FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number: 33-10943-NY
PHOTON TECHNOLOGY INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2494774
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(State of Incorporation) (I.R.S. Employer Identification No.)
1 Deerpark Drive, Suite F, Monmouth Junction, NJ 08852
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (908) 329-0910
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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 [ ]
The number of shares of the registrants Common Stock, without par value,
outstanding as of March 31, 1997 was 1,237,186
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INDEX
PHOTON TECHNOLOGY INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1997
and June 30, 1996.................................................
Consolidated Statements of Operations for the
nine months ended March 31, 1997 and 1996.........................
Consolidated Statements of Operations for the
quarter ended March 31, 1997 and 1996.............................
Consolidated Statements of Cash Flows for the
nine months ended March 31, 1997 and 1996.........................
Notes to Consolidated Financial Statements
March 31, 1997....................................................
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................
Item 2. Changes in Securities.............................................
Item 3. Defaults Upon Senior Securities...................................
Item 4. Submission of Matters to a Vote of Security Holders...............
Item 5. Other Information.................................................
Item 6. Exhibits and Reports on Form 8-K..................................
SIGNATURES .....................................................................
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31 June 30
1997 1996
----------- -----------
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................... $ 1,861,747 $ 279,041
Trade accounts receivable, less allowance
of $2,985 ($3,280 for 1996) ................ 1,691,412 2,224,355
Inventory
Finished goods ............................ 839,418 788,139
Work in process ........................... 569,542 534,750
Raw materials ............................. 607,564 570,450
----------- -----------
2,016,524 1,893,339
Receivables from employees .................. 24,452 20,005
Prepaid expenses and other current assets ... 509,441 243,957
----------- -----------
TOTAL CURRENT ASSETS ..... 6,103,576 4,660,697
PROPERTY AND EQUIPMENT
Furniture and fixtures ...................... 156,036 143,663
Machinery and equipment ..................... 1,905,888 1,810,678
----------- -----------
2,061,924 1,954,341
LESS: Accumulated depreciation ............... (1,525,839) (1,415,221)
----------- -----------
536,085 539,120
DEFERRED INCOME TAX ASSET .................... 153,452 153,452
OTHER ASSETS ................................. 1,921,284 2,057,240
----------- -----------
$ 8,714,397 $ 7,410,509
=========== ===========
See Notes to Consolidated Financial Statements.
Note: The balance sheet at June 30, 1996 has been derived from audited financial
statements at that date, and does not include all the information and notes
required under generally accepted accounting principles for complete financial
statements.
</TABLE>
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<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS - Continued
March 31 June 30
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness ............................. $ 1,411,941 $ 1,522,397
Accounts payable .............................. 941,397 984,159
Deferred income ............................... 7,904 49,755
Accrued liabilities ........................... 173,187 171,355
Current maturities of capital lease obligations 19,336 9,624
Current maturities of long term debt .......... 186,566 380,781
----------- -----------
TOTAL CURRENT LIABILITIES ........ 2,740,331 3,118,071
DEFERRED INCOME TAX LIABILITY ................... 159,724 176,452
LONG TERM DEBT .................................. 1,916,478 1,885,557
CAPITAL LEASE OBLIGATIONS ....................... 99,380 52,813
MINORITY INTEREST - Canadian Subsidiary ......... 1,975,824 --
SHAREHOLDERS' EQUITY
Common stock .................................. 6,289,391 6,279,118
Accumulated deficit ........................... (3,966,279) (3,710,312)
Treasury stock, at cost ....................... (56,433) (56,433)
Cumulative foreign currency
translation adjustment ...................... (444,019) (334,757)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ....... 1,822,660 2,177,616
----------- -----------
$ 8,714,397 $ 7,410,509
=========== ===========
See Notes to Consolidated Financial Statements.
Note: The balance sheet at June 30, 1996 has been derived from the audited
financial statements at that date, and does not include all the information and
notes required under generally accepted accounting principles for complete
financial statements.
</TABLE>
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<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine Months Ended March 31,
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Net sales .................................. $ 6,026,443 $ 6,833,082
Other income ............................... 18,656 50,369
----------- -----------
6,045,099 6,883,451
COSTS AND EXPENSES
Cost of products sold ...................... 2,570,404 2,762,868
Selling, general and administrative ........ 2,598,964 2,743,298
Research and development ................... 667,711 691,652
Interest ................................... 244,879 201,487
Depreciation ............................... 115,633 131,003
Goodwill amortization ...................... 122,712 117,658
Foreign exchange (gain) loss ............... (2,373) 1,835
----------- -----------
6,317,930 6,649,801
Income (loss) before income taxes ............ (272,831) 233,650
Benefit for income taxes ..................... (16,866) (41,368)
----------- -----------
Net income (loss) ............................ $ (255,965) $ 275,018
=========== ===========
Net income (loss) per common share ........... $ (.21) $ .10
=========== ===========
Weighted average number of common shares and
common share equivalents outstanding ........ 1,237,181 2,881,233
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Third Quarter Ended March 31,
1997 1996
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<S> <C> <C>
REVENUES
Net sales .................................. $ 1,993,262 $ 2,366,341
Other income ............................... 6,971 18,167
----------- -----------
2,000,233 2,384,508
COSTS AND EXPENSES
Cost of products sold ...................... 921,620 987,049
Selling, general and administrative ........ 964,574 965,947
Research and development ................... 218,238 210,912
Interest ................................... 84,711 80,574
Depreciation ............................... 41,764 43,160
Goodwill amortization ...................... 36,360 42,526
Foreign exchange (gain) loss ............... (2,348) 7,146
----------- -----------
2,264,919 2,337,314
Income (loss) before income taxes ............ (264,686) 47,194
Benefit for income taxes ..................... (6,294) (14,714)
----------- -----------
Net income (loss) ............................ $ (258,392) $ 61,908
=========== ===========
Net income (loss) per common share ........... $ (.21) $ .02
=========== ===========
Weighted average number of common shares and
common share equivalents outstanding ........ 1,237,186 3,461,328
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended March 31,
OPERATING ACTIVITIES: 1997 1996
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<S> <C> <C>
Net income (loss) ....................................... $ (255,965) $ 275,018
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation ........................................ 115,633 131,003
Goodwill amortization ............................... 122,712 117,658
Other amortization-other intangible assets .......... 172,453 128,624
Deferred income tax benefit ......................... (16,866) (41,368)
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable .... 532,943 (514,992)
Increase in inventory ............................... (123,185) (469,534)
(Increase) decrease in receivables from employees ... (4,447) 7,207
Increase in prepaid expenses and other current assets (265,484) (392,181)
Decrease in other assets ............................ 34,308 --
Decrease in accounts payable and accrued liabilities (40,930) (65,393)
Decrease in deferred income ......................... (41,851) (41,660)
----------- -----------
Net cash provided (used) by operating activities ........ 229,321 (865,618)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment ................... (107,583) (137,945)
Capitalized software ................................. (226,000) (90,000)
----------- -----------
Net cash used by investing activities ................... (333,583) (227,945)
----------- -----------
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<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(continued(
For the Nine Months Ended March 31,
OPERATING ACTIVITIES: 1997 1996
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<S> <C> <C>
FINANCING ACTIVITIES:
Net proceeds from sale of preference stock ........... 1,975,824 --
Financing costs incurred ............................. (7,982) --
Investment in patents ................................ (2,850) (1,145)
(Decrease) increase in bank indebtedness ............. (110,456) 658,553
Repayment of long term debt .......................... (163,294) (196,720)
Increase in long term debt ........................... -- 1,103,505
Payment of capital lease obligation .................. (9,441) (18,219)
Proceeds from issuance of common stock-Employee
Stock Purchase Plan ................................. 10,273 --
Increase in capital lease obligations ................ 65,720 66,211
----------- -----------
Net cash provided by financing activities ............... 1,757,794 1,612,185
----------- -----------
Effect of exchange rate changes on cash ............... (70,826) (93,402)
----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS .................................. 1,582,706 425,220
CASH AND CASH EQUIVALENTS-BEGINNING ..................... 279,041 46,364
----------- -----------
CASH AND CASH EQUIVALENTS-ENDING ........................ $ 1,861,747 $ 471,584
=========== ===========
Supplemental disclosure of cash paid
Interest .............................................. $ 234,791 $ 201,487
Income taxes, Canadian Subsidiary ..................... -- $ 27,761
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
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 utilize fluorescence technology. The primary target 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 accompanying consolidated financial statements of Photon Technology
International, Inc. have been prepared in accordance with generally accepted
accounting principles in the United States for interim financial information and
with the instructions to Form 10K and Article 10 of regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending June 30,
1997. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report or Form 10K for
the year ended June 30, 1996.
NOTE B -- PREFERRED AND COMMON STOCK
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 every three (3)
shares of common stock. This Reverse Split impacted 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
basis on both a current and historical basis. As a result, the earnings per
share calculations reflect the impact of the Reverse Split.
Preferred stock, $1,000 par value: authorized 500 shares and no shares issued or
outstanding. Common stock, no par value: authorized 3,333,333 shares and issued
1,292,477 shares, including 55,291 shares in treasury stock.
On March 7, 1997, 296,296 preference shares of Photon Technology International
(Canada) Inc. ( a wholly-owned subsidiary) were issued to C.I. Covington Fund
Inc. for the aggregate price of US$ 2,000,000. The shares are non-voting,
non-cumulative, non-redeemable, retractable, non-participating, and without
nominal or par value. The aggregate purchase price of the preference shares of
US$ 2,000,000, net of financing costs of US$24,176, for a net amount of US$
1,975,824 is presented as minority interest on the consolidated balance sheet,
since the shares are owned by C.I. Covington Fund Inc. and not the Company.
<PAGE>
NOTE C -- COMPARATIVE AMOUNTS
Certain comparative amounts in the prior year have been reclassified to conform
with the presentation adopted in the current fiscal year.
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the quarter and nine months ended March 31, 1997 of $2.0 million
and $6.0 million, respectively, decreased $373,000 or 15.8% and $807,000 or
11.8%, respectively, compared to the same periods of fiscal 1996. These
decreases primarily were the result of temporary delays in obtaining materials
and parts from certain suppliers.
Total revenues for the quarter and nine months ended March 31, 1997 of $2.0
million and $6.0 million, respectively, which include net sales and other
income, decreased $384,000 or 16.1% and $838,000 or 12.2%, respectively,
compared to the corresponding prior year periods. This performance reflects both
the sales impact and lower other income. Other income for the first nine months
of fiscal 1997 decreased by $32,000 primarily due to a non-recurring insurance
rebate for workers' compensation.
Cost of products sold for the third quarter of fiscal 1997 was $922,000 or 46.2%
of net sales, which compares to $987,000 or 41.7% of net sales in the same
period of fiscal 1996. The decrease of $65,000 or 6.6%, was due both to lower
sales and continued cost reductions in the plant production operations. The
lower cost of products sold for the nine months ended March 31, 1997 of $2.6
million or 42.7% of net sales compared to $2.8 million or 40.4% of net sales for
the prior year principally was the result of lower sales and maintaining
production efficiency. The percentage increase in cost of products sold for both
the third quarter and nine months of fiscal 1997 compared to the prior year
periods primarily related to the mix of products sold and material cost price
increases.
Selling (including marketing), general and administrative expenses of $965,000
for the third quarter and $2.6 million for the nine months of fiscal 1997
decreased $1,000 or 0.1% and $144,000 or 5.3%, respectively, for the comparable
periods of fiscal 1996. These expenses as a percentage of net sales increased
from 40.8% to 48.4% in the third quarter and from 40.1% to 43.1% for the nine
month period. The percentage of net sales increase for the quarter and nine
month periods primarily related to the decrease in sales during fiscal 1997.
Additionally, administrative expenses were higher due to financing related
expenses. The decrease in the dollar amount of the selling, general and
administrative expenses primarily related to volume-sensitive selling expenses
and holding discretionary spending on marketing support programs.
Research and development expenditures for the third quarter of fiscal 1997 were
$218,000 or 10.9% of net sales and for the first nine months of fiscal 1997
totaled $668,000 or 11.1% of net sales. In comparison to the prior year, these
expenses were $211,000 or 8.9% for the quarter and $692,000 or 10.1% for the
nine month period. An additional $226,000 of software development expenses,
which represents 3.8% of net sales, was capitalized for the nine months ended
March 31, 1997 and represents incremental spending in comparison to the same
prior year period. These increased expenses for the current quarter and the
capitalized expenses are due to an additional level of project activity for new
products.
Interest expense for the nine months ended March 31, 1997 of $245,000 increased
$44,000 or 21.5% in comparison to the prior year period. This increase primarily
relates to interest on long term debt related to financing activities in the
prior year. Interest expense for the second quarter of fiscal 1997 of $85,000
increased $4,000 or 5.1% compared to fiscal 1996.
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
Depreciation and amortization of $42,000 for the third quarter of fiscal 1997
decreased by $1,000 or 3.2% and of $116,000 for the first nine months of fiscal
1997 decreased by $15,000 or 11.7% in comparison to the same periods of fiscal
1996. This decrease was primarily due to the impact of lower depreciation on
equipment located at the Canadian facility.
Goodwill amortization of $36,000 for the third quarter of fiscal year 1997
decreased by $6,000 or 14.5% and of $123,000 for the nine months ended March 31,
1997, increased by $5,000 or 4.3% compared to the same prior fiscal year
periods. The increase for the nine months represent the full incremental effect
of additional capitalized start-up expenses incurred during the second half of
fiscal 1996 that are associated with the formation of the German subsidiary in
September 1994.
Foreign exchange represented nominal gains of $2,348 and $2,373 for the quarter
and nine months ended March 31, 1997, respectively. The current year gain in
comparison to the loss of $2,000 for the first nine months of the prior year was
due to the mix of transactional activity.
Deferred tax benefits of $6,000 for the quarter and $17,000 for the nine months
compared to $15,000 and $41,000, respectively for the same prior year periods.
The deferred tax benefits relate to timing differences between book and tax
income related to the Canadian and German subsidiaries. The tax benefits
represent a continuing partial reversal of the liability that was established
during the year ended June 30, 1995.
The Company reported a net loss of $258,000 for the third quarter of fiscal
1997, compared to net income of $62,000 for the same prior year quarter. For the
nine month period ended March 31, 1997, the net loss was $258,000 in comparison
to net income of $275,000 for the same prior year nine months. The sales
decrease, the required sustained level of investment expense in research and
development, interest expense related to the level of overall debt, continued
expenses related to certification of products in Europe, and the recognition of
expenses related to prepaid financing were the major impacts on income.
LIQUIDITY AND CAPITAL RESOURCES
The working capital of the Company at March 31, 1997 was $3,363,000 compared to
$1,543,000 at June 30, 1996; an increase of $1,820,000 or 118.0%.
Current assets of $6,103,576 increased $1,443,000 or 31.0% from the end of
fiscal 1996. This change primarily reflected an increase of $1,583,000 in cash
and cash equivalents, which was mainly the result of the sale of preference
stock of Photon Technology International (Canada) Inc. (see below for further
discussion). The decrease in trade receivables of $533,000 or 24.0% primarily
related to strong collection activity and the lower sales volume during the nine
months ended March 31, 1997. The trade accounts receivable balance of $1.7
million represents 2.5 months of sales in comparison to 2.8 months of sales at
June 30, 1996. The inventory level of $2.0 million at March 31, 1997, which is
an increase of $123,000 or 6.5% compared to the inventory balance at June 30,
1996, reflects both a higher level of production volume to support future sales,
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
the build up of in-transit production shipment to international locations for
completion of orders, which will be billed in the subsequent quarter, and new
product inventory. This inventory balance represents 5.6 months of sales in
inventory based on anticipated sales volume and compares to 5.3 months of sales
in inventory at the end of fiscal 1996. The increase in other current assets
mainly related to the timing of: (a) prepaid employee benefit insurance; (b)
prepaid general insurance premiums; (c) reimbursable value added taxes (VAT) and
general goods and services taxes (GST); (d) prepaid legal services; and (e)
prepaid trade show deposits and related marketing costs.
Current liabilities of $2,740,000 decreased $378,000 or 12.1% in comparison to
the prior year end. This decrease principally was due to: (a) reduction in notes
payable to banks of $110,000 or 7.3% based the replacement of the Bank of
Montreal credit facility with the Silicon Valley Bank line of credit and on the
pay down of the German subsidiary bank line; (b) reduction in trade accounts
payable of $43,000 or 4.3% based on payment activity; (c) lower deferred income
of $42,000 or 84.1% due to revenue recognition on customer orders; and (d) a
reduction in the current portion of long term debt by $194,000 or 51.0%
primarily related to the modification of the working capital line of credit
facility with Silicon Valley Bank (see discussion below).
On July 26, 1996 the Company secured a new working capital line of credit
facility with Silicon Valley Bank 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 25, 1997) and carries an interest rate charge at the prime rate
plus 1.5% (approximately 10.0% at March 31, 1997). 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. No clean-up
period is required during the term. The securities related to the Covington
Capital debenture and the MLTV note are subordinated to the bank debt. The line
of credit provided $1.2 million to repay the Bank of Montreal facility. The
balance outstanding at March 31, 1997 was $921,000. An inventory sublimit
advance of $278,000 was applied against the line of credit on February 13, 1997
(see discussion below). The Company has not borrowed additional amounts on this
line as of March 31, 1997.
Effective November 27, 1996, the working capital line of credit facility with
Silicon Valley Bank was amended and restated. The modified Loan and Security
Agreement (No.1) includes the following amendments: (a) change in bank covenants
and waivers; (b) change in definition of certain terms used in the original loan
agreement; (c) modification of the principal payment terms on the subordinated
debt held by MLTV (see discussion below); and (d) inventory sublimit advances.
The inventory sublimit advances are available through February 14,1997, in an
amount equal to 20% of the value of the "eligible inventory" (the total amount
of the advances shall not exceed $300,000). Interest on the advances is due and
payable monthly and bears interest at the prime rate plus 2.0% (approximately
10.5% at March 31, 1997); and any outstanding amounts as of February 14, 1997,
will be payable in ten equal monthly installments, including interest, beginning
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
February 14, 1997 and ending November 15, 1997. As of March 31, 1997, the
Company is in the process of having the agreement modified (Loan and Security
Agreement No. 2) in which the payments commence on March 15, 1997 and end on
December 15, 1997. As of March 31, 1997, the Company has received one inventory
sublimit advance of $278,000.
Bank indebtedness also includes the outstanding balance of $213,000 US (357,000
DM) at March 31, 1997 drawn on a credit facility with the Stadparkasse Bank in
Wedel, Germany. The total line of credit available is 500,000 DM, which was
established in conjunction with the formation of the Germany Subsidiary
(September 1994). Interest is charged on a quarterly basis at the German Federal
Bank's discount rate plus two points.
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 initial capital lease obligation was
for $90,000 Canadian dollars ($66,000 US). The term of the financing is 5.5
years at an annual interest rate of 10.4% with a purchase option of $9,000
Canadian dollars at the end of the lease term. The outstanding balance at March
31, 1997, was $74,000 Canadian dollars ($53,000 US)
In March 1997 the Company entered into an agreement with New Court Credit
Corporation of Toronto, Canada to finance the purchase of a second CNC milling
machine for the Canadian plant machine shop. The initial capital lease was for
$91,000 Canadian dollars ($66,000 US). The term of the financing is 5.5 years at
an annual interest rate of 9.2%, with a purchase option of $9,100 Canadian
dollars at the end of the lease term. The outstanding balance at March 31, 1997,
was $90,000 Canadian dollars ($65,000 US).
The December 1995 MLTV Agreement provided for repayment of subordinated debt in
the amount of $771,000, the purchase of 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 principal amount of $20,000 per 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 $651,000. 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 defer
four payments from June 1996 through September 1996. As of March 31, 1997, the
outstanding balance remained at $651,000. The deferred amount will be subject to
interest in accordance with the agreement.
As a result of the modification of the credit facility with Silicon Valley Bank
on November 27, 1996, the Company has agreed to make no payments of principal on
this subordinated debt to MLTV prior to December 1997 unless the Company has
closed a "qualified offering" prior to such date. If a qualified offering has
not closed, the Company will pay MTLV a balloon payment of $631,000. Once a
qualified offering has closed, principal payments of the subordinated debt to
MLTV shall resume according to the previous schedule, as provided in the terms
of the subordinated note. The Company purchased the technology rights and the
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
related joint venture interest by issuing to MTLV 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 $0.875 per share (prior to the reverse split) based on the
market bid price. The technology rights and joint venture interest of $875,000
is included in "other assets" as an intangible asset 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. As of March 31, 1997, the
asset balance was $766,000, net of accumulated amortization of $109,000.
Amortization was $66,000 for the nine months ended March 31, 1997. This
agreement was a strategic one for the Company, since the Company now owns the
technology rights, and no future liability for royalties exists.
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. This Covington Agreement includes a first
option to purchase 83,333 shares of the Company's common stock at a purchase
price of $3.75 per share for a term of five (5) years and a second option to
purchase 133,333 shares of the Company's common stock at purchase price of $7.50
per share until October 1996. After October 31, 1996 the purchase price
increased to $9.75 per share and this option expires on October 31, 1997. (The
share amounts and price per share are stated on a "reverse split" basis). This
debt is classified primarily as long term debt with principal payments of
$36,500 due in fiscal 1997 recorded as current debt. The balance outstanding as
of June 30, 1996 was $1,100,000 US ($1.5 million Canadian dollars). The balance
outstanding at March 31, 1997 was $1,061,000 US ($1,469,000 Canadian dollars).
Payments of principal commenced on November 30, 1996 in the amount of $6,250
Canadian dollars (approximately $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, to increase
marketing support, and to continue research and development efforts in both
hardware and software for new products and product cost reductions. In
conjunction with the issuance and sale of preference shares of Photon Technology
International (Canada) Inc. to C.I. Covington Fund Inc. (see discussion below),
the above referenced Option Agreement of October 31, 1995, was amended. The
First Amendment Agreement to the option agreement provided for the following
major changes: (a) the number of second option shares was increased by an
additional 50,000 common stock shares of the Company for a total of 183,333
shares; (b) the second option price for the additional 50,000 shares is $9.00
per share (the purchase price for the original 133,333 shares remains at $9.75);
and (c) the second option expiration date has been extended by twenty-four (24)
months to October 31, 1999. No exercise of options has occurred through March
31, 1997.
Long term debt also includes a 400,000 DM loan ($ 291,000 US) by a private
individual to the Company's wholly-owned German subsidiary, which was made 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
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
October 1, 1994 through the start date of the payments at an interest rate of
5.25% plus the prevailing German bank discount rate. The loan has clauses which
would allow both slower and/or faster payments contingent upon the cash flow of
the German subsidiary's operations and upon agreement with the individual. As of
June 30, 1996, the principal amount of 353,000 German marks ($231,000 US) was
outstanding, and as of March 31, 1997, the principal amount outstanding was
257,000 DM ($154,000 US).
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
(fiscal year 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 outstanding balance at March 31, 1997 was $329,000
Canadian dollars ($238,000 US). 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 were made in July 1994. 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.
In March 1997 296,296 preference shares of Photon Technology International
(Canada) Inc. ("Photon Canada," a wholly-owned subsidiary) were issued and sold
to C.I. Covington Fund Inc. ("Covington") for the aggregate purchase price of
$2,000,000 US.
Articles of Amendment of Photon Canada were issued effective March 7, 1997 to
create a new class of non-voting, non-cumulative, non-redeemable, retractable,
non-participating preference shares without nominal or par value, being the
preference shares to be purchased by Covington.
The share rights for the newly created preference shares define the redemption
price for each preference share as the then current market price for each common
share Photon Technology International, Inc. ("Photon U.S.") plus any declared
and unpaid dividends on the said preference shares.
With respect to dividends, the holders of the preference shares, in the
discretion of the directors of Photon Canada, but always in preference and
priority to any payment of dividends on the common shares in each year, are
entitled to non-cumulative dividends at the rate of $0.50 US per share, but the
holders of the preference shares are not entitled to any additional dividends
whatsoever. If such dividends are not declared in any year, any right to same is
forever extinguished.
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Any holder (for example, Covington) of a preference share is entitled on or
after March 7, 1998 to require Photon Canada to redeem all, but no less than
all, of such holder's preference shares for the redemption price which is the
current market price at the time of redemption. The share provisions also
contain an adjustment provision in relation to the redemption price on the basis
that each preference share is and is intended to be the equivalent of each
common share of Photon U.S., to the effect that any change in the equivalence of
the preference shares with the common shares of Photon U.S., as determined in
good faith by the board of directors of Photon U.S., will result in such
adjustment to the redemption price as is required to re-establish such
equivalence.
The holders of the preference shares are not entitled to participate in any
distribution of property of Photon Canada among its shareholders other than to
received an amount equal to the redemption price for their shares and no more.
The aggregate purchase price of the preference shares of $2,000,000, net of
financing costs of $24,176, for a net amount of $1,975,824 is shown as minority
interest on the consolidated balance sheet, since the shares are owned by
Covington and not by the Company (Photon U.S.).
In the area of operating activities, the Company's collections on trade
receivables and continued reduction in cost of sales (on a percentage of net
sales basis) during this period provided a strong contribution to working
capital. This contribution supported continued: (a) investments in sales,
marketing, research and development; (b) meeting regulatory obligations to sell
into the European Community ("EC"); and (c) payment of fees, interest, and
principal related to financing agreements.
The investments in the operating areas of sales, marketing, and research and
development are strategic to future growth and have an impact on 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 certification 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 into the EC and be a potential
competitive disadvantage.
The payment of interest, principal 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 debt through operating short term lines of
credit, term loans, and subordinated debt and equity financing. 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 scheduled payment
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
agreements. 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 terms when balloon payments come due -- MLTV in December 1997 (fiscal
year 1998) and Covington Capital in October 2000 (fiscal year 2001).
These investments and expenses have continued to put downward pressure on the
bottom line/income, and operating cash flow in that our investment exceeded the
sales growth contribution to date. These investments and expenses are necessary
and 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. It will continue cost reductions to improve
sales margin contributions.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor any of its subsidiaries is currently a party to
nor is any of their property the subject of any legal proceedings which would be
material to the business or financial condition of the Company on a consolidated
basis.
Item 2. Changes in Securities.
The Articles of Amendment of Photon Technology International (Canada)
Inc. (a wholly-owned subsidiary) were issued, effective March 7, 1997, to create
a new class of unlimited number of non-voting, non-cumulative, non-redeemable,
retractable, non-participating preference shares without nominal or par value.
As of March 31, 1997, 296,296 preference shares of Photon Technology
International (Canada) Inc. have been issued and are outstanding.
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders on Monday, December
9, 1996. The only matters considered and voted upon at the meeting were the
election of three directors for a three-year term, and approval of an Amendment
to the Stock Option Plan.
The voting for three directors: Franklin J. Iris, M. Grant Brown, and
Robert E. Curry was 1,145,021 for and 12,765 withheld.
The voting for the Amendment to the Stock Option Plan was 884,373 for,
18,065 against, and 255,348 withheld.
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herewith:
(1) Articles of Amendment of Photon Technology International
(Canada) Inc., dated March 7, 1997.
(2) Special Resolutions of the sole Director and sole
Shareholder of Photon Technology International (Canada)
Inc., dated March 7, 1997.
(3) Purchase Agreement and Put Agreement, effective March 7,
1997, by and among C.I. Covington Fund Inc., Photon
Technology International (Canada) Inc., and Photon
Technology International, Inc.
(b) Reports on Form 8-K
None
<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: May 14, 1997 By:/s/ Charles G. Marianik
-----------------------
Charles G. Marianik
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
Date: May 14, 1997 By: /s/Ronald J. Kovach
-------------------
Ronald J. Kovach
Senior Vice President, Corporate
Secretary, and Director
<PAGE>
ARTICLES OF AMENDMENT
1. The present name of the corporation is:
PHOTON TECHNOLOGY INTERNATIONAL (CANADA) INC.
2. The name of the corporation is changed to (if applicable):
3. Date of incorporation/amalgamation:
12 June 1987
4. The articles of the corporation are amended as follows:
1. To create a new class of an unlimited number of non-voting,
non-cumulative, non-redeemable, retractable, non-participating
preference shares without nominal or par value.
2. The rights, privileges, restrictions and conditions attaching to the
common shares and preference shares are as follows:
(a) COMMON SHARE RIGHTS
(I) Voting Rights:
The holders of the common shares shall be entitled to vote at all meetings of
shareholders of the corporation on the basis of one vote for each common share
held, except meetings at which only holders of a specified class of shares are
entitled to vote.
(ii) Dividends:
The holders of the common shares shall be entitled to receive, subject to the
rights of the holders of any other classes of shares, any dividends declared on
the common shares by the directors of the corporation.
(iii) Distribution of Remaining Property:
The holders of the common shares shall be entitled to receive, subject to the
rights of the holders of any other classes of liquidation, dissolution or
winding up of the corporation, whether voluntary or involuntary.
(b) PREFERENCE SHARE RIGHTS
(I) Definitions:
In these share conditions, the following words and phrases shall have the
following meanings:
"redemption amount" of each preference share means the then current
market price of each common share of Photon U.S.;
<PAGE>
"current market price" of each common share of Photon U.S. or other
securities or property means on any given date the simple average of the closing
prices (or if there were no sales on such date, the mean between the closing bid
and ask quotations on such date) per common share of Photon U.S. or other
securities or property on the principal trading market therefor for any 20
consecutive trading days selected by the corporation commencing not later than
45 trading days before such date, or, if such common shares or other securities
or property are not traded on a published market during such 45 day period for
at least 20 consecutive trading days, a price to be established in good faith by
the board of directors of the corporation as the fair market value of such
common shares or other securities or property;
"redemption price" of each preference share means the redemption amount
plus an amount equal to all dividends which have at the relevant time been
declared on the said share but which have not then been paid, if any;
"Act" means the Business Corporations Act (Ontario); and
"Photon U.S." means Photon Technology International, Inc., a
corporation incorporated under the laws of the State of New Jersey.
(ii) Voting Rights:
The holders of the preference shares shall not be entitled to receive notice of
or to attend or vote at any meetings of shareholders of the corporation except
where required under the Act.
(iii) Fixed Non-Cumulative Dividends:
Subject to the Act, the holders of the preference shares shall in each financial
year of the corporation in the discretion of the directors, but always in
preference and priority to any payment of dividends on the common shares for
that year, be entitled to non-cumulative dividends at the rate of $0.50 per
share. In any financial year, after providing for the full dividend on the
preference shares, the directors may, in their discretion, declare dividends on
the common shares in such amounts as they may determine. The holders of the
preference shares shall not be entitled to any dividend other than as provided
for in this section.
If in any financial year of the corporation, the board of directors in its
discretion shall not declare the non-cumulative dividends or any part thereof on
the preference shares for such year, then the rights of the holders of the
preference shares to such dividends or to any undeclared part thereof for such
year shall be forever extinguished.
(iv) Redemption Rights:
The corporation shall not be entitled to redeem the whole or any part of the
issued preference shares except as provided in paragraph (v) below.
(v) Retraction Rights:
Subject to the Act, at any time on or after March 7th, 1998, a holder of any
preference share shall be entitled to require the corporation to redeem all, but
not less than all of the preference shares registered in the name of such holder
on the books of the corporation. A holder of such shares wishing redemption
shall tender to the corporation at its registered office a request in writing
(the"redemption notice") specifying that the holder desires to have all of the
preference shares registered in the holder's name redeemed by the corporation
<PAGE>
and the business day, which shall not be less than thirty (30) days after the
day on which the request in writing is given to the corporation, on which the
holder desires to have the corporation redeem the said shares (the "redemption
date"), together with the share certificate(s) representing the preference
shares which the registered holder desires to have the corporation redeem. On
receipt of the redemption notice and said share certificate(s), the corporation
shall, on or before the redemption date, redeem the shares by paying to the
registered holder an amount equal to the redemption price determined as at the
date of the redemption notice (or if not a business day, on the next following
business day). Payment shall be made by cheque payable at any branch in Canada
of one of the corporation's bankers for the time being. The preference shares
shall be redeemed on the date that such payment is made and from that date the
redeemed shares shall cease to be entitled to dividends and the holder shall not
be entitled to exercise any of the rights of a shareholder in respect of the
said shares, unless payment of the redemption price is not made on or before the
redemption date, in which case the rights of the holder of the said shares shall
remain unaffected.
(vi) Adjustment to Redemption Amount:
The redemption amount was determined on the basis that each preference share is
and is intended to be the equivalent of each common share of Photon U.S.
outstanding on the date hereof. Accordingly, if at any time before the
retraction rights are fully exercised any change occurs in the capital of Photon
U.S. or the corporation which has the effect of changing the equivalence of the
preference shares and the common shares of Photon U.S., as determined in good
faith by the board of directors of Photon U.S., the redemption amount will be
adjusted as required to re-establish that equivalence. Without limiting the
generality of the foregoing, if, at any time before the retraction rights are
fully exercised, Photon U.S.:
(a) subdivides its common shares (which shall be read to include the
effect of any issue of common shares to its shareholders in their capacity as
such, whether as dividends either in the ordinary course of business or by way
of stock split or otherwise or for no consideration or less than fair value
consideration) or consolidates its common shares, the appropriate proportionate
increase or decrease, as the case requires, shall be made to the price that, but
for the adjustment, would be the redemption amount; or
(b) effects any reorganization or reclassification of its share
capital, or a merger or amalgamation with any other corporation, the redemption
amount shall thereafter be equal to the current market price of the securities
and other property into which each common share of Photon U.S. has been changed,
reclassified or converted.
<PAGE>
(vii) Distribution of Property:
In the event of the liquidation, dissolution or winding up of the corporation,
whether voluntary or involuntary, the holders of the preference shares shall be
entitled to receive, before any distribution of any part of the assets of the
corporation among the holders of the common shares, an amount equal to the
redemption price for their shares and no more.
5. The amendment has been duly authorized as required by Sections 168 and
170 (as applicable) of the Business Corporations Act.
6. The resolution authorizing the amendment was approved by the
shareholders/directors (as applicable) of the corporation on
7 March, 1997
These articles are signed in duplicate.
PHOTON TECHNOLOGY
INTERNATIONAL (CANADA) INC.
By/Par: /s/____________________Secretary
<PAGE>
SPECIAL RESOLUTIONS OF THE SOLE DIRECTOR AND SOLE SHAREHOLDER OF
PHOTON TECHNOLOGY INTERNATIONAL (CANADA) INC.
WHEREAS it is in the interests of the corporation to issue and sell to C.I.
Covington Fund Inc. ("Covington") two hundred ninety-six thousand, two hundred
ninety-six (296,296) preference shares of the corporation for a price of U.S.
$2,000,000.00, and to enter into a purchase agreement and such other related
agreements with Covington as the president of the corporation, in his sole
discretion may deem necessary or advisable;
AND WHEREAS pursuant to the unanimous shareholder agreement of the corporation
dated as of the 28th day of September, 1987, the directors of the corporation
are relieved from their rights and powers and the sole shareholder of the
corporation has assumed all such rights and powers;
NOW THEREFORE BE IT RESOLVED AS SPECIAL RESOLUTIONS THAT:
SALE OF PREFERENCE SHARES TO C.I. COVINGTON FUND INC.
1. The acceptance by Charles G. Marianik, president of the corporation, on
behalf of the corporation, of the terms of sale of the said 296,296 preference
shares of the corporation to Covington is hereby ratified, approved and
confirmed.
2. The corporation do enter into, execute and deliver to Covington a purchase
agreement (the "Purchase Agreement") in respect of the said sale of preference
shares to Covington for U.S. $2,000,000.00 substantially in the form of the
draft Purchase Agreement presented to the sole shareholder, subject to such
alterations, amendments or additions to which the president of the corporation
may agree, the president hereby being authorized in that regard, and such other
documents and agreements as may be required in relation thereto (collectively
the "Documents").
3. Upon payment of the purchase price for the preference shares, the corporation
do allot and issue to Covington 296,296 fully paid and non-assessable preference
shares of the corporation, and deliver a share certificate therefor, all as
provided in the said Purchase Agreement.
4. The execution by the president of the corporation of the Documents shall be
conclusive proof of his agreement to any amendments, alterations or additions
incorporated therein and his authority herein to agree to same.
5. The president of the corporation alone be and he is hereby authorized to
execute and deliver the Documents on behalf of the corporation and each of the
officers of the corporation is hereby authorized to execute all such other
documents and writings and to do all such acts and things as may be necessary or
desirable for fulfilling the corporation's obligations under the Documents and
each of them.
EACH OF THE FOREGOING FIVE (5) SPECIAL RESOLUTIONS is hereby consented to by the
signature of the sole director of the corporation pursuant to the Business
Corporations Act (Ontario) this 7th day of March, 1997.
/s/Michael Beattie
- - ------------------
MICHAEL BEATTIE
<PAGE>
EACH OF THE FOREGOING FIVE (5) SPECIAL RESOLUTIONS is hereby consented to by the
signature of the sole shareholder of the corporation pursuant to the Business
Corporations Act (Ontario) this 7th day of March, 1997.
PHOTON TECHNOLOGY INTERNATIONAL, INC.
Per: ___________________________________
Duly Authorized Officer
<PAGE>
PURCHASE AGREEMENT
THIS AGREEMENT is made as of this 7th day of March, 1997
B E T W E E N:
C.I. COVINGTON FUND INC., a corporation incorporated
under the laws of Canada
(the "Purchaser")
- and -
PHOTON TECHNOLOGY INTERNATIONAL (CANADA) INC., a
corporation incorporated under the laws of Ontario
("Photon")
-and -
PHOTON TECHNOLOGY INTERNATIONAL, INC., a corporation
incorporated under the laws of the State of New Jersey
("Photon U.S.")
The parties hereto agree as follows:
Purchase of Preferred Shares
1. The Purchaser shall purchase from Photon and Photon shall issue and
sell to the Purchaser 296,296 preferred shares (the "Purchased Shares")
in the capital of Photon for an aggregate purchase price of U.S.
$2,000,000 (the "Purchase Price"). The Purchased Shares shall have
rights, privileges, restrictions and conditions substantially in the
form of those set out in Schedule "A" attached hereto.
2. The purchase and sale of the Purchased Shares shall be completed on
March 7, 1997 (the "Closing") at 2:00 p.m. at the offices of the
Purchaser's solicitors, Tory Tory DesLauriers & Binnington, Suite 3000,
Aetna Tower, Toronto-Dominion Centre, Toronto, Ontario, M5K 1N2. At the
Closing, the Purchaser will pay the Purchase Price by certified cheque
or bank draft to Photon against delivery to the Purchaser of the share
certificate representing the Purchased Shares.
3. The Purchaser agrees that, for so long as the put agreement dated the
date hereof between the Purchaser and Photon U.S. (the "Put Agreement")
remains in full force and effect, the Purchaser will not exercise its
right, pursuant to the rights, privileges, restrictions and conditions
attaching to the Purchased Shares, to require Photon to redeem the
Purchased Shares unless Photon U.S. is in default of its obligation to
purchase the Purchased Shares from the Purchaser pursuant to the Put
Agreement for a period of 10 days.
<PAGE>
Covenants of Photon and Photon U.S.
4. Photon and Photon U.S. jointly and severally covenant and agree with
the Purchaser that, so long as the Purchaser continues to be a
shareholder of Photon or Photon U.S.:
(a) Photon will use the proceeds from the sale of the Purchased
Shares under this Agreement only for the purposes of ;
(b) Photon will not use the proceeds from the sale of the
Purchased Shares under this Agreement for any of the purposes
set out in Schedule "B" attached hereto;
(c) each of Photon and Photon U.S. will maintain its corporate
existence; carry on and conduct its business in a proper and
efficient manner and in accordance with all applicable laws;
not materially alter the kind of business carried on by it;
observe and perform all of its obligations under leases,
licences and other agreements to which it is a party so as to
preserve and protect its property and the income therefrom;
and keep proper books of account with correct entries of all
transactions in relation to its business;
(d) each of Photon and Photon U.S. will pay or cause to be paid,
all costs, liabilities, taxes, levies or assessments properly
payable or validly assessed or imposed upon it as and when the
same shall become due and payable, save and except when and so
long as the validity of the costs, liabilities, taxes, levies
or assessments is being contested by it diligently and in good
faith;
(e) Photon U.S. will furnish or cause to be furnished to the
Purchaser concurrently with the filing thereof, copies of all
10-K, 10-Q or similar reports and all other disclosure
documents of Photon U.S. filed with the relevant securities
regulatory authorities;
(f) each of Photon and Photon U.S. will give the Purchaser prompt
written notice of any material adverse change in the
condition, financial or otherwise, of its or Photon U.S.'s
business;
(g) each of Photon and Photon U.S. will notify the Purchaser
promptly of the details of any material claims or litigation
affecting Photon or Photon U.S.; and
(h) each of Photon and Photon U.S. will not, without the prior
written consent of the Purchaser (which consent shall not be
unreasonably withheld or delayed), amend or permit to be
amended any Material Contract (as defined below) in a manner
that may have a material adverse effect upon the business or
prospects of Photon or Photon U.S.
<PAGE>
Representations and Warranties of Photon and Photon U.S.
5. Photon and Photon U.S. hereby jointly and severally represent and
warrant to the Purchaser as follows:
(a) Photon is duly incorporated and validly existing under the
laws of Ontario;
(b) The authorized capital of Photon consists of common shares and
preferred shares, of which common shares and no preferred
shares have been duly issued and are outstanding as fully paid
and non-assessable.
(c) Photon has the corporate power and capacity to enter into, and
to perform its obligations under, this Agreement. The
execution, delivery and performance of this Agreement and all
other agreements, instruments and documents required to be
delivered by Photon at the Closing have been duly authorized
by all necessary corporate action on the part of Photon. This
Agreement has been duly executed and delivered by Photon and
is a valid and binding obligation of Photon, enforceable in
accordance with its terms, subject to the usual exceptions as
to bankruptcy and the availability of equitable remedies;
(d) the entering into of this Agreement, the issue and sale of the
Purchased Shares and the performance by Photon of its
obligations under this Agreement will not contravene, breach
or result in any default under the articles, by-laws,
constating documents or other organizational documents of
Photon or under any mortgage, lease, agreement, other legally
binding instrument, licence, permit, statute, regulation,
order, judgment, decree or law to which it is party or by
which it may be bound;
(e) no authorization, consent or approval of, or filing with or
notice to, any governmental agency, regulatory body, court or
other third party, other than those already obtained, is
required in connection with the execution, delivery or
performance of this Agreement by Photon or the issue and sale
of the Purchased Shares hereunder;
(f) there are no agreements or restrictions which limit or
restrict the issue of the Purchased Shares to the Purchaser;
(g) the audited consolidated financial statements of Photon U.S.
and its subsidiaries (including Photon) for the year ended
June 30, 1996 and the unaudited interim consolidated financial
statements of Photon U.S. and its subsidiaries (including
Photon) for the period ended , 1997 are true and correct, have
been prepared in accordance with generally accepted accounting
principles consistently applied (subject to usual year-end
adjustments in the case of the interim financial statements)
and fairly present the financial position of Photon U.S. and
its subsidiaries (including Photon) and the results of their
operations at the times and for the periods indicated and
Photon U.S. and its subsidiaries (including Photon) have no
<PAGE>
outstanding liabilities, contingent or otherwise, other than
those disclosed in the audited financial statements and trade
or business obligations subsequently incurred in the ordinary
course of business and the provisions for taxes in the audited
and interim financial statements are adequate to cover all
taxes, including interest and penalties, payable in respect of
the operations and other transactions of Photon U.S. and its
subsidiaries (including Photon) for all periods up to , 1997.
(h) the agreements (the "Material Agreements') set out in Schedule
"C" attached hereto are all the agreements which could be
considered material to the operations, financial or otherwise,
of Photon [and Photon U.S.] and all of the Material Contracts
are in full force and effect on the date hereof and constitute
valid, legal and binding obligations of Photon or Photon U.S.,
as the case may be, in accordance with their terms, and none
of the Material Contracts have been amended since the date of
their execution and delivery;
(i) Photon has no subsidiaries;
(j) there are no agreements, options, warrants, rights of
conversion or other rights pursuant to which Photon is, or may
become, obligated to issue any shares or any securities
convertible or exchangeable, directly or indirectly, into any
shares of Photon;
(k) except for that of which the Purchaser has been made aware in
writing, Photon is not party to any unanimous or other
shareholders' agreement which limits the powers of its board
of directors to direct the management of the business and
affairs of Photon;
(l) each of Photon and Photon U.S. is conducting its business in
compliance with all applicable laws, regulations, by-laws and
ordinances of each jurisdiction in which it conducts its
business;
(m) each of Photon and Photon U.S. holds all permits, licences,
approvals and franchises (collectively, "permits") which it
requires, or is required to have, to own its properties and
assets and to carry on its business as presently conducted by
it. All such permits are in full force and effect; Photon and
Photon U.S. are in compliance with all the terms and
conditions relating to such permits; and there are no
proceedings in progress, pending or threatened which may
result in revocation, cancellation, suspension or any adverse
modification of any such permits;
(n) there is no court, administrative, regulatory or similar
proceeding (whether civil, quasi-criminal or criminal);
arbitration or other dispute settlement procedure;
investigation or inquiry by any governmental, administrative,
regulatory or similar body; or any similar matter or
proceeding (collectively "proceedings") against or involving
Photon or Photon U.S. (whether in progress or threatened)
which, if determined adversely to Photon or Photon U.S., would
materially adversely affect the business or the financial
condition or future prospects of Photon or Photon U.S., no
<PAGE>
event has occurred which might give rise to any proceedings
and there is no judgment, decree, injunction, rule, award or
order of any court, government department, board, commission,
agency, arbitrator or similar body outstanding against Photon
or Photon U.S.;
(o) neither Photon nor Photon U.S. is in material default or
breach of any contract, agreement, lease or instrument to
which it is a party or by which it may be bound and there
exist no state of facts which after notice or lapse of time,
or both would constitute such a default or breach, and all
such contracts, agreements, leases and other instruments are
now in good standing and Photon or Photon U.S., as the case
may be, is entitled to all benefits, rights and privileges
thereunder;
(p) the corporate records and minute books of Photon and Photon
U.S. contain complete and accurate minutes of all meetings of
directors and committees thereof and shareholders held since
its date of incorporation, and all such meetings were duly
called and held. The share certificate books, register of
shareholders, register of transfers and registers of directors
of Photon and Photon U.S. are complete and accurate;
(q) Photon pays 50 per cent or more of its wages and salaries to
employees whose ordinary place of employment is a permanent
establishment of Photon located in the Province of Ontario;
(r) Photon has 50 per cent or more of its full-time employees
employed in an active business carried on by Photon in the
Province of Ontario;
(s) the total assets of the Group do not exceed $50,000,000 (in
this Agreement, "Group" means Photon together with all related
corporations and partnerships within the meaning of the Labour
Sponsored Venture Capital Corporations Act, 1992 (Ontario), as
amended);
(t) the Group does not have more than 500 employees;
(u) neither Photon nor Photon U.S. is aware of any material facts
or circumstances which have not been disclosed to Purchaser in
writing that may have a material adverse impact on Photon or
Photon U.S.; and
(v) the foregoing representations and warranties will be true on
and as of the Closing with the same effect as if made on and
as of the Closing.
Representations and Warranties of the Purchaser
6. The Purchaser hereby represents and warrants to Photon and Photon U.S.
as follows:
(a) The Purchaser is duly incorporated and validly existing under
the laws of Canada;
<PAGE>
(b) The Purchaser has the corporate power and capacity to enter
into, and to perform its obligations under, this Agreement and
the Put Agreement. The execution, delivery and performance of
this Agreement, the Put Agreement and all other agreements,
instruments and documents required to be delivered by the
Purchaser at Closing have been duly authorized by all
necessary corporate action on the part of the Purchaser. Each
of this Agreement and the Put Agreement has been duly executed
and delivered by the Purchaser and is a valid and binding
obligation of the Purchaser, enforceable in accordance with
its terms, subject to the usual exceptions as to bankruptcy
and the availability of equitable remedies;
(c) the entering into of this Agreement and the Put Agreement, the
purchase of the Purchased Shares and the performance by the
Purchaser of any of its obligations thereunder, will not
contravene, breach or result in any default under the
articles, by-laws, constating documents or other
organizational documents of the Purchaser or under any
mortgage, lease, agreement, other legally binding instrument,
licence, permit, statute, regulation, order, judgment, decree
or law to which it is party or by which it may be bound; and
(d) the foregoing representations and warranties will be true on
and as of the Closing with the same effect as if made on and
as of the Closing.
Time of the Essence
7. Time is of the essence of this Agreement.
Governing Law
8. This Agreement will be governed by and construed in accordance with the
laws of the Province of Ontario and the laws of Canada applicable
therein.
<PAGE>
Counterparts
9. This Agreement may be signed in counterparts and each of such
counterpart shall constitute an original document and such
counterparts, taken together, shall constitute one and the same
instrument.
C.I. COVINGTON FUND INC.
/s/M. Grant Brown
-----------------
M. Grant Brown
PHOTON TECHNOLOGY INTERNATIONAL (CANADA INC.)
/s/Charles Marianik
Charles Marianik
President and Chief
Executive Officer
PHOTON TECHNOLOGY INTERNATIONAL, INC.
/s/Charles Marianik
Charles Marianik
President and Chief
Executive Officer
<PAGE>
SCHEDULE "A"
PREFERENCE SHARE RIGHTS
(i) Definitions:
In these share conditions, the following words and phrases shall have the
following meanings:
"redemption amount" of each preference share means the then current market price
of each common share of Photon U.S.;
"current market price" of each common share of Photon U.S. or other securities
or property means on any given date the simple average of the closing prices (or
if mere were no sales on such date, the mean between the closing bid and ask
quotations on such date) per common share of Photon U.S. or other securities or
property on the principal trading market therefor for any 20 consecutive trading
days selected by Photon commencing not later than 45 trading days before such
date, or, if such common shares or other securities or property are not traded
on a published market during such 45 day period for at least 20 consecutive
trading days, a price to be established in good faith by the board of directors
of Photon as the fair market value of such common shares or other securities or
property;
"redemption price" of each preference share means the redemption amount plus an
amount equal to all dividends which have at the relevant time been declared on
me said share but which have not then been paid, if any;
"Act" means the Business Corporations Act (Ontario); and
"Photon U.S." means Photon Technology International, Inc., a corporation
incorporated under the laws of the State of New Jersey.
(ii) Voting Rights:
The holders of the preference shares shall not be entitled to receive notice of
or to attend or vote at any meetings of shareholders of Photon except where
required under the Act.
(iii) Fixed Non-Cumulative Dividends:
Subject to the Act, the holders of the preference shares shall in each financial
year of Photon in the discretion of the directors, but always in preference and
priority to any payment of dividends on the common shares for that year, be
entitled to non-cumulative dividends at the rate of $0.50 per share. In any
financial year, after providing for the full dividend on the preference shares,
the directors may, in their discretion, declare dividends on the common shares
in such amounts as they may determine. The holders of the preference shares
shall not be entitled to any dividend other than as provided for in this
section.
If in any financial year of Photon, the board of directors in its discretion
shall not declare the non-cumulative dividends or any part thereof on the
preference shares for such year, then the rights of the holders of the
preference shares to such dividends or to any undeclared part thereof for such
year shall be forever extinguished.
(iv) Redemption Rights:
Photon shall not be entitled to redeem the whole or any part of the issued
preference shares except as provided in paragraph (v) below.
(v) Retraction Rights:
Subject to the Act, at any time on or after March 7th, 1998, a holder of any
preference share shall be entitled to require Photon to redeem all, but not less
than all of the preference shares registered in the name of such holder on me
books of Photon. A holder of such shares wishing redemption shall tender to
Photon at its registered office a request in writing (the "redemption notice")
specifying that the holder desires to have all of the preference shares
registered in the holder's name redeemed by Photon and the business day, which
shall not be less than thirty (30) days after the day on which the request in
writing is given to Photon, on which the holder desires to have Photon redeem
the said shares (the "redemption date"), together with the share certificate(s)
representing the preference shares which the registered holder desires to have
photon redeem. On receipt of the redemption notice and said share
certificate(s), Photon shall, On or before the redemption date, redeem the
shares by paying to the registered holder an amount equal to the redemption
price determined as at the date of the redemption notice (or if not a business
day, on the next following business day). Payment shall be made by cheque
payable at any branch in Canada of one of Photon's bankers for the time being.
The preference shares shall be redeemed on the date that such payment is made
and from that date the redeemed shares shall cease to be entitled to dividends
and the holder shall not be entitled to exercise any of the rights of a
shareholder in respect of the said shares, unless payment of the redemption
price is not made on or before the redemption date, in which case the rights of
the holder of the said shares shall remain unaffected.
(vi) Adjustment to Redemption Amount:
The redemption amount was determined on the basis that each preference share is
and is intended to be the equivalent of each common share of Photon U.S.
outstanding on the date hereof. Accordingly, if at any time before the
retraction rights are fully exercised any change occurs in the capital of Photon
U.S. or Photon which has the effect of changing the equivalence of the
preference shares and the common shares of Photon U.S., as determined in good
faith by the board of directors of Photon U.S., the redemption amount will be
adjusted as required to reestablish that equivalence. Without limiting the
generality of the foregoing, if, at any time before the retraction rights are
fully exercised, Photon U.S.:
(a) subdivides its common shares (which shall be read to include the
effect of any issue of common shares to its shareholders in their
capacity as such, whether as dividends either in the ordinary course
of business or by way of stock split or otherwise or for no
consideration or less than fair value consideration) or consolidates
its common shares, the appropriate proportionate increase or
decrease, as the case requires, shall be made to the price that, but
for the adjustment, would be me redemption amount; or
(b) effects any reorganization or reclassification of its share capital,
or a merger or amalgamation with any other corporation, the
redemption amount shall thereafter be equal to the current market
price of the securities and other property into which each common
share of Photon U.S. has been changed, reclassified or converted.
(vii) Distribution of Property:
In the event of the liquidation, dissolution or winding up of Photon, whether
voluntary or involuntary, the holders of the preference shares shall be entitled
to receive, before any distribution of any part of the assets of Photon among
the holders of the common shares, an amount equal to the redemption price for
their shares and no more.
<PAGE>
SCHEDULE "B"
Photon shall not use the proceeds of the issue of the Purchased Shares
for any of the following purposes:
(i) relending;
(ii) investment in land except land that is incidental and
ancillary to the business activity or activities in which
Photon is primarily engaged;
(iii) reinvestment outside Canada;
(iv) purchasing or acquiring the securities of any person;
(v) financing the purchase or sale of goods or services provided
to Photon by or through a shareholder of Covington or a person
related to a shareholder of Covington;
(vi) the payment of dividends;
(vii) the return of capital to a shareholder of Photon; or
(viii) the payment of the principal amount of outstanding liabilities
owing to shareholders of Covington or to persons related to
such shareholders.
<PAGE>
PUT AGREEMENT
THIS AGREEMENT is made the 7 day of March, 1997
B E T W E E N:
PHOTON TECHNOLOGY INTERNATIONAL, INC., a corporation
incorporated under the laws of the State of New Jersey
("Photon U.S.")
- and -
C.I. COVINGTON FUND INC., a corporation incorporated
under the laws of Canada
("Covington")
RECITALS:
A. Photon U.S. owns all of the issued and outstanding common shares in the
capital of Photon Technology International (Canada) Inc. ("Photon
Canada");
B. Covington owns 296,296 preference shares in the capital of Photon
Canada;
C. Photon U.S. has agreed to grant to Covington the right to require
Photon U.S. to purchase from Covington the 296,296 preference shares on
the terms and conditions contained in this Agreement.
NOW THEREFORE in consideration of the sum of $1.00 now paid by
Covington to Photon U.S. and other good and valuable consideration (the receipt
and sufficiency of which are hereby acknowledged), the parties hereto agree as
follows:
1. Definitions
"Common Shares" means the common shares in the capital of
Photon U.S. as such shares exist at the date hereof, or any
other shares or other securities or property which derive
therefrom;
"Current Market Price" of the Common Shares or other
securities or property at any date means the simple average of
the closing prices (or if there were no sales on any
particular day, the mean between the closing bid and ask
quotations on such day) per Common Share or other securities
or property on the principal trading market therefor for any
20 consecutive trading days selected by Photon U.S. commencing
not later than 45 trading days before such date, or, if such
Common Shares or other securities or property are not traded
on a published market during such 45 day period for at least
20 consecutive trading days, a price to be established in good
faith by the board of directors of the Corporation as the fair
market value of the Common Shares or other securities or
property; and
<PAGE>
"Purchase Agreement" means the Purchase Agreement dated the
date hereof between Covington, Photon U.S. and Photon Canada
pursuant to which Covington agrees to purchase 296,296
preference shares of Photon Canada.
2. Grant of Put Right
Subject to the terms and conditions of this Agreement, Photon
U.S. grants to Covington an irrevocable, transferable right (the "Put Right") to
require Photon U.S. to purchase from Covington at any time or from time to time
on or after March 7, 1998 some or all of the 296,296 preference shares in the
capital of Photon Canada owned by Covington (the "Preference Shares"). The
purchase price for each Preference Share shall be equal to the Current Market
Price of the Common Shares on the last business day preceding the day on which
Covington exercises the Put Right in respect of that Preference Share (the "Put
Price"), subject to adjustment as provided in section 5. The Put Right may be
exercised by Covington at any time on or after March 7, 1998, provided that, on
each exercise, it must be exercised with respect to at least 75,000 Preference
Shares, or the balance of the Preference Shares then held by Covington, if a
smaller number. Upon the exercise by Covington of the Put Right, Photon U.S.
agrees to purchase from Covington all Preference Shares in respect of which
Covington exercises the Put Right at the Put Price.
3. Payment of the Put Price
Upon the exercise by Covington of the Put Right, Photon U.S.
shall satisfy the Put Price to be paid to Covington for the Preference Shares in
respect of which Covington exercises its Put Right in cash or, at the option of
Photon U.S., by issuing Common Shares to Covington. For this purpose, Common
Shares will be deemed to have a value equal to the Current Market Price of such
Common Shares on the last business day preceding the day on which Covington
exercised its Put Right.
4. Exercise of Put Right
To exercise the Put Right, Covington shall give notice to
Photon U.S. specifying the number of Preference Shares to be tendered to it for
purchase (which shall be at least 75,000 Preference Shares or such smaller
number as Covington then holds), accompanied by a share certificate or
certificates representing the number of Preference Shares so tendered, duly
endorsed for transfer. Not later than five business days after due exercise by
Covington of the Put Right, Photon U.S. shall give notice to Covington of its
election of whether it will satisfy the Put Price in respect of the Preference
Shares so tendered in cash or by the issue of Common Shares. If the Put Price is
to be satisfied in cash, Photon U.S. shall, within one business day of sending
its notice to Covington, pay the amount of the Put Price by wire transfer or by
delivery of a certified cheque to Covington.
If the Put Price is to be satisfied by the issue of Common
Shares, Covington shall have the right, instead of having such shares issued to
it, to direct Photon U.S. to issue the Common Shares in the name of a third
party to whom Covington simultaneously assigns its rights hereunder to acquire
the shares. Photon U.S. shall comply with any such direction from Covington and
shall issue, sign, register and deliver the necessary certificates representing
the Common Shares as soon as reasonably practicable. Such certificates shall
bear a restrictive legend to the effect that these shares cannot be sold except
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act") or unless, in the opinion of counsel to Photon
U.S., an exemption from such registration exists.
<PAGE>
If less than all the Preference Shares are tendered and
purchased by Photon U.S. on any exercise of the Put Right, then the Put Right
shall continue and remain in force as to that number of Preference Shares with
respect to which Covington has not previously exercised the Put Right.
5. Adjustment Provisions
The parties agree that the Put Price was determined on the
basis that each Preference Share is and is intended to be the equivalent of each
Common Share of Photon U.S. outstanding on the date hereof. Accordingly, if at
any time before the Put Right is fully exercised, any change occurs in the
capital of Photon U.S. or Photon Canada which has the effect of changing the
equivalence of the Preference Shares and the Common Shares, as determined in
good faith by the board of directors of Photon U.S., the Put Price will be
adjusted as required to re-establish that equivalence. Without limiting the
generality of the foregoing, if, at any time before the Put Right is fully
exercised, Photon U.S.:
(a) subdivides its Common Shares (which shall be read to include
the effect of any issue of Common Shares to its shareholders
in their capacity as such, whether as dividends either in the
ordinary course of business or by way of stock split or
otherwise, or for no consideration or less than fair value
consideration) or consolidates its Common Shares, the
appropriate proportionate increase or decrease, as the case
requires, shall be made to the price that, but for the
adjustment, would be the Put Price; or
(b) effects any reorganization or reclassification of its share
capital, or a merger or amalgamation with any other
corporation, the Put Price shall thereafter be equal to the
Current Market Price of the securities and other property into
which each Common Share has been changed, reclassified or
converted.
6. Notice of Proposed Action
Photon U.S. shall give Covington not less than 30 days' prior
notice of any action that Photon U.S. proposes to take with respect to:
(a) a change in the articles of Photon U.S.;
(b) the declaration of stock dividends on the Common Shares,
whether in the ordinary course of business or by way of stock
split or otherwise;
(c) the sale of all or substantially all the assets of Photon
U.S.; and
(d) any event of the type referred to in section 5.
The notice shall set out in sufficient detail the proposed
action so as to permit a full understanding and assessment thereof, including
the amounts involved and the effective dates thereof. This notice requirement
shall have been satisfied if the nominee director of Covington on the board of
directors of Photon U.S. receives a copy of the information provided to the said
board of directors concerning such matter.
<PAGE>
7. Representations and Warranties of Photon U.S.
Photon U.S. represents and warrants to Covington as follows:
(a) Photon U.S. is incorporated and is an existing corporation
under the laws of the State of New Jersey;
(b) the authorized capital of Photon U.S. consists of 500 shares
of preferred stock of which no shares are issued or
outstanding and 3,333,333 Common Shares of which 1,292,477
Common Shares were, on February 28, 1997, validly issued and
outstanding as fully paid and non-assessable. The number of
issued and outstanding Common Shares has not materially
increased since that date;
(c) except as Photon U.S. has disclosed in its public filings and
existing options in favour of Covington, there are no
agreements, options, warrants, rights of conversion or other
rights pursuant to which Photon U.S. is or may become
obligated to issue Common Shares or any securities convertible
or exchangeable, directly or indirectly, into Common Shares;
(d) Photon U.S. has the corporate power and capacity to enter
into, and to perform its obligations under, this Agreement and
the Purchase Agreement and such agreements have been duly
executed and delivered by Photon U.S. and are valid and
binding obligations of Photon U.S., enforceable against it in
accordance with their terms;
(e) the issue of the Common Shares upon the exercise of the Put
Right has been authorized by all necessary corporate action of
Photon U.S. and Common Shares issuable upon the exercise of
the Put Right shall be issued as fully paid and non-assessable
shares in the capital of Photon U.S.;
(f) neither the entering into of this Agreement and the Purchase
Agreement, nor the performance by Photon U.S. of any of its
obligations thereunder will contravene, breach or result in
any default under the articles, by-laws, constating documents
or other organizational documents of Photon U.S. or under any
mortgage, lease, agreement, other legally binding instrument,
licence, permit, statute, regulation, order, judgment, decree
or law to which it is a party or by which it may be bound; and
(g) no authorization, consent or approval of, or filing with or
notice to, any governmental agency, regulatory body, court or
other person is required in connection with the execution,
delivery or performance of this Agreement and the Purchase
Agreement by Photon U.S. or the issue of any Common Shares
pursuant hereto, other than the approval of the securities
exchanges and/or markets on which the Common Shares are to be
listed and the filing of a registration statement or similar
document required for the purposes of making the Common Shares
freely tradeable securities in the United States of America.
<PAGE>
8. Covenants of Photon U.S.
Photon U.S. covenants with Covington that so long as the Put
Right remains outstanding:
(a) it shall maintain its corporate existence; carry on and
conduct its business in a proper and efficient manner and in
accordance with all applicable laws; not materially alter the
kind of business carried on by it; observe and perform all of
its obligations under leases, licences and other agreements to
which it is a party so as to preserve and protect its property
and the income therefrom; and keep proper books of account
with correct entries of all transactions in relation to its
business;
(b) it shall furnish or cause to be furnished to Covington
concurrently with the filing thereof, copies of all 10-K, 10-Q
or similar reports and all other disclosure documents of
Photon U.S.
filed with the relevant securities regulatory authorities;
(c) it shall reserve and keep available out of its authorized
Common Shares a sufficient number of Common Shares for the
purpose of enabling it to satisfy its obligation to issue
Common Shares upon the exercise of the Put Right;
(d) it shall, from time to time upon the demand of Covington,
prepare and file a registration statement with the Securities
and Exchange Commission with respect to the Common Shares that
have been issued upon the exercise of the Put Right, within
thirty (30) days of such demand and thereafter use its best
efforts to cause such registration statement to become
effective under the 1933 Act (it being understood that such
demand will apply only to Common Shares issued at the time of
the demand), provided that the expenses incurred in complying
with such demand will be paid by Photon U.S. the first two
times Covington makes such demand and will thereafter be paid
by Covington; and
(e) it shall from time to time take all action which may be
necessary so that the Common Shares issuable upon the exercise
of the Put Right will, immediately upon their registration
under the 1933 Act, be listed on the principal securities
exchanges and/or markets within the United States of America
and Canada, if any, on which the Common Shares are then
listed.
9. Assignment
Covington shall be entitled at any time and from time to time
to transfer and assign to any person all or part of the Preference Shares and
its rights under this Agreement relating thereto, provided that such person
enters into an agreement with Photon U.S., in form and substance satisfactory to
Photon U.S., pursuant to which such person agrees to be bound by the provisions
of this Agreement. In such agreement, Photon U.S. shall also confirm the Put
Right and consent to the assignment of Covington's rights under this Agreement
to such person, in form satisfactory to Covington and such person.
<PAGE>
10. Filing of Agreement and Notice to Register
A copy of this Agreement shall be filed in the minute book of
Photon U.S. and Photon U.S. shall give notice of this Agreement to the
registrar, if any, of the Common Shares.
11. Submission to Jurisdiction
Photon U.S. agrees that any suit, action or proceeding arising
out of or relating to this Agreement or the Purchase Agreement against it or any
of its assets may be brought in any court of the Province of Ontario or Canada
(or, at the option of Covington in the Federal Court of Canada, if within that
court's jurisdiction) and Photon U.S. hereby irrevocably and unconditionally
attorns and submits to the jurisdiction of such courts over the subject matter
of any such suit, action or proceeding. Photon U.S. irrevocably waives and
agrees not to raise any objection it might now or hereafter have to any such
suit, action or proceeding in any such court including, without limitation, any
objection that the place where such court is located is an inconvenient forum or
that there is any other suit, action or proceeding in any other place relating
in whole or in part to the same subject matter. Photon U.S. agrees that any
judgment or order in any such suit, action or proceeding brought in such a court
shall be conclusive and binding upon it and consents to any such judgment or
order being recognized and enforced in the courts of its jurisdiction of
incorporation or any other courts, by registration or homologation of such
judgment or order, by a suit, action or proceeding upon such judgment or order,
or any other means available for enforcement of judgments or orders, at the
option of Covington, provided that service of any required process is effected
upon it in the manner specified in section 12 or as otherwise permitted by law.
Nothing in this section 11 shall restrict the bringing of any such suit, action
or proceeding in the courts of any other jurisdiction.
12. Attorney for Service
Photon U.S. irrevocably appoints Photon Canada, at the
following address: 347 Consortium Court, London, Ontario, N6E 2S8 its authorized
attorney and agent to accept and acknowledge, for and on behalf of Photon U.S.,
service of any and all process in the Province of Ontario, Canada in any suit,
action or proceeding arising out of or relating to this Agreement or the
Purchase Agreement. Photon U.S. agrees that service of process upon such
attorney and agent by delivering a copy thereof, addressed to Mr. Charles
Marianik, in care of such attorney and agent, at the above address, shall be
conclusively deemed to have come to the notice of Photon U.S. at the time of
such delivery and shall constitute in every respect valid and effective personal
service upon Photon U.S. at the time of such delivery, and that failure by such
attorney and agent to give notice of such service to Photon U.S. shall not
affect the validity or effect of such service or any judgment or order based
thereon or arising therefrom. Photon U.S. irrevocably authorizes and directs
such attorney and agent to accept service on its behalf and agrees to appear in
such suit, action or proceeding. Photon U.S. further agrees to take all action
as may be necessary to confirm and continue in full force and effect the
appointment of such attorney and agent so that until the expiry of all rights
and remedies under this Agreement or the Purchase Agreement, Photon U.S. shall
have an attorney and agent for service of process in the Province of Ontario,
Canada.
<PAGE>
13. Entire Agreement
This Agreement constitutes the entire agreement between the
parties pertaining to the subject matter of this Agreement. There are no
warranties, representations or agreements between the parties in connection with
such subject matter except as specifically set forth or referred to in this
Agreement. No reliance is placed on any representation, opinion, advice or
assertion of fact made by any party hereto, or its directors, officers and
agents, to any other party hereto or its directors, officers and agents, except
to the extent that the same has been reduced to writing and included as a term
of this Agreement. Accordingly, there shall be no liability, either in tort or
in contract, assessed in relation to any such representation, opinion, advice or
assertion of fact, except to the extent aforesaid.
14. Waiver, Amendment
Except as expressly provided in this Agreement, no amendment
or waiver of this Agreement shall be binding unless executed in writing by the
party to be bound thereby. No waiver of any provision of this Agreement shall
constitute a waiver of any other provision nor shall any waiver of any provision
of this Agreement constitute a continuing waiver unless otherwise expressly
provided.
15. Notices
Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be given by prepaid first-class
mail, by facsimile or other means of electronic communication or by delivery as
hereafter provided. Any such notice or other communication, if mailed by prepaid
first-class mail at any time other than during a general discontinuance of
postal service due to strike, lockout or otherwise, shall be deemed to have been
received on the fourth business day after the post-marked date thereof, or if
sent by facsimile or other means of electronic communication, shall be deemed to
have been received on the business day following the sending, or if delivered by
hand shall be deemed to have been received at the time it is delivered to the
applicable address noted below either to the individual designated below or to
an individual at such address having apparent authority to accept deliveries on
behalf of the addressee. Notice of change of address shall also be governed by
this section. In the event of a general discontinuance of postal service due to
strike, lock-out or otherwise, notices or other communications shall be
delivered by hand or sent by facsimile or other means of electronic
communication and shall be deemed to have been received in accordance with this
section. Notices and other communications shall be addressed as follows:
(a) if to Photon U.S.:
Photon Technology International, Inc.
1 Deerpark Drive
Suite F
South Brunswick, New Jersey 08852
Attention: Charles Marianik, President
Telecopier number: 908-329-9069
<PAGE>
(b) if to Covington:
C.I. Covington Fund Inc.
c/o Bedford Capital Corporation
1 First Canadian Place
Suite 2620
100 King Street West
Toronto, Ontario
M5X 1C9
Attention: M. Grant Brown
Telecopier number: 416- 365-9822
For the purposes of this Agreement, "business day" means any
day, other than Saturday, Sunday or any statutory holiday in the Province of
Ontario.
16. Time of Essence
Time is of the essence of this Agreement.
17. Further Assurances
Each of Photon U.S. and Covington shall use reasonable efforts
and take all such steps, execute all such documents and do all such acts and
things as may be reasonably within its and his power to implement to their full
extent the provisions of this Agreement.
18. Counterparts
This Agreement may be signed in counterparts and each of such
counterparts shall constitute an original document and such counterparts, taken
together, shall constitute one and the same instrument.
19. Enurement
This Agreement shall enure to the benefit of and be binding
upon the parties hereto and their respective successors and assigns.
20. Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
<PAGE>
IN WITNESS WHEREOF the parties have executed this Agreement.
PHOTON TECHNOLOGY INTERNATIONAL, INC.
By:
C.I. COVINGTON FUND INC.
By:
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