand upon Borrower, make such payments and
do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to
be prior or superior to its security interest and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's owned
premises, Borrower hereby grants Bank a license to enter into possession of
such premises and to occupy the same, without charge, for up to one hundred
twenty (120) days in order to exercise any of Bank's rights or remedies
provided herein, at law, in equity, or otherwise;
(f) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein)
the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section , to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or
any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral
and, in connection with Bank's exercise of its rights under this Section ,
Borrower's rights under all licenses and all franchise agreements shall
inure to Bank's benefit;
(h) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially
<PAGE>
-26-
reasonable;
(i) Bank may credit bid and purchase at any public sale; and
(j) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during
-----------------
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time from the date of this
-------------------
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account, provided, however,
as long as no Event of Default has occurred and is continuing, any such
notification and verification by the Bank shall only be made upon three Business
Days' prior notice to Borrower. Upon and during the continuance of an Event of
Default, Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish
-------------
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or
deposited by Bank shall constitute Bank Expenses, shall be immediately due and
payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by
<PAGE>
-27-
the Collateral. Any payments made by Bank shall not constitute an agreement by
Bank to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
-------------------
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
---------------
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
<PAGE>
-28-
If to Borrower: Photon Technology International, Inc.
1 Deerpark Drive
Suite F
South Brunswick, New Jersey 08852
Attn: William D. Looney
Vice President, Controller and Treasurer
FAX: (908) 329-9069
If to Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
Attn: Greg Linvill
Senior Vice President
FAX: (408) 496-2429
With copies to: Silicon Valley East
40 William Street
Wellesley, Massachusetts 02181
Attn:
FAX: (617) 431-9906
Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Attn: Dennis J. White, Esq.
Fax: (617) 338-2880
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. EACH OF BORROWER AND BANK HEREBY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE
COMMONWEALTH OF MASSACHUSETTS, BUT IF FOR ANY REASON THE BANK IS DENIED ACCESS
TO SUCH COURTS, THEN IN SUCH EVENT THE STATE AND FEDERAL COURTS LOCATED IN THE
COUNTY OF SANTA CLARA, STATE OF CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF
<PAGE>
-29-
THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY
RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to
----------------------
the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
-------- -------
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder, provided however, any such
transaction which would result in the Bank holding less than 50% of the then
outstanding Advances or in the Bank's being responsible for less than 50% of the
Committed Revolving Line shall be subject to the prior approval of the Borrower,
which shall not be unreasonably withheld.
12.2 Indemnification. Borrower shall defend, indemnify and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of
---------------
all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this
--------------------------
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be
----------------------------------
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
------------
<PAGE>
-30-
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made
--------
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section shall survive until all applicable statute of limitations periods
with respect to actions that may be brought against Bank have run, provided that
so long as the obligations set forth in the first sentence of this Section have
been satisfied, and Bank has no commitment to make any Advances or to make any
other loans to Borrower, Bank shall release all security interests granted
hereunder and redeliver all Collateral held by it in accordance with applicable
law.
12.8 Confidentiality. In handling any confidential information
---------------
Bank shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order and (iv) as may be required
in connection with the examination, audit or similar investigation of Bank.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
12.9 Countersignature. This agreement shall become effective only
----------------
when it shall have been executed by Borrower and Bank, provided, however, in no
event shall this agreement become effective until signed by an officer of the
Bank in California.
<PAGE>
-31-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
PHOTON TECHNOLOGY INTERNATIONAL, INC.
By: /s/ William D. Looney
-----------------------------------------------------
Name: William D. Looney
Title: Vice President, Controller and Treasurer
SILICON VALLEY BANK, doing business as SILICON
VALLEY EAST
By: /s/ Joan S. Parsons
---------------------------------------------------
Name:
Title:
SILICON VALLEY BANK
By: /s/ Christine Ware
----------------------------------------------------
Name:
Title:
(signed in Santa Clara, California)
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located but excluding goods and
equipment the acquisition of which is financed from sources other than Silicon
Valley Bank (the "Excluded Equipment");
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All general intangibles to the extent they consist of contract rights,
leases, purchase orders, customer lists, claims, computer records, literature,
reports, catalogs, income tax refunds, payments of insurance and rights to
payment of any kind now owned or hereafter acquired, but expressly excluding
patents, trademarks, copyrights and other intellectual property;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
(f) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: TIME:
- --------------------------------------------------------------------------------
FROM: PHOTON TECHNOLOGY INTERNATIONAL, INC.
-------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
PHONE NUMBER:
FROM ACCOUNT # TO ACCOUNT #
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
respects as of such date.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
Authorized Requester Phone #
Received By (Bank) Phone #
Authorized Signature (Bank)
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: Photon Technology International, Inc.
Bank: Silicon Valley Bank
<TABLE>
<CAPTION>
Commitment Amount: $2,000,000
- -------------------------------------------------------------------------------
<S> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ________ $
2. Additions (please explain on reverse) $
3. TOTAL ACCOUNTS RECEIVABLE $
ACCOUNTS DOMESTIC RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
5. Balance of 50% over 90 day accounts $
6. Concentration Limits $
7. Foreign Accounts (Canadian AR considered domestic) $
8. Governmental Accounts (in excess of $250,000 or
assigned to the Bank under the Federal Assignment
of Claim Act) $
9. Contra Accounts $
10. Promotion or Demo Accounts $
11. Intercompany/Employee Accounts $
12. Other (please explain on reverse) $
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
14. Eligible Accounts (#3 minus #13) $
15. LOAN VALUE OF ACCOUNTS (75% of #14) $
ELIGIBLE FOREIGN ACCOUNTS
16. TOTAL FOREIGN ACCOUNTS RECEIVABLE $
17. TOTAL FOREIGN ACCOUNTS RECEIVABLE DEDUCTIONS $
18. Eligible Foreign Accounts (#16 minus #17) $
19. LOAN VALUE OF FOREIGN ACCOUNTS (90% OF #18) $
BALANCES
20. Maximum Loan Amount $2,000,000
---------
21. Total Funds Available [Lesser of #20 or (#15 plus #19) $
22. Present balance owing on Line of Credit $
23. Outstanding under Sublimits for Letters of Credit $
24. RESERVE POSITION (#21 minus #23 and #24) $
</TABLE>
<PAGE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
By:
Authorized Signer
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: PHOTON TECHNOLOGY INTERNATIONAL, INC.
The undersigned authorized officer of Photon Technology International, Inc.
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in complete compliance for the period ending ______________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- ---------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
(except for last month of FY)
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- -------------------- -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 0.75:1.0 _____:1.0 Yes No
(through 6/30/96)
1.0:1.0 _____:1.0 Yes No
(9/30/97 and thereafter)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Minimum Tangible Net Worth $2,200,000 $________ Yes No
(at 3/31/96 plus 100%
of Net Income ($_____)
and 100% of net proceeds
from issuance of capital
stock ($______) after
3/31/96)
Total Liabilities less Subordinated 1.5:1.0 _____:1.0 Yes No
Debt, less Deferred Revenues/ (at 3/31/96 and 6/30/96)
Tangible Net Worth 1.4:1.0 _____:1.0 Yes No
(9/30/96)
1.25:1.0 _____:1.0 Yes No
(at 12/31/96 and 3/31/97)
1.0:1.0 _____:1.0 Yes No
(at 6/30/97 and each
quarter end thereafter)
Profitability: Quarterly $1 $________ Yes No
(at 3/31/96)
$150,000 $________ Yes No
(at 6/30/96)
$1 $________ Yes No
(at 9/30/96)
$150,000 $________ Yes No
(at 12/31/96 and
each quarter end
thereafter)
Capital Expenditures: Annually Not to exceed
$500,000 $________ Yes No
</TABLE>
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
- ---------------------------------------------
Signature
Title
Date
<PAGE>
EXHIBIT E
PROMISSORY NOTE
<PAGE>
PROMISSORY NOTE
$2,000,000 Wellesley, Massachusetts
As of June 26, 1996
For value received, the undersigned, PHOTON TECHNOLOGY INTERNATIONAL, INC.,
a New Jersey corporation (the "Borrower") promises to pay to SILICON VALLEY BANK
--------
(the "Bank") at the office of the Bank located at 3003 Tasman Drive, Santa
----
Clara, California 95054, or to its order, the lesser of Two Million Dollars
($2,000,000) or the outstanding principal amount hereunder, on June 25, 1997
(the "Maturity Date"), together with interest on the principal amount hereof
-------------
from time to time outstanding at a fluctuating rate per annum equal to the Prime
Rate (as defined below) plus 1.5% until the Maturity Date, payable monthly in
arrears on the twenty-fifth day of each calendar month occurring after the date
hereof and on the Maturity Date. The Borrower promises to pay on demand
interest at a per annum rate of interest equal to 5% per annum in excess of the
rate otherwise then in effect on any overdue principal (and to the extent
permitted by law, overdue interest). The Bank's "Prime Rate" is the per annum
rate of interest from time to time announced and made effective by the Bank as
its Prime Rate (which rate may or may not be the lowest rate available from the
Bank at any given time).
Computations of interest shall be made by the Bank on the basis of a year
of 360 days for the actual number of days occurring in the period for which such
interest is payable.
This note is the Note referred to in the Loan and Security Agreement of
even date herewith between the Bank and the Borrower (together with all related
schedules), as the same may be amended, modified or supplemented from time to
time (the "Loan and Security Agreement"), and is entitled to the benefits
---------------------------
thereof and of the other Loan Documents referred to therein, and is subject to
optional and mandatory prepayment as provided therein. This note is secured
inter alia by the Loan and Security Agreement dated of even date herewith by the
- ----- ----
Borrower in favor of the Bank, as the same may be amended, modified or
supplemented from time to time.
Upon the occurrence and during a continuance of any Event of Default under,
and as defined in, the Loan and Security Agreement, at the option of the Bank,
the principal amount then outstanding of and the accrued interest on the
advances under this note and all other amounts payable under this note shall
become immediately due and payable, without notice (including, without
limitation, notice of intent to accelerate), presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly waived by the
Borrower.
The Bank shall keep a record of the amount and the date of the making of
each advance pursuant to the Loan and Security Agreement and each payment of
principal with respect thereto by maintaining a computerized record of such
information and printouts of
<PAGE>
such computerized record, which computerized record, and the printouts thereof,
shall constitute prima facie evidence of the accuracy of the information so
----- -----
endorsed.
The undersigned agrees to pay all reasonable costs and expenses of the Bank
(including, without limitation, the reasonable fees and expenses of attorneys)
in connection with the enforcement of this note and the other Loan Documents and
the preservation of their respective rights hereunder and thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THIS NOTE HAS BEEN DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN THE
STATE OF CALIFORNIA.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE
TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE LOAN AND SECURITY
AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF
AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY
KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT
(AS DEFINED IN THE LOAN AND SECURITY AGREEMENT), OR THE TRANSACTIONS
CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT
OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL
JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN
WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED,
SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT
THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION,
AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY
IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS
<PAGE>
BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND
AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING
IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS,
RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL
RULES OF CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE
COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL.
PHOTON TECHNOLOGY INTERNATIONAL, INC.
By:
----------------------------------------------------
Name: William D. Looney
Title: Vice President, Controller and Treasurer
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
BORROWER: Photon Technology International, Inc. BANK: Silicon Valley Bank
================================================================================
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $2,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: _______________.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving Line
--------------
Amount paid to Borrower directly $________
Undisbursed Funds $________
Principal $________
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $________
$20,000 Loan Fee
$______ Accounts Receivables Audit
Other Charges Paid in Cash: $________
$ -0- Patent Filing Fees
$ -0- Trademark Filing Fees
$ -0- Copyright Filing Fees
$_____ Outside Counsel Fees and Expenses (Estimate)
(includes UCC Search & Filing Fees)
Total Charges Paid in Cash $________
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered 3300031037 the amount of any loan payment. If
the funds in the account are insufficient to cover any payment, Bank shall not
be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER
<PAGE>
REPRESENTS AND WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND
CORRECT AND THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL
CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK.
THIS AUTHORIZATION IS DATED AS OF ____________________, 199__.
BORROWER:
Authorized Officer
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: Photon Technology International, Inc. BANK: Silicon Valley Bank
- --------------------------------------------------------------------------------
INSURANCE REQUIREMENTS. Photon Technology International, Inc. ("Grantor")
understands that insurance coverage is required in connection with the extending
of a loan or the providing of other financial accommodations to Grantor by Bank.
These requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be canceled or diminished
without a minimum of twenty (20) days' prior
written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Bank. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of June 26, 1996, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement. The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 26,
1996.
GRANTOR:
X
Authorized Officer
<PAGE>
================================================================================
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
================================================================================
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 279,041
<SECURITIES> 0
<RECEIVABLES> 2,227,635
<ALLOWANCES> 3,280
<INVENTORY> 1,893,339
<CURRENT-ASSETS> 4,660,697
<PP&E> 1,954,341
<DEPRECIATION> 1,415,221
<TOTAL-ASSETS> 7,410,509
<CURRENT-LIABILITIES> 3,118,071
<BONDS> 0
0
0
<COMMON> 26,272
<OTHER-SE> 2,151,344
<TOTAL-LIABILITY-AND-EQUITY> 7,410,509
<SALES> 9,190,227
<TOTAL-REVENUES> 9,258,800
<CGS> 3,655,910
<TOTAL-COSTS> 4,126,412
<OTHER-EXPENSES> 1,113,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280,364
<INCOME-PRETAX> 82,503
<INCOME-TAX> (63,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,503
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.09
</TABLE>
