SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ___________________ to ____________________
Commission File Number: 33-10943-NY
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Deerpark Drive, Suite F, Monmouth Junction, NJ 08852
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(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (908) 329-0910
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of September 27, 1997, the registrant had 1,159,810 shares of its
Common Stock outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of that date is $6,958,860.
<PAGE>
Part I
Item 1. BUSINESS
General
Photon Technology International, Inc. (the "Company" or "PTI(") is a New Jersey
based high technology corporation, incorporated in November 1983. PTI is engaged
in the business of exploiting the many applications of the proprietary
fluorescence technology that it has developed.
Fluorescence is a relatively new technique that offers the following user
benefits:
o sensitivity - can detect 10,000,000 times smaller quantities than
conventional techniques
o speed - can detect 1,000,000 times faster than conventional
techniques
o universal - some substances fluoresce directly, others can be made
to fluoresce, by means of fluorescence dyes that are specific to
that substance
o safe and can be used in vitro - the only competing technique is
radio active labeled substances, obviously much less desirable.
ocost competitive
Fluorescence is used to:
o measure minute amount of substances - can detect much smaller
quantities than by any other means
o measure changes in substances over time - the time can be very short
o show where substances of interest are located - can be visually
observed through a microscope trace where substances are migrating
Examples of fluorescence applications are:
o environmental studies - how much pollutant; where is it located;
where does it originate
o pharmaceutical studies - drug affects
o process control - impurities, contaminants
o medical - detection of diseases in early stages, such as:
cancer, Alzheimer's, heart, kidneys,
nervous disorders - diagnostic
- causes of diseases - research
- reaction and monitoring of treatment
o agriculture
o foods - detection of bacteria and contaminants, measurement of
freshness
Fluorescence applications are growing, and can be found in virtually every
field, where the detection and monitoring of minute substances is of
significance.
PTI has developed a full line of proprietary and/or patented fluorescence based
instrumentation to serve as a platform for the exploitation of this useful
technique.
PTI's head offices are located in Monmouth Junction New Jersey. PTI sells its
products in North America through a direct sales force, located in six different
sales offices in the U.S. and Canada.
In June of 1987, the Company incorporated a wholly owned subsidiary, Photon
Technology International (Canada) Inc., located in London, Ontario, Canada ("PTI
Canada"). PTI Canada's operations include manufacturing, research and
development, engineering and product support. PTI Canada serves as one of the
Company's primary manufacturing sites.
European sales, service, distributors and product distribution are managed from
offices located in London England, through an unincorporated branch office of
the Company (PTI UK). In September of 1994, PTI established a 51% owned
subsidiary, PhotoMed GmbH in Wedel, Germany, to handle sales and service in
Germany, Austria, Benelux and Scandinavia, through a direct sales force. In July
of 1995, PTI acquired 100% of the subsidiary.
In April of 1987, the Company entered into a research agreement with M.L.
Technology Ventures L.P. ("MLTV") to develop four different products. PTI has
successfully completed the products under the agreement. MLTV's interest in the
products have been taken over by PTI in exchange for 333,333 shares of the
Company in December 1995.
The Company is focused on the fluorescence market place. PTI believes
fluorescence is a multi-billion dollar market, enjoying substantial growth. PTI
has the ability to identify commercial and scientific applications through its
technical and design capability and to provide products which "add value" to the
end users and which are responsive to these needs. This ability is key to the
Company's success. The Company's know-how that is employed in its design and
assembly techniques results in competitive products which have high precision,
quality and lower cost.
Industry
The Company operates in what can be broadly defined as the photonics industry.
The photonics industry utilizes light for application in medical research and
testing, pharmaceutical drug development, industrial process and quality
control, and environmental, research monitoring and control. It is a relatively
new industry, having only emerged in the 1970s.
Light-based instrumentation for industry, medicine, and research is a
multi-billion dollar business. As a result, applications for photonics
instrumentation and techniques for medicine are still emerging. The Company's
industry niche utilizes fluorescence technology to measure samples in small
amounts or quantities, track movement/location, monitor chemical or physical
changes and identify or isolate the sample from the surrounding environment. In
medical research applications and drug development, this can be accomplished
without harm or destruction to the sample (i.e. cells). In all applications the
speed, sensitivity and light reaction are important for process, quality control
and monitoring.
Technology
The application of light in the fields of industry, medicine, and research falls
into many broad categories. Among these is a phenomenon called "fluorescence."
It is this phenomenon that PTI's instruments are designed to create and measure.
When light strikes a substance, the light is absorbed and then re-emitted. If
the wavelength of light that is re-emitted is different from that which is
absorbed, then the substance is said to have fluoresced. By stimulating
fluorescence and monitoring its location and intensity, scientists can identify
the concentration and changes of substances. While not all substances fluoresce,
it is possible to create a dye (also called a probe) that will cause
non-fluorescent substances to fluoresce.
While the phenomenon of fluorescence is certainly not new, applications for the
technique are new and emerging. The recent development of fluorescent dyes has
made fluorescence the most exciting tool in the industry today. Practical
applications for new dyes and assays are being discovered almost on a daily
basis. Fluorescence is now a multi-billion dollar industry.
Fluorescence is a powerful and rapidly expanding tool for cellular and
sub-cellular testing because it is:
o more sensitive than other means of detection (about a factor of
1,000,000 times more) which means that very small, sub-cellular
amounts of substances can be detected and measured with great
accuracy.
o safer than other means of detection, because it is non-invasive
(does not physically injure the cell) and non-radioactive (avoids
health and disposal problems).
o faster than other means - it can monitor changes in trillionths of a
second, or about 1,000,000 times faster than other techniques.
o a visual process - microscopic images can be gathered and displayed,
for example, showing changes inside living cells.
o less expensive than other techniques, which means it can do more
work for less money, while saving time, resources and even lives.
Products
PTI initially developed a line of proprietary and/or patented optical building
blocks ("OBB's") which form the basis of all light based instrumentation. The
Company sells these building blocks as stand alone units. In addition PTI uses
these unique building blocks to develop its open architecture fluorescence
systems. The open architecture offers the benefits of:
o more versatile equipment - more options
o customers can buy upgrades and options as they need them or can
afford them
o less time for development of new systems - PTI can more rapidly meet
new market demands
o less chance of product obsolescence
o lower costs
PTI at the start of the 1998F year has reorganized its product line, into seven
product lines.
Product Group I - Optical Building Blocks
PTI's components make up this line. They are composed of: light sources, light
and sampling handling modules and various detectors. This product line has a
very broad market, since these modules can be used wherever light is used. They
also have significant O.E.M. applications. This product line is PTI's oldest.
The products have been totally redesigned and kept up to the latest technology
and specifications.
Product Group II - Intensified Cameras
PTI's newest product group was developed only two years ago. The line was
expanded in 1997F, with two new cameras added to the line. Intensified cameras,
or ICCD's, are cameras that are very similar in the basic technology to
camcorders except that they use an intensifier that allows these cameras to see
under very low light levels. These cameras were originally used by PTI for
fluorescence applications. PTI decided to develop these cameras to lower the
costs. Formerly such cameras cost more than $15,000, PTI's cameras were designed
to offer virtually the same benefits, for $6,000. This has opened up a whole new
line of applications for such cameras in: machine vision, surveillance and
military applications, just to name a few.
Most of the new applications use the camera as a detection component of a
system. Therefore the sales will be to O.E.M.'s.
Product Group III - Microscope Accessories
PTI has had to develop specialized building blocks for use with microscopes for
its systems. Prior to the 1998F year, PTI has not offered these components as
individual units. They were sold exclusively in PTI's systems. By popular
demand, PTI has elected to offer these units as components in a separate product
line, since the market for such products is different from the OBB line.
The product line contains microscope illuminators and detectors that can be used
with most of the popular manufactured microscopes.
Product Group IV - Ratio-Fluorescence Systems (excluding imaging) - RatioMaster
This is PTI's first systems line, introduced in 1987. The line is composed of
systems that can detect various ions, or fluorescent labeled compounds,
generally found in living organisms. These have a wide range of applications in
the medical, life science and pharmaceutical areas. They are currently used for
research applications to diagnose diseases, monitor drug effects, or to
understand various functions of living organisms. The systems can be used to
study, in-vivo:
tissues, cells, single cells or even events happening at sub-cellular levels.
PTI is well recognized as a scientific leader in this field. The recently
introduced RAM technology (patent pending), developed with the MLTV funding,
once again makes PTI a technological leader in this area.
Product Group V - Fluorescence Imaging Systems - ImageMaster
Initially, these imaging systems were used with PTI's Ratio-Fluorescence line.
Imaging gives the added dimension of spatial resolution. Not only can one detect
and measure substances, but one can also tell where they are - or if they are on
the move - where they are moving. Because the technology is much different from
ratio-fluorescence and because there are new applications that are developing in
other areas, fluorescence imaging has been set up as a separate product line.
The RAM technology is also being used in the imaging area to give the product
unique advantages.
Product Group VI - Steady State Fluorescence - QuantaMaster
PTI has recently entered the largest single market in the fluorescence area.
Steady state fluorimeters are used in most basic fluorescence applications
wherever one has to detect small amount of substances, such as: environmental,
pharmaceutical, chemical, medical and process control.
PTI's modular architecture and price is unique in this market. PTI had not had
the necessary financial resources to properly promote this product. With the new
financing in 1997, (refer to Note I in Financial Statements) PTI will place more
emphasis on this product line.
Product Group VII - Fluorescence Life-Time Systems - TimeMaster
TimeMaster( systems are used to determine fluorescence lifetimes, a technique
used to distinguish between similar substances. The fluorescence lifetime
represents the average time that a molecule spends in an excited state before
emitting a photon and returning to the ground state. It is an important and
unique feature of an excited state. Fluorescence lifetimes are very short. Most
fluorescence lifetimes fall within the range of hundreds of picoseconds to
hundreds of nanoseconds. The fluorescence lifetime can function as a molecular
stopwatch to observe a variety of interesting molecular events. An antibody may
rotate slightly within its molecular environment. A protein can change
orientation. A critical binding reaction may occur. Because the time-scale of
these events is similar to the fluorescence lifetime, the measurement of the
fluorescence lifetime allows the researcher to peer into the molecule and
observe these phenomena.
In late fiscal 1994, the Company introduced a revolutionary newly patented
design, and the most economical systems for fluorescence lifetime measurements,
the TimeMaster( fluorescence Lifetime Spectrometers. These systems
revolutionized the fluorescence lifetime techniques by designing easy-to-use
systems which are consistent with the Company's modular and open architecture
strategy for products. Research and development efforts by the Company during
fiscal 1994 and 1995 provided a product line with a unique strobe technique, a
choice of two different lifetime techniques and three different base system
configurations as follows:
StrobeMaster( provides a unique and patented strobe technique for measuring
fluorescence lifetimes which is economical to use. The strobe technique is
intensity dependent and provides accurate measurements at very high speeds.
These characteristics of the strobe technique are very important in the life
sciences area, where samples are not stable over long periods of time. The
StrobeMaster( uses a NanoFlash( illuminator source.
LaserStrobe( is based on the strobe technique for measuring fluorescence
lifetimes and is as unique as the StrobeMaster(. With a nitrogen/dye laser
illumination source, the strobe technique provides for measurements of lifetimes
with a precision of below one nanosecond.
The unique strobe technique, through the introduction and sales of the
StrobeMaster( and LaserStrobe(, has started to be recognized and accepted for
measuring fluorescence lifetimes as evidenced by sales of these systems during
fiscal 1996.
Sales and Marketing
PTI reorganized its product line and its sales force at the start of the 1998F
year. Prior to this time PTI used product specialists to sell the entire line.
Now selected product specialists sell individual product lines. PTI expects
better sales coverage and a more competitive sales force through this
reorganization.
The Company's sales are primarily for research and development of analytical
measurement applications. The Company will continue to focus on opportunistic
areas in both life sciences and physical sciences areas because of the diversity
of the markets and different user demands.
Buying decisions for the Company's products are generally made by professionals
in corporations, universities, government or private labs and hospitals. These
individuals usually belong to professional organizations, read and receive
professional journals and attend trade conferences and seminars. Papers that
have been published which discuss the Company's equipment in the research
process represent a significant influence on the peers and affiliated groups of
such professionals and their industries. Such papers are an important marketing
tool for the Company.
In addition to private industry, universities and hospitals, a significant
source of the Company's sales comes from government supported purchases (except
in the U.S. where health care is privatized). The major market for fluorescence
instrumentation is still limited to the developed nations. The U.S. and Canada
are by far the largest markets estimated at 30% of the total world market. This
is followed by Europe, which is roughly equivalent to the North American market
size. The Japanese market is around 15% and has local competition that is
successful only in this market area. The remainder of the world accounts for
less than 25%.
The Company enjoys an excellent reputation with its customer base. There have
been numerous multiple-system sales to the same customers, and most of these
systems have been the more expensive "top-of-the-line" models. The Company has
recently introduced its lower-priced systems lines to be competitive in the
mid-market range for both ratio-fluorescence and general fluorescence. The
Company's objective is to create a higher profile and to become better known in
the marketplace.
The Company's promotional activities to penetrate the various markets, both
domestically and internationally, take the form of trade shows, direct mail,
research seminars, symposiums and advertising in periodicals. In North America,
sales are handled by direct sales personnel located in Monmouth Junction, New
Jersey; Ashland, Massachusetts; San Diego, California; and London, Ontario,
Canada. In Continental Europe, including the former Eastern Bloc countries,
sales responsibilities are shared by the Company's branch office in London,
England, independent distributors PhotoMed GmbH, a wholly owned subsidiary, and
the sales office in Oslo, Norway. Independent distributors and/or agents service
the Far East and other foreign markets. Distributor coverage is being expanded
in 1998F.
Competition
The market for the Company's products is highly competitive, and PTI expects
this competition to increase. Many of the Company's competitors have
significantly greater research and development, marketing and financial
resources than the Company, and therefore represent significant competition. As
with all new and emerging markets, there are no dominant players in the
fluorescent instrumentation marketplace (greater than 10% market share). There
are many small companies, many of which are smaller than PTI. The Company
believes that the primary competitive factors in the market for the Company's
products are product performance, price, breadth of product offerings and
technical support.
With respect to the OBB product line, the Company competes with catalogue
distributors that sell standard items and companies that manufacture a limited
range of competitive sub-components and components.
The Company's systems compete with fluorescence instruments offered by large
corporations such as Perkin Elmer, Hitachi, Kontron, Jasco and Shimadzu. These
corporations have a much higher market profile and significantly greater
marketing and financial resources, with the capacity to offer products at a
lower price. In addition, many other small companies have attempted to enter the
fluorescence market, including SLM, IBH, SPEX, Edinburgh, ISS and Universal
Imaging.
Proprietary Rights
PTI is a registered trademark of the Company. In addition: FeliX, TimeMaster,
QuantaMaster, RatioMaster, Deltascan, PowerArc, PowerFilter, DeltaRam,
ImageMaster are registered. The Company endeavors to maintain its know-how and
technologies as trade secrets. The Company has one U.S. patent on each of the
current Deltascan(, RatioMaster( and the TimeMaster( Fluorescence Lifetime
systems, with expiration dates ranging from 2005 to 2007. The Company has filed
for patent protection on the RAM technology. The Company also relies on trade
secrets and proprietary know-how. There can be no assurance that the trade
secret or propriety nature of such information will not wrongfully be breached
by employees, consultants, advisors or others, or that the Company's trade
secrets or propriety know-how will not otherwise become known or be
independently developed by competitors in such a manner that the Company has no
practical recourse.
Research and Development
PTI believes that its key strength is its product research. In 1997, the Company
spent $878,425 (1996-$844,403) or more than 10% (1996-9%) of total revenues on
research and development. This is above the average by other companies in PTI's
industry. PTI not only spends monies for developing new products but is also
coming up with new ways to decrease costs while maintaining or even improving
existing products performance.
Research and development was in four primary areas in the last two years:
Cost Reduction
PTI has invested a substantial amount of monies in the reduction of the product
costs. The results have allowed the Company to reduce prices, while still
increasing margins and improving product performance. PTI believes that cost
benefit analysis will increasingly be a factor in the purchasing decision
process. By investing in this type of research it will help PTI to become more
competitive.
An excellent example of this research is the ICCD camera line which, while
offering very competitive performance, costs half of existing products being
offered for sale in the market place.
Software
Particularly for systems, an important selling feature is the software that
controls the product and helps in analyzing the results. With the constantly
changing computers and operating systems, software research has become a major
expense in research.
Given the scarcity of software personnel, PTI has been particularly successful
in recruiting off-shore talent to meet the Company's growing software skill
needs.
The RAM Project
The Company has invested heavily in the commercialization of products developed
under the RAM technology that was developed with the MLTV financing. This
technology offers a lot of unique benefits that will be utilized in virtually
all of the current systems lines and will also lead to new products in the
future. PTI has applied to patent the RAM technology. Currently, the Company is
already successfully using one of the products in the RatioMaster and
ImageMaster systems lines.
EC Compliance
About two years ago, the European Economic Community introduced new rules for
electronic products. Since virtually all of our products have some electronics,
we have had to test all products and make modifications that allowed them to
pass this test. Currently all of our products comply with the new standards.
This has been a major and costly undertaking. PTI will attempt to recover these
costs by charging higher prices in Europe. PTI believes that a significant
number of its smaller competitors did not bother to comply. This should give PTI
a competitive advantage and may even reduce the competition.
Backlog
The Company's backlog consists of orders scheduled for delivery within three
months. As of June 30, 1997, the Company backlog was $1,362,000, as compared
with $1,087,000 as of June 30, 1996.
Manufacturing, Raw Materials and Suppliers
Manufacturing of the Company's products involves optical, mechanical and
electronics assembly, including product component and product systems testing to
specifications, in order to provide quality control and quality assurance. Some
of the process manufacturing requires machining and manufacturing of electronics
and optical components.
The Company's manufacturing operations are located within a total of 18,000
square feet which includes production capabilities in two North American plants.
The primary production operation is located in the plant at London, Ontario,
Canada. The secondary production operation is located at the Corporate
headquarters in Monmouth Junction, New Jersey. These operations provide the
Company the opportunity to produce products, systems, components and
subcomponents where production resources are most economical.
The Company's production network includes sourcing of material, components
and/or subcomponents from outside vendors. There are several "key" outside
vendors for specialty manufacturing and sourcing of optical components. There
are some materials, optics and electronics components, that are "sole" sourced
by the Company. In certain cases, subcontractors are used for machining and
tooling, thereby reducing the need for capital expenditures.
Overall, the supply of materials, components, subcomponents and subcontracted
services have been reliable and consistent. The Company's reliance on a sole or
limited sourcing from some outside supply or service vendors does present
several risks including an inability to obtain an adequate supply, to negotiate
the lowest price and to sustain timely deliveries of components or services. The
Company will continue its efforts to negotiate more blanket orders to protect
its supply chain and to lower costs. In the area of sole sourced materials
and/or components, the Company will continue its efforts to identify and engage
secondary suppliers and to consider capital equipment purchases in order to
manufacture within the Company's operations.
Recent Developments
Distribution Agreement-Germany
On August 15, 1996, PhotoMed GmbH entered into an agreement to become the
exclusive distributor for Omega Optical/USA for the European Community ("EC")
territories of Germany and Austria. This agreement provides incremental products
and business for the PhotoMed GmbH sales operation. Omega Optical products and
components are complements to the Company's product lines which are sold into
the same markets and customer base. This business relationship should provide a
source of leads for the Company's system product lines in addition to
incremental sales of Omega products.
Corporate Alliance with Otsuka Electronics Co., Ltd. Japan
In August of 1997, PTI signed a distribution agreement with Otsuka Electronics
Co., Ltd. ("Otsuka"), to sell the Company's products in Japan. Otsuka is a
wholly owned subsidiary of Otsuka Pharmaceutical Co Ltd of Japan.
Distribution Agreement for Lasers
In August of 1997, PTI signed a distribution agreement with LTB Lasertechnik in
Berlin GmbH ("LTB") for a line of nitrogen and dye lasers. PTI currently makes a
nitrogen and dye laser product. The LTB lasers should be complementary and help
to complete the Company's product line.
$2,000,000 Financing
In March of 1997, PTI raised $2 million of financing from C. I. Covington Fund
Inc. The financing will allow PTI to finance its future growth plans. For more
detail refer to Note I in Financial Statements.
Human Resources
As of fiscal year ended June 30, 1997, the Company has 57 full-time employees,
20 of whom are employed in the United States, 26 of whom are employed by the
Canadian Subsidiary in London, Ontario, Canada, 6 of whom are employed in the
London, England sales office and 3 of whom are employed in the Germany
sales/service office, 2 in the Oslo, Norway sales office. The total employees
consist of 22 in manufacturing/operations, 22 in sales and marketing, 8 in
product development and 5 in administration. None of the Company's employees are
covered by collective bargaining agreements. The Company's success will depend
in part on its continued ability to attract and retain high quality employees.
The Company considers its relations with employees to be good.
Item 2. PROPERTIES
The Company leases a total of approximately 18,000 square feet in manufacturing,
administrative, sales and research and development office space in Monmouth
Junction, New Jersey and London, Ontario. The 9,000 square foot lease in New
Jersey is for a period of three years, expiring in 2000. The 9,000 square foot
lease in London, Ontario is a three year lease term expiring in 1997. The lease
was renewed for two additional years. Additionally, the Company leases sales
offices in, Norway, England and Germany. The London, England sales office is
approximately 3,000 square feet and has a lease term of five years (expiration
September 2001), and the Wedel, Germany sales/service office is approximately
4,000 square feet and has a lease term of seven years (expiration September
1999). The Norway sales office is approximately 500 square feet and has a lease
term of three years (expiration January 1999).
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings involving the Company or any of
its properties.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year ended June 30, 1997.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock commenced trading in the over-the-counter market
under the NASDAQ symbol "PHON" on February 9, 1987. In August 1992, the
Company's common stock was delisted from The NASDAQ Small Cap Market and is now
traded on the OTC Bulletin Board under the symbol "PHON".
<TABLE>
<CAPTION>
QUARTERLY COMMON STOCK PRICE RANGES
Fiscal 1997 Fiscal 1996
----------- -----------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st (Jul. 1-Sep. 30) 3 1/2 13/16 3 2 1/4
2nd (Oct. 1-Dec. 31) 4 3/4 3 3/4 2 1/16
3rd (Jan. 1-Mar. 31) 6 2 4 7/8 2 13/16
4th (Apr. 1-Jun. 30) 6 1/4 3 1/4 5 1/4 2 7/16
</TABLE>
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markup, mark-down or commission, and may not necessarily represent actual
transactions.
Effective June 21, 1996 the Company amended its Restated and Amended Certificate
of Incorporation to reflect a three for one Reverse Split. As a result of the
Reverse Split the Company's Common Stock is traded on the OTC Bulletin Board
under the symbol "PHTO".
As of June 30, 1997, the approximate number of holders of record of the common
stock of the Company was 163, which does not include those owners who are
registered with the Depository Trust Company.
The Company has never paid any cash dividends in the past and anticipates that
for the foreseeable future all earnings, if any, will be retained to finance
growth and to meet working capital requirements.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included herein.
Income Statement Information:
<TABLE>
<CAPTION>
(in thousands, except per share data)
Year ended June 30
------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues $6,241 $5,511 $7,848 $9,259 $8,402
Net Income (Loss) 219 202 357 146 (274)
Net Income (Loss) per
Share of Common Stock $ .15 $ .27 $ .47 $ .14 (.24)
<CAPTION>
Balance Sheet June 30
Information: 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $2,546 $3,018 $4,822 $7,411 $8,432
Long-Term Obligations 5 809 1,218 1,957 1,323
Preferred Stock ---- ---- ---- ---- $1,962
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Total revenue of $8,401,786 in 1997 decreased by $857,014 or 9% from $9,258,800
in 1996. The decrease in revenue was primarily due to a decrease in orders in
the first half of the year, due to resources being directed towards obtaining
financing and completing research and development projects. During the second
half of the year, when financing was assured, orders caught up the first half of
the year.
Cost of product sold of $3,385,717 for 1997 decreased in dollar terms by
$270,193 or 7.4% in comparison to cost of sales of $3,655,910 in 1996. On a
percentage of net sales basis, cost of products sold increased from 39.5% to
40.3% for the same comparative period. The dollar cost decrease in cost of sales
related to the decrease in sales volume. The increase as a percentage of net
sales reflects the additional one time product cost increases to meet EC rules.
Selling, general and administrative expenses of $3,944,653 in 1997 decreased
$181,759 or 4.4% over $4,126,412 in 1996. The decrease reflected the reduced
spending on sales promotion as resources were diverted for financing, meeting EC
regulations and research and development. On a percentage sales basis, selling,
general and administrative expenses increased from 44.6% in 1996 to 46.9% in
1997. This increase in percentage is due to the decrease in sales while the
expenses were maintained at a higher level in order to be able to react to
anticipated financing.
Research and development expenditures of $878,425 or 10.5% of net sales in 1997,
increased from $844,403 or 9.2% of net sales in 1996. The increase in these
expenses reflected the Company's continued commitment to research and
development expenses and was primarily due to increased personnel for both
software and hardware development, and increased contract engineering support in
Germany to satisfy the requirements of certifying the Company's products for
sales into the EC in accordance with regulatory guidelines. Despite the lower
sales PTI actually increased its research and development efforts in
anticipation of the financing.
Interest expense increased by $38,257 or 13.6% from $280,364 in 1996 to $318,621
in 1997. This increase primarily relates to interest on incremental short-term
borrowings on the credit facilities with the Company's lenders.
Depreciation and amortization increased from $150,370 in 1996 to $158,843 in
1997. This increase represents increase in property and equipment of $54,000.
There was no material change in goodwill amortization, which represents is the
goodwill amortization of the German Company's acquisition.
There was a loss of $3,377 in foreign exchange for 1997, versus a gain of
$34,293 in 1996. This is primarily due to the rise in the U.S. dollar against
the German mark.
Deferred tax benefit increased to $167,000 in 1997 from $63,000 in 1996. For
further explanation refer to Note G to the Financial Statements.
As a result of the foregoing, the Company reported a net loss for fiscal 1997 of
$274,161 in comparison to a net income of $145,503 in 1996, a decrease of
$419,664.
As a result of this net loss performance, the net loss per Common Share on a
weighted average number of common outstanding shares was ($0.24) in comparison
to net income of $0.14 per share in 1996
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Total revenue of $9,259,000 in 1996 increased $1,411,000 in 18.0% from
$7,848,000 in 1995.
Cost of products sold of $3,656,000 for 1996 increased in dollar terms by
$334,000 or 10.0% in comparison to cost of sales of $3,322,000 in 1995. On a
percentage of net sales basis, cost of products sold decreased from 42.6% to
39.5% for the same comparative periods. The dollar cost increase in cost of
sales related to the increased sales volume. The decrease as a percentage of net
sales in comparison to the prior year reflected (a) a volume-mix impact of
international sales with higher gross margins (b) the impact of component
material cost reductions through re-engineering of specific products (c) the
impact of adding machining capacity with provided incremental production for
some components previously manufactured outside (d) fuller absorption of
overhead costs due to higher production volume throughout to support increased
sales volume.
Selling, general and administrative expenses of $4,126,000 in 1996 increased
$951,000 or 30.0% over $3,175,000 in 1995. This increase reflected (a) the
impact of higher sales volume on variable selling related expenses (b) the level
of international agent commission due to a volume-mix shift from direct sales to
agent sales (c) incremental sales personnel to expand sales territory coverage
worldwide (d) the full year expense effect of the German Subsidiary sales
operation (e) incremental administrative expenses related to financing
activities and support for the German Subsidiary operations for a full year. On
a percentage of sales basis, selling, general and administrative expenses
increased from 40.8% in 1995 to 44.6% in 1996. This increase was primarily due
to the necessary and incremental fixed level of investment in sales and
marketing and higher administrative costs, which were not fully leveraged by the
sales volume increase year to year.
Research and development expenditures of $844,000 or 9.2% of net sales in 1996,
increased from $571,000 or 7.3% of net sales in 1995, an increase of $274,000 or
48.0%. The increase in these expenses reflected the Company's continued
commitment to research and development expenses and was primarily due to
increased personnel for both software and hardware development, and increased
contract engineering support in Germany to satisfy the requirements of
certifying the Company's products for sales into the EC in accordance with
regulatory guidelines. Research and development activities were heavily focused
on new product development - hardware and software, and cost reduction. The
Company's goal is to target at least 10% of its net sales for this strategic
area and will continue to allocate financial resources to the best extent
possible while seeking additional financial resources in order to increase
investment.
Interest expenses increased by $158,000 or 130% from $122,000 in 1995 to
$280,000 in 1996. This increase primarily relates to interest on incremental
short term borrowings on the credit facilities with the Company's lenders and
interest payments related to the 12% subordinated debt issue with Covington
Capital Corporation as part of a financing agreement.
Depreciation and amortization increased from $148,000 in 1995 to $150,000 in
1996. New equipment purchased and related depreciation was mostly offset by
lower amortization on equipment under capital lease pursuant to the
sale-leaseback agreement for lab equipment, which was purchased for one (1)
dollar in the fourth quarter of fiscal year 1996.
Goodwill amortization increased by $47,000 or 44.7% from $106,000 in 1995 to
$153,000 in 1996. This increase represents the full year incremental effect of
the formation and capitalized start-up expenses of the German Subsidiary in
September 1994 of fiscal 1995. The total amount of goodwill represents $801,000
and is amortized using a straight line method over five (5) years. The balance
of goodwill recorded in "other assets" at June 30, 1996 was $542,000.
Foreign exchange gain of $34,000 in 1996 was lower in comparison to the $81,000
foreign exchange gain in 1995. Foreign exchange gain and losses are primarily
related to the level of cash transactions denominated in foreign currency and
the fluctuation of foreign currency in comparison to the U.S. dollar. The lower
exchange in this fiscal year, in comparison to the prior year, relates to lower
cash transactional activity overall and a non-repetitive single bank transaction
involving a re-financing between Midlantic National and Bank of Montreal in
fiscal 1995.
Deferred tax benefit of $63,000 in 1996 represents a partial reversal of a
deferred tax expense recorded in 1995. Deferred taxes arise from a temporary
difference between book and tax income, as a result of the capitalization of the
excess of liabilities over acquired assets. In 1995 this deferred tax expense
related to the formation and start-up of the German Subsidiary, which at that
time was 51% owned and fully controlled by the Company. In 1996, this deferred
tax was reversed due to an increase in the net deferred tax asset (reduction of
valuation allowance) related to Canadian net operation loss carryforwards from
prior years which, based on past experience, will have greater than a fifty
percent probability of being realized. (See Note G).
In fiscal 1995 the Company recorded minority interest of $42,000 as an
adjustment to consolidated income of the Company in order to exclude the 49%
minority ownership position of the shareholders of German Subsidiary. In this
fiscal year 1996, on July 5, 1995, the Company acquired the remaining 49% of the
German Subsidiary for 150,000 shares of treasury stock a value of $1.00 per
common share or $150,000. As a result of this transaction, German Subsidiary
became a wholly-owned subsidiary of the Company and there was no longer any
adjustments or exclusions to income for minority interest.
As a result of the foregoing, the Company reported net income for fiscal 1996 of
$146,000 in comparison to net income of $357,000, a decrease of $212,000 or
59.3% from the prior year.
As a result of this net income performance, earnings per share based on weighted
average number of common shares outstanding was $0.14 in comparison to $0.47 per
share in 1995. The earnings per share were impacted by the dilution effect of
one cent ($.01) per share due to the impact on the average common stock
outstanding of the 1,000,000 shares of common stock issued December 8, 1995 to
MLTV to purchase the technology rights and related joint venture interest.
Factors That May Affect Future Results
The Company believes that results of operations in any period could be impacted
by factors such as delays in the shipments or lack of market acceptance of new
products, a slower growth rate in the Company's target markets, order deferrals
in anticipation of new product releases, increased competition, adverse changes
in general economic conditions in any of the countries in which the Company does
business, or reduction or delay of private sector and government spending on
research activities.
Liquidity and Capital Resources
The working capital of the Company at June 30, 1997 was $2,402,388 as compared
to $1,562,626 at June 30, 1996, an increase of $839,762 or 53.7%.
Current assets of $5,833,770 increased $1,173,073 or 25.2% in comparison to the
prior year. This change primarily reflects (a) an increase in cash of
$1,088,662, (b) a decrease in trade accounts receivable of $166,110 or 7.4%, (c)
an increase in inventory of $168,535 or 8.9% and an increase in prepaid expenses
and other current assets of $81,986. The net increase in cash was primarily due
to financing activities. The dollar decrease in trade receivables reflect the
better collection of accounts receivable, due to the fact that a larger
percentage of sales was U.S. based, which is generally faster to collect than
foreign receivables. The accounts receivable balance of $ 2.1 million
represented 3 months of sales in comparison to 2.8 months of sales in the prior
year. The increase in months of sales reflects the higher level of sales in June
1977.
The inventory balance of $2.1 million represents 7.3 months of sales, compared
with 6.2 months in the prior year. The change in inventory primarily reflected a
build-up of long lead time items for new products for the next fiscal year.
Current liabilities of $3,431,382 increased $333,311 or 10.8% in comparison to
the prior year. This was primarily due to: (a) net decrease in bank indebtedness
on short term credit facilities of $200,568 or 13.2%, (b) increase in trade
accounts payable of $97,000 or 10% primarily due to higher purchases of long
lead items for new product launches and (c) increase in the current portion of
the long term debt by $464,781, which reflects the MLTV promissory note of
$631,000 and regular principal payments on the remaining debt coming due. The
Company believes that there is a possibility that the MLTV loan can be
refinanced. In case that the MLTV loan may not be refinanced, the Company can
pay off the loan, but it would be a serious drain on its financial resources and
could hamper growth.
The Company owes the Silicon Valley Bank $1,066,615 on a $2,000,000 working
capital line of credit. The line of credit has been extended to October 15,
1997. The company has paid back the inventory sub-limit advance as of September
15, 1997. The Company believes that the line of credit will be extended after
the October 15 date.
Bank indebtedness includes the line of credit with the German Stadtparkasse Bank
to support the German Subsidiary operations. The outstanding balance was
$255,214 (445,478 DM) on June 30, 1997, on a line of credit of $285,714 (500,000
DM).
The December 1995 MLTV Agreement provided for repayment of subordinated debt in
the amount of $771,000, the purchase by the Company of the technology developed
under the Joint Venture and the acquisition of MLTV's interest in the Joint
Venture, thereby dissolving the Joint Venture. As it relates to the subordinated
debt the Company agreed to pay the principle amount of $20,000 a month for a
twenty-four (24) month period for a total of $480,000. The balance of $291,000
was due at the end of the two year term. As of June 30, 1997, the Company has
paid $140,000 and reduced the total outstanding balance to $631,000. The Company
is not required to pay any additional interest on the outstanding balance under
this agreement unless the Company makes a late payment or an event of default
occurs under the terms of the agreement. MLTV agreed to defer payments from June
1996 through July 1997. The deferred amount is subject to interest in accordance
with the agreement.
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 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. Payments of principal commenced on
November 30, 1996 in the amount of $6,250 Canadian dollars ($4,500 US) per month
for a period of forty-eight (48) months with the balance due at the end of the
term. This financing was an important source of funds during fiscal 1996 which
provided for investment to expand sales territory coverage through addition of
personnel, increase marketing support, and continue research and development
efforts in both hardware and software for new products and product cost
reductions.
In July 1994, documents were fully executed between the "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. The
balance outstanding as of June 30, 1997 on the ODC fixed loan was $299,992
Canadian dollars ($217,224 US) based on specific advance requests approved
through this date. The term of repayment is forty (40) months and includes an
interest rate of 6.75%. Interest has been charged on a monthly basis since the
first disbursements made on July 1994, and interest paid amounted to $19,000
this fiscal year. The Company may not draw additional funds on the facility for
capital equipment up to $500,000, the original facility amount, due to Ontario
government budgetary constraints. This term loan is classified as a long term
debt with a current portion equal to twelve months of principal payments.
In the 1996 fiscal year, the Company did not have sufficient financial resources
to finance growth, research and development and complete EC compliance. PTI
elected to sacrifice temporarily the financing of the growth, in order to
complete its research and development plans and the EC compliance, since it
believed that it was the best road to follow if it was going to raise funds
necessary to continue its growth.
On March 7, 1997, PTI raised its first significant equity financing since 1987,
for $2,000,000, net $1,962,137 (for detail on specific terms, refer to Note I to
the Financial Statement). The importance of this financing is that it allows the
Company to pursue its growth goals. The Company will use the financing for new
product introduction and to expand its sales and marketing coverage.
The major risk is the timing of sales following the promotional campaigns.
Generally there is a six month sales cycle, but the sales cycles can lengthen
due to economic conditions. Should the sales cycle become too long, PTI does not
have the financial resources to sustain the sales and marketing plans and would
have to cut back on its marketing and sales efforts.
If the Company has to repay some of the short term maturing debt, it will loose
a substantial portion of its financial resources to pursue its growth plans.
Whereas there is every reason to believe that the Company can refinance its
maturing debt, there is no guarantee that it will be able to do so.
The Company will continue to manage within its financial resources and attempt
to balance its working capital needs with cash flow generated from operations
and available current financing. The Company will continue to seek additional
financing to fully exploit its sales and marketing potential. The Company cannot
be certain that it will be successful in efforts to raise additional funds.
Inflation
The Company believes that there has not been a significant impact from inflation
on the Company's operations during the past three fiscal years.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, Notes to Consolidated Financial
Statements and the report of Ernst & Young, independent auditors, with respect
thereto, referred to in the Index to Financial Statements and Supplemental
Schedule of the Company contained in Item 14(d) below, appear on pages F1
through F31 of this form 10-K and are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning executive officers and
directors of the Company, including their ages and positions with the Company as
of September 15, 1997.
<TABLE>
<CAPTION>
MANAGEMENT
Name Age Position
---- --- --------
<S> <C> <C>
Charles G. Marianik 51 Chairman of the Board, President, Chief Executive
Officer and Director
Ronald Kovach 56 Executive Vice President, Secretary and Director
Howard D. Zumbrun 57 Vice President, Chief Financial Officer
Louis Balogh 50 Director
M. Grant Brown 48 Director
Robert E. Curry 50 Director
Franklin J. Iris 67 Director
James F. Mrazek 56 Director
</TABLE>
Charles G. Marianik has acted as Chairman of the Board and Chief Executive
Officer of the Company since the Company was formed in 1983. Mr. Marianik held
the office of President from November 1983 until December 1991, and was
re-elected President in December of 1992. Mr. Marianik received a B.Sc. degree
in 1971 and an M.B.A. in 1976 from the University of Western Ontario.
Ronald J. Kovach has served as Senior Vice President of the Company since
joining the Company in 1985 until 1993. He was elected Executive Vice President
in 1993. Mr. Kovach has been the Secretary and a member of the Board of the
Company since 1988. Mr. Kovach received his diploma in Engineering Technology
from the Western Ontario Institute of Technology in 1966.
Howard D. Zumbrun joined the Company as Vice President and Chief Financial
Officer on September 15, 1997. Mr. Zumbrun, who is a retired partner of Ernst &
Young, was an audit principal in the accounting firm of Amper, Politziner &
Mattia from 1994 to 1997 and held the position of director of litigation support
with Campos & Stratis from 1992 to 1994 prior to joining the Company. He
received his B.A degree in Business Administration from Rutgers University in
1961 and is a CPA.
William D. Looney, who passed away in January 1997, joined the Company as Vice
President of Planning and Control in September 1988. Mr. Looney was appointed
Vice President, Controller, and Treasurer of the Company in 1991. From 1986 to
1988, Mr. Looney held the position of Corporate Controller for Syncsort, Inc.
Mr. Looney received his B.S. Degree in Business Administration/Finance from
Seton Hall University in 1973 and an M.B.A. degree in Management from Fairleigh
Dickinson University in 1983.
Louis Balogh is a self-employed practicing physician specializing in pediatrics.
He became a director of the Company in 1989. Dr. Balogh is the Chief of Staff of
York County Hospital in Newmarket, Ontario, Canada from 1989 to 1994, was the
Chairman of the Board of the Blue Hill Academy, and Children's Mental Health
Center from 1984 to 1992. Dr. Balogh was the Director of the Children's Aid
Society from 1981 to 1987, Director of York County Hospital from 1986 to 1987,
and President of Medical Staff of York County Hospital from 1985 to 1987. Dr.
Balogh received his degree in Medicine from the University of Western Ontario in
1972 and a specialist degree in pediatrics from McMaster University in 1978.
M. Grant Brown became a director of the Company in December 1995. Mr. Brown's
appointment as director satisfied a condition of the financing agreement between
Covington Capital Corporation and the Company. Mr. Brown was the founding
partner of Covington Capital Corporation, a venture capital company, since 1994
and Manager of the C.I. Covington Fund Inc. He was Vice Chairman of Canadian
Corporation Funding LTC, a merchant bank from 1984 to 1994. Mr. Brown received
an Engineering degree in 1971 and an M.B.A. degree in 1979 from McMaster
University.
Robert E. Curry, Ph.D. was appointed Director in April 1996. Dr. Curry had
previously served on the Board from December 1991 to July 1992, but resigned due
to conflicting professional obligations at that time. Dr. Curry has been a
General Partner of the Sprout Group, a venture capital company, since 1991 and
responsible for M.L. Technology Venture, L.P. ("MLTV") an investor in the
Company. Dr. Curry was President of Merrill Lynch R&D Management Inc. and
President of Merrill Lynch Venture Capital, Inc., a predecessor to MLTV, from
1990 to 1991. Dr. Curry also serves on the Boards of Autocyte, Inc.,
Biocircuits, and Diatide, Inc. Dr. Curry received a B.S. degree from the
University of Illinois in 1968 and a Masters degree in 1972 and a Ph.D. in 1974
from Purdue University.
Franklin J. Iris became a member of the Board of Directors in 1987 and has been
the president of Iris and Associates since 1986. His firm provides investment
consulting services for venture capital and emerging grown companies in the
medical industry. He was a group president of the clinical laboratory business
of Becton Dickinson and Company from 1973 to 1985 and Chairman and Chief
Executive Officer of Emzamatics, a medical diagnostics company from 1994 to
1995. He currently serves on the board of directors of several privately held
health care companies and is also on the board of Cytyc Corporation, a publicly
held diagnostic Company. Mr. Iris received his B.S. degree from Fairfield
University in 1953.
James F. Mrazek became a member of the Board of Directors in 1986. He recently
joined the Four Corners Venture Fund and holds the position of President and
managing General Partner. From 1990, Mr. Mrazek was the President of Carnegie
Venture Resources, a consulting and venture capital firm. Previously, he was
Chairman and a founding General Partner of the Edison Venture Fund after holding
senior executive positions with Johnson & Johnson. Mr. Mrazek serves on the
board of directors of Sepracor, Inc., Laser Institutes of America, Inc., and
XyloMed, inc. He received a B.A degree from St. Lawrence University in 1962 and
an M.B.A. degree from Cornell University in 1964.
The Bylaws of the Company provide for a Board with a minimum of six directors
and a maximum of nine directors. The Board is divided into three classes. On
April 4, 1996 the Board of Directors approved an increase in the number of Board
members from six (6) to seven (7). The one (1) class I director, James F. Mrazek
will be nominated for election by the shareholders of the Company at the 1997
Annual Meeting for terms expiring in 2000. The three (3) class II directors,
Ronald J. Kovach, Charles G. Marianik and Louis Balogh, were elected at the 1995
Annual Meeting for terms expiring in 1998. The three (3) class III directors
which include Frank Iris, M. Grant Brown, and Robert Curry were elected at the
1996 Annual Meeting for terms expiring in 1999.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten-percent beneficial owners are required
by SEC regulation to furnish the Company with copies of all Section 16(a)
reports they file.
Based solely upon review of the copies of such reports furnished to the Company
and written representations that no other reports were required, the Company
believes that there was compliance for the fiscal year ended June 30, 1997 with
all Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than ten-percent beneficial owners.
Item 11. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth, for fiscal years ending June 30, 1997, 1996, and
1995, certain information regarding the compensation earned by the Company's
Chief Executive Officer and each of the Company's most highly compensated
executive officers whose aggregate annual salary and bonus for fiscal 1997
exceeded $100,000, (the "Named Executive Officers") with respect to services
rendered by such persons to the Company and its subsidiaries. No individual who
would otherwise have been included in such table on the basis of salary and
bonus for the 1997 fiscal year resigned or terminated employment during that
fiscal year:
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards
------------------- ------
NAME AND Other Securities
PRINCIPAL Fiscal Bonus Annual Underlying All Other
POSITION Year Salary($) ($)(1) Compensation(1) Options Compensation(2)
- -------- ---- --------- ------ --------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles G. Marianik 1997 $153,961 ---- $28,666 24,000 $35,983
Chairman, Chief 1996 $180,927 ---- $32,548 13,721 $35,983
Executive Officer 1995 $167,497 $10,000 $20,856 8,137 $21,734
and President
Ronald J. Kovach 1997 $105,863 ---- $ 6,016 12,000 $ 5,819
Secretary and 1996 $118,279 ---- $ 8,961 5,843 $ 5,819
Executive Vice 1995 $108,063 $10,000 $ 6,914 5,775 $ 4,224
President-Technology
William D. Looney(3) 1997 $ 58,665 ---- $ 3,128 ---- $ 3,369
Vice President, 1996 $112,365 ---- $11,252 5,546 $ 5,776
Controller and 1995 $102,649 $10,000 $11,897 5,486 $ 5,570
Treasurer
</TABLE>
(1) These amounts reflect personal benefits received by each Named
Executive Officer during the 1997 fiscal year. These personal benefits
include payments made on behalf of those individuals for (a) disability
insurance premiums, which include $1,666 for Mr. Marianik, $1,365 for
Mr. Kovach and $628 for Mr. Looney (b) medical expenses not otherwise
covered by the group plan, which include $15,000 for Mr. Marianik and
$651 for Mr. Kovach and (c) all income taxes attributed to these and
paid by the Company as a result of their receipt of these personal
benefits, which include approximately $12,000 for Mr. Marianik,
approximately $4,000 for Mr. Kovach and approximately $2,500 for Mr.
Looney.
(2) These amounts reflect supplemental term life insurance premiums for
each Named Executive Officer which includes for the 1997 fiscal year a
premium of $2,946 for Mr. Marianik, $703 for Mr. Kovach and $770 for
Mr. Looney. For Mr. Marianik, these amounts also include the premiums
of $33,037 for the 1997 fiscal year paid on a permanent-whole life
insurance policy. For Mr. Kovach, these amounts also include a premium
of $5,116 for a permanent-whole life policy. For Mr. Looney, these
amounts include a premium of $2,599 for the permanent whole-life
policy.
(3) Mr. William D. Looney passed away in January 1997.
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants made
to each of the Named Executive Officers for the fiscal year ended June 30, 1997.
No stock appreciation rights were granted to these individuals during such year.
<TABLE>
<CAPTION>
Individual Grants(1)
Potential Realizable
Number of Value at Assumed
Securities Annual Rates of Stock
Underlying % of Total Price Appreciation
Options Options Granted Exercise For Option Term(3)
Granted to Employees in Price Expiration ----------------------
Name (#)(1) Fiscal Year ($/Sh)(2) Date 5%($) 10%($)
---- ---------- ------------ ---------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Charles G. Marianik 24,000 67% $4.00 06/27/07 60,000 153,000
Ronald J. Kovach 12,000 33% $4.00 06/27/07 30,000 76,500
</TABLE>
- -------------------
(1) All options granted to Named Executive Officers are incentive stock
options under the federal tax laws and were granted on June 27, 1997.
Pursuant to the option agreement evidencing these options, the options
were to become exercisable in three (3) successive equal annual
installments upon the optionee's completion of each year of service
with the Company over the three (3)-year period measured from the grant
date.
(2) The exercise price may be paid in cash or in shares of the Company's
Common Stock. Alternatively, the option may be exercised through a
same-day sale program with no cash outlay required of the optionee.
(3) There is no assurance provided to any Named Executive Officer or any
other holder of the Company's securities that the actual stock price
appreciation over the 10-year option term will be at the assumed 5% or
10% annual rates of compounded stock price appreciation or at any other
defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from the option grants
made to the Named Executive Officer.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the number and value of
unexercised options held by each of the Named Executive Officers as of June 30,
1997. None of the Named Executive Officers exercised any stock options in 1997.
No stock appreciation rights were exercised during such year or were outstanding
at the end of that year.
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at June 30, 1997 at June 30, 1997 (1)
------------------------ --------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles G. Marianik 35,191 24,000 $15,753 $-0-
Ronald J. Kovach 24,951 12,000 $13,841 $-0-
</TABLE>
- -----------------------
(1) Equal to the fair market value of securities underlying the option at
fiscal year end ($4.00 per share) minus the exercise price payable for
those securities.
Director Remuneration
Directors have not been paid a fee for serving on the Board or any committees of
the Board with the exception of Mr. Brown who receives a per meeting fee of $750
(Canadian Dollars) as part of the financing agreement with Covington Capital
Corporation. Directors are reimbursed for expenses related to attending Board or
committee meetings and annually are granted non-qualified stock options to
purchase the Company's Common Stock under the automatic option grant provision
of the Company's Stock Option Plan, as amended (the "Plan"). In the fiscal year
ended June 30, 1997 the Company paid an aggregate of $5,000 for director
traveling expenses. In addition, each non-employee director received an option
grant to purchase 3,333 shares of Common Stock on December 8, 1996 at an option
price of $1.31 per share under the Automatic Option Grant Program in effect for
non-employee directors under the Company's Stock Option Plan. Each option has a
maximum term of ten (10) years measured from the grant date, subject to earlier
termination following the optionee's cessation of Board service. Each option is
immediately exercisable for all of the option shares; however, any shares
purchased under the option will be subject to repurchase by the Company, at the
option exercise price paid per share, upon the optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each grant will
vest in three successive equal annual installments upon the optionee's
completion of each year of Board service over the three-year period measured
from the grant date. However, the option shares will immediately vest in full
upon certain changes in control or ownership of the Company or upon the
optionee's death or disability while serving as a Board member.
Employment Agreements, Termination of Employment and
Change-In-Control Agreements
On June 30, 1997, the employment agreement between the Company and Mr. Marianik
was automatically extended for one year in accordance with the terms of the
contract. This employment agreement entitles Mr. Marianik to a base salary of
$215,000 in 1997. Under such agreement, Mr. Marianik is to be employed by the
Company in an executive capacity as Chairman of the Board, Chief Executive
Officer and President, or in a position substantially similar thereto. In the
case of (i) a change in control, sale or merger of the Company, (ii) the
termination of his employment without cause, or (iii) a substantial change in
his position with the Company, Mr. Marianik will be entitled to receive a
minimum of two years of salary continuation (including bonuses), as well as to
retain certain employee benefits, including an automobile and a life insurance
policy, paid in full by the Company. (There are no other employment agreements
with any other Named Executive Officer.)
Pursuant to the express provisions of the Stock Option Plan, the outstanding
options under the Plan held by the Chief Executive Officer and the Company's
other Named Executive Officer will immediately accelerate in full and become
exercisable for all of the shares at the time subject to that option in the
event the Company is acquired by merger, consolidation or asset sale, unless the
option is to be assumed by the successor corporation or otherwise replaced with
a comparable option to purchase the shares of such successor corporation.
Pursuant to the terms of the option agreements the outstanding options will also
accelerate and become immediately exercisable for all of the shares at the time
subject to those options, should there occur certain changes in the ownership of
more than twenty percent (20%) of the Company's outstanding voting securities or
in the event there is a change in the majority of the Board members as a result
of any tender for the Company's outstanding voting securities, merger or other
business combination, or proxy contest for the election of Board members. On
December 8, 1995, MLTV purchased 333,333 shares of the Company's common stock
resulting in a change in ownership of more than 20% of the Company's outstanding
securities and the acceleration of the exercisability all of the then
outstanding options.
No Named Executive Officer of the Company served on the Board of Directors or
Compensation Committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of September 1, 1997, information with respect
to (a) each person (including any "group" as that term is used in section
13(d)(3) of the Securities Exchange Act of 1934) who is known to the Company to
be the beneficial owner of more than five percent (5%) of the outstanding Common
Stock of the Company and (b) the number and percentage of the Company's Common
Stock owned by (i) each of the directors and the executive officers named on the
Summary Compensation Table above and (ii) all directors and executive officers
of the Company as a group. The Company believes that, unless otherwise
indicated, each of the shareholders has sole voting and investment power with
respect to the shares beneficially owned.
<PAGE>
<TABLE>
<CAPTION>
Name of Number of Percent of Class
Beneficial Owner(1) Shares Owned Outstanding (9)
- ------------------- ------------ ---------------
<S> <C> <C>
M.L. Technology Ventures, L.P. (7)
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025 396,825 24.7%
Charles G. Marianik(2)
Princeton Corporate Plaza
1 Deerpark Drive, Suite F
Monmouth Junction, NJ 08852 317,430 20.0%
Covington Capital Corporation (8)
1 First Canadian Place
100 King Street West
Suite 2620, P.O. Box 165
Toronto, Ontario M5X 1C9 266,333 16.6%
Edison Venture Fund, L.P.
Princeton Pike Corporation Center
997 Lenox Drive #3
Lawrenceville, NJ 08648 112,333 7.0%
Michael Winderbaum
600 Columbus Ave., Apt 13R
New York, NY 10024 101,285 6.3%
Ronald Kovach(3) 50,853 3.2%
Franklin J. Iris(4) 27,348 1.7%
Louis Balogh(5) 21,366 1.4%
James F. Mrazek(6) 22,000 1.4%
All Directors and Executive
Officers as a Group (7 persons)(8) 1,102,155 69.9%
</TABLE>
(1) For purposes of this table, a beneficial owner is one who, directly or
indirectly, has or shares with others (a) the power to vote or direct
the voting of the Common Stock or (b) investment power with respect to
the common stock which includes the power to dispose or direct the
disposition of the common stock.
(2) Includes 35,191 shares which may be acquired within sixty days of
September 1, 1997 pursuant to the exercise of stock options.
(3) Includes 24,951 shares which may be acquired within sixty days of
September 1, 1997 pursuant to the exercise of stock options.
(4) Includes 20,999 shares which may be acquired within sixty days of
September 1, 1997 pursuant to the exercise of stock options.
(5) Includes 20,999 shares which may be acquired within sixty days of
September 1, 1997 pursuant to the exercise of stock options.
(6) Includes 18,333 shares which may be acquired within sixty days of
September 1, 1997 pursuant to the exercise of stock options.
(7) ML Technology Ventures, LP is represented on the Board of Directors by
Dr. Robert Curry. These shares were therefore included as part of the
Directors and Executive Officers Group.
(8) Includes 266,333 shares which may be acquired within sixty days of
September 1, 1997 pursuant to the exercise of stock options. Covington
Capital Corporation is represented on the Board of Directors by Mr.
Grant Brown. These shares were therefore included as part of the
Directors and Executive Officers Group.
(9) In calculation of percentages, there were 1,159,810 outstanding shares
plus 416,769 options that could be exercised within sixty days of
September 1, 1997. On this basis, for purposes of calculations, the
number of shares used is 1,576,579.
There are no arrangements known to the Company the operation of which may, at a
subsequent date, result in a change in control of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of the start-up financing for the German Subsidiary, Mr. Oliver Claas, a
private individual, former shareholder of German Subsidiary, and currently a
minority shareholder of the Company, gave the Company a four (4) year term loan
for 400,000 DM (US $291,000).
As part of the Covington Agreement Mr. Grant Brown was appointed to the Board of
Directors of the Company on December 8, 1995.
On April 4, 1996, Dr. Robert Curry, a General Partner of the Sprout Group and
President of MLTV, was appointed to the Board of Directors of the Company.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of the report:
1.and 2. The financial statements and supplemental schedules
filed as part of this report are listed separately in the
Index to Financial Statements and Financial Statement
Schedule located on page F1 of this report.
3.Exhibits - See Item 14(c). Each management contract or
compensatory plan or arrangement required to be filed as an
exhibit hereto is listed in Exhibit Nos. 4(b), 4(c), 4(d)
and 10(a)(1) of Item 14(c).
(b) No reports on Form 8-K were filed by the Company during the
last quarter of fiscal 1997.
(c) List of Exhibits
Exhibit Number Description
- -------------- -----------
Exhibit 3 (a) Restated and Amended Certificate of Incorporation of the
Company, by reference to the Company's form 10K for the year
ended June 30, 1996
Exhibit 3 (b) Restated and Amended Bylaws of the Company, incorporated
by reference to the Company's Registration
Statement on Form S-18 (Registration No. 33-10943-NY).
Exhibit 3 (c) Articles of Amendment of Photon Technology International
(Canada) Inc., dated March 7, 1997, incorporated by
reference from the Company's report on Form 8-K.
Exhibit 3 (d) Special Resolution of the sole director and sole shareholder
of Photon Technology International (Canada) Inc., dated
March 7, 1997, incorporated by reference from the Company's
report on Form 8-K.
Exhibit 4 (b) Stock Option Plan as amended and restated December 10, 1987
incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended June 30, 1988.
Exhibit 4 (c) Form of Incentive Stock Option, incorporated by reference
from the Company's Annual Report on Form 10-K for year ended
June 30, 1989.
Exhibit 4 (d) Form of Non-Qualified Option, incorporated by reference from
the Company's Annual Report on Form 10-K for year ended June
30, 1989.
Exhibit 4 (e) 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., Incorporated by reference from the
Company's report on Form 8-K.
Exhibit 10 (a) (1) Employment Agreement between Charles G. Marianik and the
Company dated June 30, 1990, incorporated by reference from
the Company's Annual Report on Form 10-K for year ended June
30, 1990.
Exhibit 10 (d) Exclusive Licensing Agreement for Deltascan( software
program, incorporated by reference to the Company's
Registration Statement on Form S-18 (Registration No.
33-10943-NY).
Exhibit 10 (f) Stockholders' Agreement, incorporated by reference to the
Company's Registration Statement on Form S-18 (Registration
No. 33-10943-NY).
Exhibit 10 (q) (3) First Amendment to Intercreditor Agreement dated May 18,
1994.
Exhibit 10(q) (4) Ontario Development Corporation Loan Agreement, March 16,
1994.
Exhibit 10(v) Stock Purchase Agreement, September 25, 1990, between the
Company Purchasers identified therein. Incorporated by
reference from the Company's Form 10-Q for the quarter ended
September 30, 1990.
Exhibit 10(w) Purchase Agreement dated as of December 8, 1995, by and
between Photon Technology International, Inc. and MLTV with
all exhibits, incorporated by reference from the Company's
Form 10-Q for the quarter ended December 31, 1995.
Exhibit 10(x) Debenture Agreement dated October 31, 1995, by and between
Photon Technology International, Inc. and CI.-CPA. Business
Venture Fund, Inc., incorporated by reference from the
Company's Form 10-Q for the quarter ended December 31, 1995.
Exhibit 10(y) Option Agreement dated October 31, 1995, by and between
Photon Technology International, Inc. and C.I.-CPA. Business
Venture Fund, Inc., incorporated by reference from the
Company's Form 10-Q for the quarter ended December 31, 1995.
Exhibit 10(z)(1) Loan and Security Agreement dated June 26, 1996, by and
between Silicon Valley Bank and Photon Technology
International, Inc., with Exhibits, incorporated by
reference from the Company's Form 10-K for the fiscal year
ended June 30, 1996.
Exhibit 10(z)(2) Loan Document Modification Agreement dated June 10, 1997.
Exhibit 21 Subsidiaries, incorporated by reference from the Company's
Annual Report on Form 10-K for year ended June 30, 1988.
Exhibit 99 (a) 401(K) Plan, incorporated by reference from the Company's
Annual Report on Form 10-K for year ended June 30, 1989.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOTON TECHNOLOGY INTERNATIONAL, INC.
Date: September 26, 1997 By: /s/Charles G. Marianik
---------------------------
Charles G. Marianik
Chairman of the Board,
Chief Executive Officer,
President and
Principal Executive Officer
Date: September 26, 1997 By: /s/Howard D. Zumbrun
---------------------------
Howard D. Zumbrun
Vice President,
Chief Financial Officer
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/Charles G. Marianik Chairman of the Board and Chief September 26, 1997
--------------------------------- Executive Officer, President and
Charles G. Marianik Director, (Principal Executive Officer)
By: /s/Ronald J. Kovach Executive Vice President, September 26, 1997
--------------------------------- Corporate Secretary and Director
Ronald J. Kovach
By: /s/Howard D. Zumbrun Vice President, September 26, 1997
--------------------------------- Chief Financial Officer
Howard D. Zumbrun
By: /s/Franklin J. Iris Director September 26, 1997
--------------------------------
Franklin J. Iris
By: /s/Louis Balogh Director September 26, 1997
------------------------------
Louis Balogh
By: /s/James F. Mrazek Director September 26, 1997
------------------------------
James F. Mrazek
By: Robert E. Curry Director September 26, 1997
------------------------------
Robert E. Curry
By: M. Grant Brown Director September 26, 1997
------------------------------
M. Grant Brown
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Photon Technology International, Inc.
The following Consolidated Financial Statements of Photon Technology
International, Inc. are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets--As at June 30, 1997 and 1996
Consolidated Statements of Operations--For the Years Ended
June 30, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity--For the Years
Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows--For the Years Ended
June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
The following financial statement schedule is included herein:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore have been omitted.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors of
Photon Technology International, Inc.
We have audited the accompanying consolidated balance sheets of Photon
Technology International, Inc. as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. Our audits also
included the financial statement schedule listed in the index at item 14(a) of
Form 10-K. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Photon Technology
International, Inc. at June 30, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1997, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
London, Canada Ernst & Young
September 17, 1997 Chartered Accountants
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
As at June 30,
(in U.S.$)
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,367,703 $279,041
Trade accounts receivable, less allowances of nil
(1996-$3,280) 2,078,250 2,244,360
Inventory
Finished goods 970,184 788,139
Work in process 472,109 534,750
Raw materials 619,581 570,450
------- -------
2,061,874 1,893,339
Prepaid expenses and other current assets 325,943 243,957
------- -------
TOTAL CURRENT ASSETS 5,833,770 4,660,697
PROPERTY AND EQUIPMENT
Furniture and fixtures 153,135 143,663
Machinery and equipment 1,955,035 1,810,678
--------- ---------
2,108,170 1,954,341
LESS: Accumulated depreciation (1,569,689) (1,415,221)
----------- -----------
538,481 539,120
DEFERRED INCOME TAX ASSET (Note G) 143,758 153,452
OTHER ASSETS (Note M) 1,915,702 2,057,240
--------- ---------
$8,431,711 $7,410,509
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS -- continued
As at June 30,
(in U.S.$)
1997 1996
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness (Note D) $1,321,829 $1,522,397
Accounts payable 1,061,135 964,159
Deferred income 11,924 49,755
Accrued liabilities (Note N) 170,448 171,355
Current maturities of capital lease obligations -
(Notes F and L) 20,484 9,624
Current maturities of long term debt (Note E) 845,562 380,781
---------- ----------
TOTAL CURRENT LIABILITIES 3,431,382 3,098,071
DEFERRED INCOME TAX LIABILITY (Note G) ---- 176,452
LONG TERM DEBT (Note E) 1,229,041 1,905,557
CAPITAL LEASE OBLIGATIONS (Notes F and L) 94,443 52,813
PREFERRED SHARES - Canadian subsidiary (Note I) 1,962,137 ----
COMMITMENTS (Note L)
SHAREHOLDERS' EQUITY (Notes H, J, and K)
Preferred stock, $1,000 par value: authorized 500
shares; no shares issued or outstanding;
Common stock, no par value: authorized
3,333,333 shares; issued 1,215,101
(1996-1,209,067) shares, including 55,291
shares in treasury stock (1996 - 55,291) 6,297,386 6,279,118
Accumulated deficit (3,984,473) (3,710,312)
Treasury stock, at cost (56,433) (56,433)
Cumulative foreign currency translation adjustment (541,772) (334,757)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,714,708 2,177,616
---------- ----------
$8,431,711 $7,410,509
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
(in U.S.$)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUE $8,401,786 $9,258,800 $7,848,054
COSTS AND EXPENSES
Cost of products sold 3,385,717 3,655,910 3,322,043
Selling, general, and administrative 3,944,653 4,126,412 3,175,272
Research and development 878,425 844,403 570,603
Interest 318,621 280,364 121,890
Depreciation and amortization 158,843 150,370 148,072
Goodwill amortization 153,311 153,131 105,825
Foreign exchange (gain) loss 3,377 (34,293) (81,344)
---------- ---------- ----------
8,842,947 9,176,297 7,362,361
---------- ---------- ----------
Income (loss) before income tax provision
and minority interest (441,161) 82,503 485,693
Provision (benefit) for income taxes (Note G) (167,000) (63,000) 86,000
---------- ---------- ----------
Income (loss) before minority interest (274,161) 145,503 399,693
Minority interest's share of German
subsidiary's net income --- --- (42,198)
---------- ---------- ----------
Net income (loss) ($274,161) $145,503 $357,495
========== ======== ========
Net income (loss) per common share and
common share equivalents $ (0.24) $ 0.14 $ 0.47
======== ======= ========
Weighted average number of common shares
and common share equivalents outstanding 1,156,935 1,008,620 766,328
========= ========= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended June 30, (in US$)
Cumulative
Foreign
Treasury currency Total
Common Accumulated Stock, Translation Shareholders'
Stock Deficit At Cost Adjustment Equity
------ ----------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $5,279,095 $(4,213,310) $(117,806) $(102,166) $845,813
10,132 shares issued
from treasury stock 26,056 10,340 36,396
Net income 357,495 357,495
Foreign currency
translation adjustment (79,948) (79,948)
---------- ----------- --------- --------- --------
Balance at June 30, 1995 5,305,151 (3,855,815) (107,466) (182,114) 1,159,756
333,333 shares issued for
purchase of technology
from MLTV 875,000 875,000
Purchase 49% PhotoMed
GmbH subsidiary-
with 50,000 shares
from Treasury stock 98,967 51,033 150,000
Net income 145,503 145,503
Foreign currency
translation adjustment (152,643) (152,643)
---------- ----------- --------- --------- --------
Balance at June 30, 1996 6,279,118 (3,710,312) (56,433) (334,757) 2,177,616
5,958 shares issued under
the Company's Employee
Stock Purchase Plan (Note H) 18,268 18,268
Net loss (274,161) (274,161)
Foreign currency
translation adjustment (207,015) (207,015)
---------- ----------- --------- --------- --------
Balance at June 30, 1997 $6,297,386 $ (3,984,473) $ (56,433) $ (541,772) $1,714,708
========== ============= ========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, (in US$)
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (loss) $ (274,161) $ 145,503 $ 357,495
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation 158,843 150,370 148,072
Goodwill amortization 153,311 153,131 105,825
Amortization - Other intangible assets 292,903 130,621 65,659
Deferred income tax (benefit) expense (167,000) (63,000) 86,000
Minority interest's share of German subsidiary's net income -- -- 42,198
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 166,110 (801,747) (468,183)
Increase in inventory (168,535) (229,302) (211,554)
Decrease (increase) in prepaid expenses and
other current assets (81,986) 37,641 (118,577)
Increase (decrease) in accounts payable and accrued liabilities 96,069 90,222 (88,312)
(Decrease) increase in deferred income (37,831) 7,731 11,419
----------- ----------- -----------
Net cash provided (used) by operating activities 137,723 (378,830) (69,958)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (88,109) (115,687) (81,419)
Reduction in certificates of deposit -- -- 25,120
Investments in patents (6,025) (1,145) --
Investment in capital of subsidiary -- -- (18,452)
Capitalized software (280,570) (249,750) (255,036)
----------- ----------- -----------
Net cash used by investing activities (374,704) (366,582) (329,787)
----------- ----------- -----------
<PAGE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, (in US$)
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net proceeds from issuance of preference shares 1,962,137 -- --
Proceeds from issuance of common stock-
Employee Stock Purchase Plan 18,268 -- --
Financing costs incurred (77,406) (136,393) --
Increase (decrease) in bank indebtedness (200,568) 499,708 (54,395)
Increase in long-term debt -- 1,035,648 591,581
Repayment of long-term debt (211,735) (242,888) (49,225)
Payment of capital lease obligations (13,230) (25,343) (15,599)
Minority interest's investment in German subsidiary -- -- 17,728
----------- ----------- -----------
Net cash provided by financing activities 1,477,466 1,130,732 490,090
----------- ----------- -----------
Effect of exchange rate changes on cash (151,823) (152,643) (79,948)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,088,662 232,677 10,397
CASH AND CASH EQUIVALENTS - BEGINNING 279,041 46,364 35,967
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 1,367,703 $ 279,041 $ 46,364
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID:
Interest $ 294,779 $ 271,642 $ 107,418
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in US$)
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 markets are medical life
sciences, physical sciences, environmental, and industrial.
The Company operates in one principal industry segment, the photonics industry.
The Company's products are sold on a worldwide basis to universities, research
hospitals, pharmaceutical companies, bio-tech companies, federal and state
government institutions, environmental companies, and commercial businesses, all
of which are primarily engaged in research activities.
The following is a summary of the significant accounting policies followed in
the preparation of the consolidated financial statements of the Company.
1. Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of Photon Technology International, Inc., its wholly owned subsidiaries in
Canada and in Germany (see Note O), its sales office branch in the United
Kingdom, and a domestic joint venture in which the Company had a
controlling interest through December 8, 1995 (see Note B). All significant
intercompany transactions and balances are eliminated on consolidation.
2. Foreign Currency Translation
Assets and liabilities of the Company's international operations are
translated into U.S. dollars using year-end exchange rates. Income and
expense accounts are translated into U.S. dollars at average rates of
exchange prevailing during the year. The resulting translation adjustments
are recorded as a separate component of shareholders' equity. Gains and
losses from foreign currency transactions are reported in income.
3. Cash and Cash Equivalents
Cash and cash equivalents consist of temporary and highly liquid debt
instruments with a maturity at acquisition of three months or less, and are
stated at cost plus accrued interest which approximates market.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
4. Inventory
Inventory is stated at the lower of cost or net realizable value for work
in process and finished goods and at the lower of cost or replacement cost
for raw materials. The cost of inventory is determined using the first in,
first out method.
5. Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
which range from three to ten years. At the time of disposal of assets,
both the cost and accumulated depreciation related to the particular assets
are removed from the appropriate accounts and any gains or losses are
included in income. Major renewals and betterment of assets are
capitalized.
6. Other Assets
Software development costs are capitalized in accordance with the guidance
of Statement of Financial Accounting Standards No. 86 "Accounting for
Software Costs", which provides for the capitalization of costs incurred
from the point of establishing technological feasibility until the general
release of the software. Amortization of software product development costs
is computed using the straight-line method over the estimated economic life
of the products, which is approximately five years. Software is an
integrated component and included with each product system sale.
Goodwill, which represents the difference between the purchase price of an
acquired subsidiary (German Subsidiary), and the related value of net
assets acquired or net liabilities assumed, is reported net of
amortization, and is amortized using the straight-line method over a five
year period.
Technology rights acquired through issuance of the Company's shares of
common stock are valued at the bid price of the stock at the date of
transaction. These technology rights are being amortized on a straight-line
basis over a ten year term.
Direct costs related to financing are deferred and amortized on a
straight-line basis over the term of the related financing agreement.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
On an ongoing basis, management assesses the carrying value of its
intangible assets to determine if there is an impairment in value by
comparing expected undiscounted cash flows to the carrying value and
reviewing other relevant factors that may affect carrying value. The amount
of impairment, if any, is measured based on discounted projected cash flow
compared to the carrying value.
7. Revenue Recognition
Revenue is recognized when the risks and benefits inherent in ownership are
transferred, which normally occurs at the time of shipment of products.
Revenue under extended warranty and maintenance contracts is deferred and
recognized in income as the related services are performed.
8. Income Taxes
The liability method under Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," is utilized to account for income
taxes. Under this method, deferred tax assets and liabilities are
recognized for temporary differences between the financial statement
carrying amount and the tax basis of the respective assets and liabilities
at the enacted tax rates.
9. Net Income (Loss) Per Common Share and Common Share Equivalents
Net income (loss) per common share and common share equivalents is computed
on the basis of the weighted average number of common shares and common
share equivalents outstanding. For the years presented, the effect of
common stock equivalents arising from stock options was not included as
they were anti-dilutive using the treasury method.
10. Leases
Leases are classified as capital or operating leases. Leases which transfer
substantially all of the benefits and risks incident to ownership of
property are accounted for as capital leases. Assets required under capital
leases are amortized on a straight-line method using rates based on the
estimated life of the asset or based on the lease term as appropriate. All
other leases are accounted for as operating leases and the related lease
payments are charged to expense as incurred.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE B--RESEARCH AND DEVELOPMENT AGREEMENT
On April 6, 1987, the Company entered into a research and development agreement
with M.L. Technology Ventures, L.P. ("MLTV"), a related party. The agreement
provided that MLTV pay the Company $3,133,000 to develop new photonic
technologies with applications in the medical field. MLTV would own all the
technology rights to the products developed under the terms of the agreement.
The agreement provided for the development of four products ("MLTV Products"),
and the fourth product was completed to a prototype stage during fiscal 1996.
In March of 1990, upon the sale of the first MLTV Product, the Company entered
into a partnership and joint venture agreement with MLTV to market all of the
MLTV Products. On December 8, 1995, the Company entered into an agreement with
MLTV whereby the Company issued 333,333 shares of common stock to purchase the
technology rights and related joint venture interest of the products developed
under the Research and Development Agreement between the Company and MLTV. The
common stock is in full settlement of all obligations of the Company related to
the technology rights and joint venture interest. The technology rights were
valued at $875,000, using the bid price of the Company's shares on the day of
the transaction, which in management's opinion is the most objective measure of
the value of the technology rights. As a result of the agreement, the joint
venture between the Company and MLTV terminated.
NOTE C--GEOGRAPHIC INFORMATION
Geographical financial information for the years ended June 30, is as follows:
<TABLE>
<CAPTION>
(in thousands)
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
North America $5,880 $6,385 $4,784
Germany 1,238 1,841 1,905
United Kingdom 1,284 1,033 1,159
------ ------ ------
$8,402 $9,259 $7,848
====== ====== ======
Transfers between geographic areas:
North America 4,228 4,422 3,920
Germany 329 227 112
United Kingdom - - -
------ ------ ------
Revenue $4,557 $4,649 $4,032
====== ====== ======
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(in US$)
NOTE C--GEOGRAPHIC INFORMATION--Continued
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Operating income (loss):
North America $ 175 $ 293 $ 387
Germany (256) 311 210
United Kingdom (41) (241) (31)
-------- -------- --------
Total Operating Income (loss) $ (122) $ 363 $ 566
======== ======== ========
Identifiable Assets:
North America $ 10,572 $ 8,326
Germany 1,116 1,494
United Kingdom 540 398
Elimination (3,796) (2,807)
-------- --------
Total Identifiable Assets $ 8,432 $ 7,411
======== ========
</TABLE>
Net sales to unaffiliated customers is based on the location of the selling
organization. Transfers among geographic areas are recorded at cost plus a
mark-up. Operating income consists of income before income tax provision after
adding back interest expense, after determining minority interest. Identifiable
assets of geographic areas are those assets used in and/or are directly related
to the activities of the Company's specific operations in each of the locations,
and intercompany assets are eliminated on consolidation.
NOTE D--BANK INDEBTEDNESS
Bank indebtedness as of June 30, consists of:
<TABLE>
<CAPTION>
(in US$)
1997 1996
---------- ----------
<S> <C> <C>
Working capital line of credit-Silicon Valley Bank $920,696 ---
Inventory sublimit advances-Silicon Valley Bank 145,919 ---
Line of credit-Bank of Montreal, denominated in Canadian
dollars (1996-$1,740,527 CDN) --- $1,276,328
Line of credit-Stadparkasse Bank, denominated in German
Deutsche marks (1997-445,478 DM; 1996-375,008 DM) 255,214 246,069
------- -----------
$1,321,829 $1,522,397
========== ==========
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE D--BANK INDEBTEDNESS--Continued
On June 26, 1996 the Company secured a working capital line of credit with
Silicon Valley Bank for $2,000,000, from which the Bank of Montreal facility was
repaid in full. This credit facility, which had an original term expiring June
25, 1997, has been extended to October 15, 1997 and bears interest at prime
(8.5% at June 30, 1997) plus 1.5%. 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 the United Kingdom branch office. The Company retains ownership
of intellectual property and is restricted on the pledge of this property to any
other party. The advances are based on 75% of eligible domestic and Canadian
accounts receivable due within ninety days of invoice date and 90% of eligible
foreign accounts receivable that are covered (supported) by either: (a) credit
insurance; or (b) letters of credit.
Effective November 27, 1996, the facility with Silicon Valley Bank was modified
to establish inventory sublimit advances, up to a maximum of $300,000. Interest
on the inventory sublimit advances is due and payable monthly and bears interest
at prime (8.5% at June 30, 1997) plus 2.0%. This modification included a warrant
to Silicon Valley Bank for the purchase of 5,000 common shares at $3.75 expiring
November 26, 2001. Also as part of this modification, MLTV agreed to defer the
principal repayment requirements on its subordinated promissory note (Note E).
Effective June 10, 1997, the terms of repayment for the inventory sublimit
advances were modified requiring the Company to make monthly principal
repayments such that the balance outstanding would be repaid in full, including
accrued interest, on September 15, 1997. The Company has received from Silicon
Valley Bank a waiver of covenant breaches at June 30, 1997.
Bank indebtedness includes the outstanding balance of 255,214 (445,478 DM) drawn
on a credit facility with the Stadparkasse Bank of Wedel, Germany. The total
line of credit available is 500,000 DM, which was established in conjunction
with the formation of the German Subsidiary (See Note O). The collateral for the
line represents a security interest in all assets of the Germany Subsidiary.
Interest is charged on a quarterly basis at rates based on the German Federal
Bank's discount rate (8.75% at June 30, 1997).
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE E--LONG TERM DEBT
Details of long-term debt as of June 30, are as follows:
<TABLE>
<CAPTION>
(in US$)
1997 1996
---------- ----------
<S> <C> <C>
Subordinated promissory note payable to a
shareholder (MLTV) $ 650,761 $ 650,761
Term loan payable to the Ontario Development
Corporation ("ODC"), at 6.75%, denominated in Canadian
dollars (1997-$299,992 CDN; 1996 - $415,000 CDN) 217,224 304,320
Term loan denominated in German
marks (1997-267,339 DM; 1996-352,600 DM) 156,673 231,307
12% subordinated promissory note payable to Covington
Capital Corporation, denominated in Canadian
dollars (1997-$1,450,000 CDN; 1996-$1,500,000 CDN) 1,049,945 1,099,950
---------- ----------
Total 2,074,603 2,286,338
Less: current maturities 845,562 380,781
---------- ----------
Long-term debt, net of current maturities $1,229,041 $1,905,557
========== ==========
</TABLE>
On September 20, 1995, the Company entered into an agreement with MLTV. Under
this agreement, the Company was to repay the existing $770,761 subordinated
debt, without interest charged or accruing over a two year period, commencing
October 1995. The repayment was in the amount of $20,000 per month, with the
remaining balance to be paid in full at the end of this term. In June 1996, as
part of the Company obtaining its facility with Silicon Valley Bank (Note D),
MLTV agreed to defer the monthly payments on the promissory note for the period
from June 1996 through June 1997, and to extend the maturity of the note to
December 1, 1997. Interest accrues on the deferred amounts ($260,000) at 12%.
The Company granted a security interest in all of the Company's right, title,
and interest in all amounts and proceeds. This collateral is subordinated to the
bank debt with Silicon Valley Bank of California (Note D) and ranks equally in
priority with the Covington Capital Corporation promissory note.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE E--LONG TERM DEBT--Continued
On February 3, 1994 the Company received from ODC an "offer of loan" for a
$500,000 Canadian dollar fixed term loan at an interest rate of 6.75% for a term
of 4.5 years. This term loan was originally part of an ODC credit facility of
$900,000 Canadian dollars under the Export Loan Program. The loan was based on
specific advance requests for equipment, inventory, and training expenditures to
finance the relocation of production operations from the New Jersey plant to the
Canada plant.
Payment of principal was originally scheduled to start on the earlier of full
disbursement or August 15, 1995. Since the full disbursement had not occurred by
June 30, 1995, the Company was granted an extension by ODC until June 30, 1996.
Repayments began on July 15, 1996 for an amended period of forty months at a
rate of $11,597 Canadian ($8,500 US) per month, including principal and
interest. Interest has been charged on a monthly basis at a stated rate of
6.75%, effective since July 1994. The Company provided a security interest in
all chattel owned and acquired under this loan program. ODC waived a floating
charge on all assets in subordination to the Silicon Valley Bank debt (Note D).
Long term debt also includes an unsecured loan by a private individual to the
Company's wholly-owned German subsidiary. Blended principal and interest
payments of 10,000 German marks per month are required. Interest accrues at
5.25% plus the prevailing German Federal Bank's discount rate (2.5% at June 30,
1997).
On October 31, 1995, the Company completed a $1,500,000 Canadian ($1,100,000 US)
financing agreement in the form of subordinated debt with C.I.-C.P.A. Business
Ventures Fund, Inc., a venture capital fund of Covington Capital Corporation.
This subordinated debt has a term of five years and bears interest at 12% per
annum, compounded monthly. Principal payments of $6,250 Canadian monthly began
November 1996 and will extend through September 2000. This agreement includes a
first option for 83,333 shares of common stock of the Company at $3.75 per share
for a term of five years (expires October 31, 2000), and a second option of
133,333 shares of common stock of the Company at $7.50 per share until October
1996 and then at $9.75 per share until October 1997. In conjunction with the
issuance of preference shares of Photon Technology International (Canada), Inc.
on March 7, 1997 (Note I), the option agreement between C.I. - C.P.A. Business
Ventures Fund, Inc., and the Company was amended. The number of second option
shares was increased by an additional 50,000 shares of common stock of the
Company at $9.00 per share. The total number of second option shares is 183,333,
and the option for all such second option shares was extended by twenty-four
months to October 31, 1999. The Company granted a security interest in all of
the Company's right, title and interest in all accounts and proceeds. This
collateral is subordinated to the bank debt with Silicon Valley Bank and ranks
equally in priority with the subordinated promissory note payable to MLTV.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE E--LONG TERM DEBT--Continued
The approximate aggregate amount of all long-term debt maturities for the years
ended June 30, is as follows:
1998 $ 845,562
1999 200,909
2000 141,109
2001 887,023
----------
$2,074,603
==========
NOTE F--CAPITAL LEASE OBLIGATIONS
The Company (Canadian Subsidiary) has entered into two capital leases for
equipment expiring through August 2002 (Note L), with aggregate monthly payments
of approximately $3,500 Canadian dollars ($2,500 US), with interest ranging from
9.2% to 10.4%.
Details of capital lease obligations as of June 30, are as follows:
<TABLE>
<CAPTION>
(in US$)
1997 1996
------- --------
<S> <C> <C>
Capital lease obligations, denominated in Canadian
dollars (1997-$158,717 CDN; 1996-$85,145 CDN) $114,927 $ 62,437
Less: current maturites 20,484 9,624
------- --------
Long-term maturities $94,443 $ 52,813
======= ========
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE G--INCOME TAXES
At June 30, 1997 the Company has net operating loss carryforwards of
approximately $3,000,000 and $500,000 for U.S. federal and Canadian tax
reporting purposes, respectively, which expire in varying amounts through 2012
and 1999, respectively. In addition, the Company has approximately $400,000 of
net operating loss carryforwards for German tax reporting purposes, and these
loss carryforwards do not have an expiration date. The Company also has at June
30, 1997, unused tax credits of approximately $117,000 and $64,000 for U.S.
federal and Canadian tax reporting purposes, respectively, which expire in
varying amounts through 2003 and 1999, respectively, to offset future income
taxes. The tax credits primarily relate to research and development. As a result
of certain transactions involving issuance of the Company's common stock and
options to purchase stock, an "ownership" change occurred in 1988 under Section
382 of the U.S. Internal Revenue Code of 1986. Consequently, future utilization
of the Company's U.S. net operating loss carry forwards and tax credit
carryforwards attributable to periods before the ownership change will restrict
the utilization of the loss carryforwards and tax credit carryforwards in a
particular year.
The provision (benefit) for income taxes for the years ended June 30, consists
of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred (167,000) (63,000) 86,000
--------- --------- ---------
Tax provision (benefit) ($167,000) $ (63,000) $ 86,000
========= ========= =========
</TABLE>
All tax provisions (benefits) relate to the Company's international operations.
No provision has been made for the Company's domestic operations.
Significant components of the Company's deferred tax assets and liabilities as
at June 30, 1997, are as follows:
<TABLE>
<CAPTION>
Deferred Tax Assets Current Non Current Total
- ------------------- ------- ----------- ----------
<S> <C> <C> <C>
Accruals/Reserves $74,470 $ --- $ 74,470
Deferred Income 4,054 --- 4,054
Net Operating Loss Carryforward --- 1,433,856 1,433,856
Tax Credits --- 181,354 181,354
Other 50,284 1,729 52,013
------ ----- ------
Gross Deferred Tax Asset 128,808 1,616,939 1,745,747
------- --------- ---------
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE G--INCOME TAXES--Continued
<TABLE>
<CAPTION>
Deferred Tax Assets Current Non Current Total
- ------------------- ------- ----------- ----------
<S> <C> <C> <C>
Deferred Tax Liabilities
Capitalized Software --- (252,125) (252,125)
Goodwill related to the start-up of
the German subsidiary --- (175,725) (175,725)
------- --------- ---------
Gross Deferred Tax Liability --- (427,850) (427,850)
-------- --------- ---------
128,808 1,189,089 1,317,897
Valuation Allowance For Deferred Tax
Assets (128,808) (1,045,331) (1,174,139)
--------- ----------- -----------
Net Deferred Taxes $ --- $ 143,758 $ 143,758
========= ========== ==========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of June 30, 1996, are as follows:
<TABLE>
<CAPTION>
Deferred Tax Assets Current Non-Current Total
- ------------------- ------- ----------- -----
<S> <C> <C> <C>
Accruals/Reserves $ 76,988 $ -- $ 76,988
Deferred Income 16,917 -- 16,917
Net Operating Loss Carryforward -- 1,317,214 1,317,214
Tax credits -- 187,813 187,813
Other 18,058 4,502 22,560
----------- ----------- -----------
Gross Deferred Tax Asset 111,963 1,409,529 1,621,492
----------- ----------- -----------
Deferred Tax Liabilities
Capitalized software -- (177,229) (177,229)
Goodwill related to the start-up of
the German subsidiary -- (257,163) (257,163)
Other -- (10,308) (10,308)
----------- ----------- -----------
Gross Deferred Tax Liability -- (444,700) (444,700)
----------- ----------- -----------
111,963 964,829 1,176,792
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE G--INCOME TAXES--Continued
<TABLE>
<CAPTION>
Deferred Tax Assets Current Non-Current Total
- ------------------- ------- ----------- -----
<S> <C> <C> <C>
Valuation allowance for deferred
tax assets (111,963) (1,087,829) (1,199,792)
----------- ----------- -----------
Net Deferred Taxes $ --- $ (23,000) $ (23,000)
=========== =========== ===========
</TABLE>
U.S. and foreign income (loss) from operations before income tax provision and
minority interest for the years ended June 30, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
U.S. (66,239) $13,176 $(204,284)
Foreign 374,922 69,327 689,977
--------- ------- --------
$(441,161) $82,503 $485,693
========== ======= ========
</TABLE>
The U.S. statutory rate of 34% can be reconciled to the effective tax rate for
the years ended June 30, as follows:
<TABLE>
<CAPTION>
Liability Method
----------------
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Pre-tax income (loss) $(441,161) $82,503 $485,693
========== ======= ========
Provision for taxes at statutory rate (149,995) 28,051 165,136
Canadian net operating loss carryforward (7,153) (23,164) (150,204)
Canadian corporate minimum and capital taxes 7,220 8,138 ---
Canadian research tax credit --- ---- (71,050)
Goodwill related to start-up of German operations (81,438) (33,137) 290,300
German net operating loss carryforward ---- (204,300)
Non-deductible meals and entertainment expense 4,791 10,100 10,000
Change in beginning of year valuation allowance (25,653) (123,083) (10,326)
Foreign tax rates in excess of U.S. Statutory rate 753 45,168 24,342
Other 84,475 24,927 32,102
--------- ------- --------
Provision (benefit) for income taxes $(167,000) $(63,000) $86,000
========== ========= ========
</TABLE>
The Company paid no corporate income taxes in 1997, 1996, or 1995. One of the
Company's subsidiaries, Photon Technology International (Canada) Inc., paid
corporate minimum and capital taxes to the Province of Ontario in Canada of
$9,850 in 1997 (1996 - $20,902; 1995 - $nil).
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE G--INCOME TAXES--Continued
Undistributed earnings of the Company's foreign subsidiaries are considered to
be indefinitely reinvested, and, accordingly, no provision for US federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation;
however, unrecognized foreign tax credit carryforwards would be available to
reduce some portion of the U.S. liability.
NOTE H--EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan, effective April 1, 1996, to
provide eligible employees of the Company (including the Canadian and German
subsidiaries) with the opportunity to acquire a proprietary interest in the
Company. The number of authorized shares reserved for issuance is 83,334. In
1997, 5,958 shares were issued (no shares were issued during 1996).
NOTE I--PREFERENCE SHARES--Canadian Subsidiary
On March 7, 1997, 296,296 preference shares of Photon Technology International
(Canada) Inc., (a wholly-owned subsidiary) were issued. The shares are
non-voting, non-cumulative, non-redeemable, retractable, non-participating, and
without nominal or par value. The aggregated purchase price of the preference
shares was US$ 2,000,000, net of financing costs of US$37,863, for a net amount
of US$1,962,137.
The holders of the preference shares, at the discretion of the directors of
Photon Technology International (Canada), Inc., but always in preference and
priority to any payment of dividends on the common stock of the Company in each
year, are entitled to non-cumulative dividends at the rate of $0.50 per share.
In conjunction with the issuance of the preference shares, a put option
agreement was adopted between the Company and the holder of the preferred
shares. Under this agreement, the Company granted to the holder an irrevocable
and transferable right to require the Company to purchase from the holder, on or
after March 7, 1998, some or all of the preference shares. The retraction price
for each preference share is the then current market price of the Company's
common shares. The Company then has five business days in which to notify the
holder of its election of whether it will satisfy the put price in cash or by
the issuance of common stock of the Company (subject to equivalence and
adjustment, if necessary).
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE I--PREFERENCE SHARES--Canadian Subsidiary--Continued
Any holder of a preference share is entitled on or after March 7, 1998, to
require Photon Technology International (Canada), Inc. to redeem all, but no
less than all, of such holder's preference shares for the redemption price equal
to the then current market price of the Company's common shares, plus any
declared and unpaid dividends. The holder of the preference shares has agreed
not to exercise its redemption right unless the Company defaults on its
obligations under the put option agreement described above. 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 the Company, to the effect that any change in the equivalence of
the preference shares with the common stock of the Company, as determined in
good faith by the board of directors of the Company, will result in such
adjustment to the redemption price as is required to re-establish such
equivalence.
NOTE J--STOCK OPTIONS
The Company adopted a Stock Option Plan (the "Plan") in 1987 to provide
incentive and non-qualified common stock options for officers, key employees,
and directors of the Company. The number of authorized shares issuable in the
option pool is 300,000 at June 30, 1997 (an additional 66,667 shares were
authorized during fiscal 1997). The plan limits the maximum number of shares of
common stock for which any one participant may be granted stock options per
calendar year to 100,000 shares.
The Plan was established primarily to assist the Company in retaining the
services of valued employees, directors, and consultants by offering them the
opportunity to acquire an equity interest in the Company and to aid the Company
in attracting those individuals whose services would be essential to the
Company's future success.
The Plan is divided into two separate equity incentive programs: (a) a
discretionary option grant program under which executive officers, key
employees, non-employee directors, and consultants may be granted options to
purchase shares of the Company's common stock at the discretion of the plan
administrator; and (b) an automatic option grant program under which eligible
non-employee directors will automatically receive, at periodic intervals over
their period of Board service, special option grants to purchase shares of the
Company's common stock.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE J--STOCK OPTIONS--Continued
The options granted under the discretionary option grant program vest after one
year from the grant date, unless otherwise provided in the option agreement.
Options granted under the automatic option grant program will vest (and the
Company's repurchase rights of the option shares will lapse) in three successive
equal annual installments over the optionee's period of Board service, with the
first such installment to vest upon the completion of one year of Board service
measured from the automatic grant date.
All options granted have a maximum term of ten years from grant date, and each
option has an exercise price equal to 100% of the fair market value per share of
the Company's common stock on the grant date.
For the year ended June 30, 1997, the Company granted 45,999 stock options, of
which 36,000 options were issued to executive officers, and 9,999 options were
issued to directors. For fiscal 1996, the Company granted 35,110 stock options,
of which 25,110 options were issued to executive officers, and 10,000 options
were issued to directors. No options were exercised in fiscal 1997 and 1996. In
1997, 37,699 options were cancelled (1996 nil).
197,471 options or 66% of the authorized shares in the option pool have been
granted as of June 30, 1997, of which 151,472 are exercisable. Of the granted
options, 86,661 or 44% are under the automatic option grant program, and 110,810
or 56% are under the discretionary option grant program. The exercise price of
the common stock options range from $1.31 per share to $4.50 per share, and on a
weighted average basis approximates $3.57 per share. The granted and outstanding
options have expiration dates ranging from 1999 to 2007.
See Notes D and E for descriptions of the options granted by the Company to
Silicon Valley Bank and C.I. - C.P.A. Business Ventures Fund, Inc.,
respectively.
NOTE K--TREASURY STOCK
In October 1994, the Company issued 2,667 shares of treasury stock to three
executives in lieu of paying an earned 1994 cash bonus. The stock was issued at
a fair market value of $30,000 or $3.75 per share.
On March 20, 1995 the Company issued a total of 2,132 shares of treasury stock
in lieu of entitled vacation pay to two key Canadian employees. The stock was
issued at a fair market value of $3.00 per share.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE K--TREASURY STOCK--Continued
On July 5, 1995, the Company acquired the remaining 49% ownership of the German
Subsidiary from its minority shareholders. The Company issued 50,000 common
shares from treasury stock, at a fair market value of $3.00 per share. As a
result of this transaction, German Subsidiary became a wholly-owned subsidiary
of the Company. The transaction is accounted for as a business combination
(step-by-step acquisition) using the purchase method of accounting.
As a result of acquiring the remaining 49% ownership of German Subsidiary for
treasury stock, the number of shares in treasury stock decreased from 105,291
shares to 55,291.
NOTE L--LEASES AND COMMITMENTS
Future minimum annual rental commitments under capital leases and non-cancelable
operating leases at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- --------
<S> <C> <C>
1998 $30,799 $129,829
1999 30,799 95,267
2000 30,799 59,691
2001 30,799 38,961
2002 and thereafter 20,456 10,807
--------- --------
Total minimum lease payments 143,652 $334,555
========
Less interest 28,725
---------
Present value of net minimum
lease payments at June 30, 1997 $ 114,927
=========
</TABLE>
Equipment under capital leases and accumulated amortization amounted to $131,062
and $27,100, respectively, as of June 30, 1997, and $100,465 and $22,280,
respectively, as of June 30, 1996. Rental expense for operating leases was
$271,377, $278,780, and $207,609 for 1997, 1996 and 1995, respectively.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE L--LEASES AND COMMITMENTS--Continued
In August 1997 the Company entered into an agreement with Charter Financial,
Inc. (third party leasing company) of New York City, New York to finance the
purchase of a computer network system with several vendors for the corporate
offices in New Jersey. The lease, which will be treated as a capital lease, will
total approximately $150,000 once the computer network system has been completed
and payments to the various vendors have been finalized. The term of the
financing is three years with monthly payments of $4,812 at an annual interest
rate of 10.8%, with a purchase option of $100 at the end of the lease term. The
Company provided a security interest in all the equipment owned and acquired
under this lease agreement. Silicon Valley Bank agreed to subordinate any and
all interests in the equipment acquired under the lease with Charter Financial,
Inc. (Note D).
NOTE M--OTHER ASSETS
Other assets consist of the following as of June 30,:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Goodwill, net of accumulated
amortization of $408,751 (1996: $258,956)
(see Note O) $ 329,235 $ 541,870
Capitalized software development costs,
net of accumulated amortization of $223,126
(1996: $136,257) 741,544 547,844
Patents, net of accumulated amortization of
$ 32,050 (1996: $30,140) 25,124 19,098
Purchase of technology rights and related joint venture
interest (see Note B), net of accumulated
amortization of $131,250 (1996: $43,750) 743,747 831,250
Deferred financing costs net of accumulated
amortization of $52,393 (1996: $19,215) 76,052 117,178
---------- ----------
$1,915,702 $2,057,240
========== ==========
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE M--OTHER ASSETS --Continued
The Company capitalized approximately $280,000 of software development costs
during fiscal 1997 ($250,000 in 1996 and $251,000 in 1995). Amortization of
capitalized software development costs was $87,000 for 1997, $87,000 for 1996,
and $49,000 for 1995. These amortization costs have been recorded in Cost of
Products Sold.
Financing costs, primarily related to the Covington Capital and MLTV financing
agreements, have been capitalized and are amortized over the term of the
agreements (See Note E).
NOTE N--ACCRUED LIABILITIES
Accrued liabilities consist of the following as of June 30:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Employee compensation and other employee benefits 122,214 $117,308
Warranty and installation -- 47,781
Interest 22,258 --
Other 25,976 6,266
-------- --------
170,448 $171,355
======== ========
</TABLE>
NOTE O--GERMAN SUBSIDIARY
On September 30, 1994, the Company established a new subsidiary (German
Subsidiary) in Hamburg, Germany. The Company owned 51% of the subsidiary at that
time, and three individual investors owned the remaining 49%. Subsequent to the
formation, the German Subsidiary entered into an agreement with the
Stadtparkasse Bank of Wedel, Germany. Under this agreement, German Subsidiary
acquired certain inventory and fixed assets through the bank from the Company's
German distributor. In addition, German Subsidiary agreed to assume certain
outstanding liabilities of the previous German distributor, including
outstanding payables to various vendors, unpaid compensation and social costs of
certain employees.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE O--GERMAN SUBSIDIARY--Continued
This series of transactions was accounted for as a business combination using
the purchase method of accounting. Accordingly, the acquired assets and
liabilities were recorded at their estimated fair value at the date of
acquisition. The excess of purchase price over the net liabilities acquired has
been capitalized as goodwill, and will be amortized on a straight-line basis
over a five year period. The unamortized balance of goodwill is included in
"other assets".
The purchase price of the 51% ownership, which comprised the assumption of
liabilities, was allocated as follows:
Inventory $ 216,000
Fixed assets 67,500
Goodwill 686,400
Deferred tax assets 343,200
Deferred tax liability (343,200)
---------
Total 969,900
Less: liabilities assumed:
Bank indebtedness (499,700)
Trade payable (470,200)
---------
$ 0
=========
The operating results in fiscal 1995 of German Subsidiary, subsequent to
September 30, 1994, were included in the Company's result of operations. The
minority interest's 49% share of German Subsidiary's income was deducted from
the determination of net income of the Company in 1995.
On July 5, 1995, the Company acquired the remaining 49% ownership of German
Subsidiary from its minority shareholders. The Company issued 50,000 common
shares from treasury stock, at a value of $3.00 per share. As a result of this
transaction, the German Subsidiary became a wholly-owned subsidiary of the
Company. The transaction is accounted for as a business combination
(step-by-step acquisition) using the purchase method of accounting.
The purchase price for the remaining 49% ownership was allocated as follows:
Goodwill on acquisition $ 72,000
Net assets acquired from minority interest 78,000
--------
$150,000
========
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE O--GERMAN SUBSIDIARY--Continued
In fiscal 1996, the Company assumed an additional $43,000 of liabilities with
respect to the 51% acquisition of the German Subsidiary, which was added to
goodwill in other assets.
The operating results of German Subsidiary for fiscal 1996 were fully included
as a wholly-owned subsidiary.
NOTE P--STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related Interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
For a summary description of the principal features of the Company's stock
option plan, see Note J--Stock Options.
Pro forma information regarding net income and earnings per share is required
under the Statement of Financial Accounting Standards (FASB) No. 123,
"Accounting for Stock Based Compensation," and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997: risk-free interest rate of 6.35%
(1996-5.56%); dividend yields of 0.0% (1996-0.0%); volatility factors of the
expected market price of the Company's common stock of 2.423 (1996-1.164); and a
weighted-average expected life of the option of 5 years (1996-5 years).
The Company's pro forma information for the years ended June 30, is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net income (loss) under U.S. GAAP $(274,161) $ 145,503
Compensation expense per FASB 123 5,382 92,690
--------- ---------
Pro forma net income (loss) ($279,543) $ 52,813
========= =========
Pro forma earnings per common share
and common share equivalents ($ 0.24) $ 0.05
========= =========
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE P--STOCK COMPENSATION--Continued
A summary of the Company's stock option activity, and related information as of
June 30, is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Weighted Weighted
Number of Average Number of Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 189,171 $3.63 154,061 $3.70
Granted 45,999 3.42 35,110 3.31
Exercised --- --- --- ---
Forfeited 37,699 3.70 --- ---
------- ----- ------- -----
Outstanding, end of year 197,471 $3.57 189,171 $3.63
======= ===== ======= =====
Exercisable at end of year 151,472 $3.61 189,171 $3.63
======= ===== ======= =====
Weighted-average fair value of
options granted during the period $3.40 $2.64
===== =====
</TABLE>
Exercise prices for options outstanding as of June 30, 1997 range from $1.31 to
$4.50. The weighted-average remaining contractual life of those options is 7.2
years.
NOTE Q--RECENT ACCOUNTING PRONOUNCEMENTS
New U.S. accounting standards regarding the determination of earnings per share
have recently been issued by the Financial Accounting Standards Board. The
Company will initially adopt these new standards, commencing with its interim
financial statements for the period ended December 31, 1997. Adoption of the new
standards, which involves restatement of net income (loss) per share amounts for
prior periods, is expected to have no material effect on the Company's net
income (loss) per share amounts.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE R--COMPARATIVE AMOUNTS
Certain comparative amounts in the prior years have been reclassified to conform
with the presentation adopted in the current fiscal year.
NOTE S--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair market
values of the Company's financial instruments as of June 30,:
<TABLE>
<CAPTION>
(in thousands)
1997
----
Book Fair
Value Value
----- -----
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $1,368 $1,368
Trade accounts receivable 2,078 2,078
Financial Liabilities:
Bank indebtedness 1,322 1,322
Long Term Debt: (Note E)
Subordinated promissory note - MLTV 651 631
Term loan payable - ODC 217 219
Term loan - German Marks 157 157
Subordinated promissory note - Covington Capital 1,050 1,169
Capital leases 114 116
</TABLE>
The fair value of the Company's long-term debt is estimated by discounting
expected cash flows at the Company's incremental borrowing rate for debt of the
same remaining maturities.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
NOTE S--FAIR VALUE OF FINANCIAL INSTRUMENTS--Continued
The Company is exposed to credit losses in the event of non-performance by the
counter-parties to its financial assets; however, the Company does not
anticipate non-performance of such parties. There is no off-balance sheet credit
risk of accounting loss.
Concentrations of credit risk arise since a number of the Company's customers
are government agencies or academic institutions worldwide. However, the Company
does not foresee a credit risk associated with its receivables primarily due to
the fact that these customers are funded prior to the purchase of products and
overall the Company historically has had no material bad debts. The allowance
for doubtful accounts is adequate to provide for normal credit losses.
NOTE T--SIGNIFICANT RISKS AND UNCERTAINTIES
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods ended June 30. Actual amounts may differ
from estimates.
The Company's major products are electro-optical and light-based instrumentation
which utilizes fluorescence technology. The primary-markets served are medical
life sciences, physical sciences, environmental and industrial. The Company
markets its products worldwide. Markets of particular concentration include
North America, Europe, South America and the Pacific Rim. The Company's products
are primarily used in research, diagnostics testing, monitoring or
process/quality control. The Company's customer base includes universities,
pharmaceutical companies, hospitals, biotechnology companies and industrial
companies. The Company has been in business and serving these markets with
products since 1983 and has established a solid customer base which provides
repeat and/or referral business. The products are proprietary and patented. The
products are very competitive and accepted due to the technical properties of
fluorescence such as sensitivity. This allows detection of very
small-subcellular amounts of substance with accuracy, non-invasive and
non-radioactive characteristic for safety, speed in monitoring changes,
visualization of images to monitor changes and relatively low cost. Although
there are competing technologies and competition in existing markets for
fluorescence technology, the Company does not appear to be materially impacted
or limited by this competition.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II -- VALUATION AND QUALIFICATION ACCOUNTS
Charged to
Beginning Costs and Ending
Description Balance Expenses (Decrease) Balance
----------- ------- -------- ---------- -------
June 30, 1994 June 30, 1995
------------- -------------
<S> <C> <C> <C> <C>
1. Allowance for
Doubtful Accounts 3,970 --- (402) 3,568
2. Allowance for Inventory 70,061 15,146 --- 85,207
3. Valuation Allowance -
Deferred Income Taxes 1,333,201 (10,326) --- 1,322,875
<CAPTION>
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C> <C> <C>
1. Allowance for
Doubtful Accounts 3,568 --- (268) 3,280
2. Allowance for Inventory 85,207 30,000 --- 115,207
3. Valuation Allowance -
Deferred Income Taxes 1,322,875 (123,083) --- 1,199,792
<CAPTION>
June 30, 1996 June 30, 1997
------------- -------------
<S> <C> <C> <C> <C>
1. Allowance for
Doubtful Accounts 3,280 3,280 ---
2. Allowance for Inventory 115,207 14,000 129,207
3. Valuation Allowance -
Deferred Income Taxes 1,199,792 (25,653) 1,174,139
</TABLE>
LOAN DOCUMENT MODIFICAON AGREEMENT
(No. 2: dated as of June 10, 1997)
LOAN DOCUMENT MODIFICATION AGREEMENT dated as of June 10, 1997 by
and between PHOTON TECHNOLOGY INTERNATIONAL, INC., a New Jersey corporation with
its principal place of business at 1 Deerpark Drive, Suite F, South Brunswick,
New Jersey 08852, (the "Borrower") and SILICON VALLEY BANK (the "Bank"), a
California chartered bank with its principal place of business at 3003 Tasman
drive, Santa Clara, California 95054, and with a loan production office located
at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, MA 02181,
doing business under the name "Silicon Valley East".
1. Reference to Existing Loan Document
Reference is hereby made to that Loan and Security Agreement,
dates as of June 26, 1996, as amended by Loan Document Modification Agreement
No.1, dated as of November 27, 1996, by and between the Bank and the Borrower
(with the attached schedules and exhibits, the "Loan and Security Agreement")
and the Loan Documents referred to therein, including without limitation that
certain Promissory Note of the Borrower, dated as of June 26, 1996, as amended
and restated by the Amended and Restated Promissory Note, dated as of November
27, 1996, in the principal amount of Two Million Dollars ($2,000,000) (the
"Note"). Unless otherwise defined therein, capitalized terms used in this
Agreement shall have the same respective meanings as set forth in the Loan and
Security Agreement.
2. Effective Date
This Agreement shall become effective as of June 10, 1997 (the
"Effective Date") provided that the Bank shall have received the following on or
before June 15, 1997 and provided further, however, in no event shall this
Agreement become effective until signed by an officer of the Bank of California:
a. two copies of this Agreement, duly executed by the
Borrower:
b. the Consent of Photon Technology International (Canada),
Inc. in the form enclosed, duly executed by such entity;
and
By the signature of its authorized officer below, the borrower is
hereby representing that, except as modified in Schedule A attached hereto, the
representations of the Borrower set forth in the Loan Documents (including those
contained in the Loan and Security Agreement, as amended by this Agreement) are
true and correct as of the Effective Date as if made on and as of such date. The
Borrower also authorizes the debiting of its account in the amount of $5,000 in
payment of the Bank's extension fee in connection herewith, which fee shall be
non-refundable. Finally, the Borrower agrees that, as of the Effective Date, it
has no defenses against its obligations to pay any amounts under the Loan and
Security Agreement and the other Loan Documents.
3. Description of Change in Terms
As of the Effective Date, the Loan and Security Agreement is
modified in the following respects:
a. Section 1.1 of the Loan and Security Agreement is hereby
amended by restating the definition of "Revolving Maturity
Date" in its entirety as follows:
"'Revolving Maturity Date' means October 15, 1997."
b. Section 2.1(b) of the Loan and Security Agreement is
hereby amended by restating in its entirety to read as
follows:
"(b) Inventory Sublimit Advances. Subject to the terms and
conditions of this Agreement, at any time from the date hereof
through February 14, 1997, Borrower may from time to time
request advances (each an "Inventory Sublimit Advance" and
collectively the "Inventory Sublimit Advances") from the Bank
in an aggregate amount not to exceed the lesser of (i) the
Committed Revolving Line minus the then outstanding principal
balance of the Advances of all Letters of Credit (including
drawn but unreimbursed Letters of Credit) or (ii) the
Inventory borrowing Base, provided that the aggregated amount
of outstanding Inventory Sublimit Advances shall not in any
case exceed Three Hundred Thousand Dollars ($300,000). The
proceeds of Inventory Sublimit Advances shall be used only to
finance the purchase of Eligible Inventory. For purposes of
this Agreement, "Inventory Borrowing Base" shall mean through
March 15, 1997 an amount equal to twenty percent (20%) of the
value of Borrower's Eligible Inventory (valued at the lower of
cost or wholesale fair market value).
Interest shall accrue from the date of each Inventory
Sublimit Advance at the rate specified in Section 2.3(a), and
shall be payable monthly for each month through February 1997.
Any Inventory Sublimit Advances that are outstanding as of 1
p.m. Pacific Time on March 14, 1997 will be payable as
follows:
(i) three consecutive monthly payments of
$27,794.10 each on March 15, April 15 and May 15, 1997.
(ii) three consecutive monthly payments of
$48,639.67 each on June 15, July 15 and August 15, 1997,
and a payment of $48,639.69 on September 15, 1997,
provided that the last such payment on September 15, 1997
shall in any event be in an amount sufficient to pay all
Inventory Sublimit Advances and all interest accrued but
unpaid thereon.
When Borrower desires to obtain an Inventory Sublimit
Advance, borrower shall notify Bank (which notice shall be
irrevocable) by facsimile transmission to be received no later
than 3:00 p.m. Pacific time one (1) Business Day before the
day on which the Inventory Sublimit Advance is to be made.
Such notice shall be substantially n the form of Exhibit B
hereto, and shall specifically indicate that the advance being
requested in an Inventory Sublimit Advance. The notice shall
be signed by a Responsible Officer and include a copy of the
invoice for the Inventory which shall be Eligible Inventory,
to be financed."
c. Section 6.14 of the Loan and Security Agreement is hereby
amended by reducing the minimum sum of gross proceeds required for a "Qualified
Offering from "$5,000,000" to $2,000,000."
d. Section 7.9 of the Loan and Security Agreement is hereby
restated in it entirety as follows:
"7.9 Subordinated Debt. The Borrower shall make no
payments of principal in respect of its Subordinated Debt,
including without limitation Subordinated Debt held by ML
Technology Ventures, L.P. (the "ML Debt"), except for,
commencing July 1997, monthly payments of principal in the
amount of $20,000 with respect to the ML Debt."
e. The Compliance Certificate attached to the Loan and Security
Agreement as Exhibit D is hereby restated in its entirety in the form of Exhibit
D hereto.
4. Waiver. The Bank hereby waives any Event of Default arising
solely as a result of the Borrower's failure to comply with the profitability
covenant set for the in Section 6.11 of the Loan and Security Agreement for the
fiscal quarter ending March 31, 1997.
5. Continuing Validity.
Upon the effectiveness hereof, each reference in each Security
Instrument or other Loan Document to "the Loan and Security Agreement",
"thereunder", "thereof", "therein", or words of like import referring to the
Loan and Security Agreement, shall mean and be a reference to the Loan and
Security Agreement, as amended hereby. Except as specifically set forth above,
the Loan and Security Agreement shall remain in full force and effect and is
hereby ratified and confirmed. Each of the other Loan Documents is in full force
and effect and is hereby ratified and confirmed. The amendments set forth above
(i) do not constitute a waiver or modification or any term, condition or
convenant of the Loan and Security Agreement or any other Loan Document, other
than as expressly set forth herein, and (ii) shall not prejudice any rights
which the Bank may now or hereafter have under or in connection with the Loan
and Security Agreement, as modified hereby, or the other Loan Documents and
shall not obligate the Bank to assent to any further modifications.
6. Miscellaneous.
a. This Agreement may be signed in one or more
counterparts each of which taken together shall constitute one and the same
documents.
b. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
c. THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH
ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICATION IN THE COMMONEALTH OF MASSACHUSETTS IN
ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY
REASON OF THIS LOAN MODIFICATION AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY
REASON LENDER CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS,THEN VENUE SHALL LIE IN SANTA CLARA COUNTY, CALIFORNIA.
d. The Borrower agrees to promptly pay on demand all costs
and expenses of the Bank in connection with the preparation, reproduction,
execution and delivery of this letter amended and the other instruments and
documents to be delivered hereunder, including the reasonable fees and
out-of-pocket expenses of Sullivan & Worcester LLP, special councel for the Bank
with respect hereto.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the Bank and the Borrower have caused this
Agreement to be signed under seal by their respective duly officers as of the
date set forth above.
Sincerely,
SILICON VALLEY EAST, a Division
of Silicon Valley Bank
By:___________________________
Name: Jane A. Braun
Title: Vice President
SILICON VALLEY BANK
By:___________________________
Name:
Title:
(signed in Santa Clara, CA)
PHOTON TECHNOLOGY INTERNATIONAL, INC.
By:___________________________
Name: Charles G. Marianik
Title: President and
Chief Executive Officer
<PAGE>
SCHEDULE A
Qualifications and Supplements to Prior Representations
None
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: PHOTON TECHNOLOGY INTERNATIONAL, INC.
The undersigned authorized officer of Photon Technology
International, Inc. hereby certifies that in accordance with the terms and
conditions of the Loan and Security Agreement between Borrower and Bank (the
"Agreement"), (i) Borrower is in complete compliance for the period ending
__________ with all required convenants except as noted below and (ii) all
representation and warranties of borrower stated in the Agreement are true and
correct in all material respects as of the date hereof. Attached herewith are
the required documents supporting the above certification. The Officer further
certifies that these are prepared in accordance with the Generally Accepted
Accounting Principles (GAAP) and are consistently applied from one period to the
next except as explained in an accompanying letter or footnotes. The Officer
expressly acknowledges that no borrowings may be requested by the Borrower at
any time or date of determination that Borrower is not in compliance with any of
the terms of the Agreement, and that such compliance is determined not just at
the date this certificate is delivered.
<PAGE>
Please indicate compliance status by circling Yes/No under
"Complies" column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
(except for last month FY)
Annual (CPA Audit) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
<CAPTION>
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarter Basis:
Minimum Quick Ratio 0.60:1.0 ____:1.0 Yes No
Minimum Tangible Net Worth $1,900,000 $______ Yes No
(at 9/30/96 plus 100%
of Net Income ($____)
and 80% of net proceeds
from issuance of capital
stock ($______) after
9.30/96)
Total Liabilities less Subordinated 1.7:1.0 ____:1.0 Yes No
Debt, less Deferred Revenues/
Tangible Net Worth
Profitability: Quarterly $1 $_____ Yes No
Capital Expenditures: Annually Not to exceed
$500,000 $______ Yes No
Minimum Cash plus Unutilized 2.0:1.0 _____:1.0 Yes No
Availability Under the Committed
Revolving Line/Outstanding Amount
Under Inventory Sublimit Advances
</TABLE>
Comments Regarding Exceptions: See Attached.
Sincerely,
- --------------------------------------
SIGNATURE
TITLE
DATE
<PAGE>
CONSENT
The undersigned, as a party to a certain Agreement, dated as of
June 26, 1996, as amended by Loan Document Modification agreement No. 1, dated
as of November 27, 1996 (the "Agreement"), by and between the undersigned and
Silicon Valley Bank, hereby consents to the foregoing Loan Document Modification
Agreement (No.2)(the "Amendment") and hereby confirms and agrees that the
Agreement is, and shall continue to be in full force and effect and is hereby
ratified and confirmed in all respects, except that, upon the effectiveness of,
and on and after the date of, said Amendment, each reference in the Agreement to
"the Loan and Security Agreement", "the Credit Agreement", "thereunder",
"thereof", "therein", or words of like import referring to the Loan and Security
Agreement, shall mean and be a reference to the Loan and Security Agreement, as
amended hereby.
PHOTON TECHNOLOGY INTERNATIONAL
(CANADA), INC.
By_________________________________
Name: Charles G. Marianik
Title: President and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,367,703
<SECURITIES> 0
<RECEIVABLES> 2,078,250
<ALLOWANCES> 0
<INVENTORY> 2,061,874
<CURRENT-ASSETS> 5,833,770
<PP&E> 2,108,170
<DEPRECIATION> 1,569,689
<TOTAL-ASSETS> 8,431,711
<CURRENT-LIABILITIES> 3,431,381
<BONDS> 1,323,484
1,962,137
0
<COMMON> 6,297,386
<OTHER-SE> (4,582,678)
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