SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1998
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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(Name of small business issuer 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 Deer Park Drive, Suite F, Monmouth Junction, NJ 08852
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (732) 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $8,070,202
As of September 22, 1998, the registrant had 1,167,356 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 $2,042,873.
<PAGE>
Part I
ITEM 1. DESCRIPTION OF BUSINESS
General
Photon Technology International, Inc. (the "Company" or "PTI(R)") 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.
o cost 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
o 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 common 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 H in Financial Statements) PTI has placed more
emphasis on this product line.
Product Group VII - Fluorescence Life-Time Systems - TimeMaster
TimeMaster(TM) systems are used to determine fluorescence lifetimes, a technique
used to distinguish between similar substances. The fluorescence lifetime
represents the average time that a molecule spends in an excited state before
emitting a photon and returning to the ground state. It is an important and
unique feature of an excited state. Fluorescence lifetimes are very short. Most
fluorescence lifetimes fall within the range of hundreds of picoseconds to
hundreds of nanoseconds. The fluorescence lifetime can function as a molecular
stopwatch to observe a variety of interesting molecular events. An antibody may
rotate slightly within its molecular environment. A protein can change
orientation. A critical binding reaction may occur. Because the time-scale of
these events is similar to the fluorescence lifetime, the measurement of the
fluorescence lifetime allows the researcher to peer into the molecule and
observe these phenomena.
In late fiscal 1994, the Company introduced a revolutionary newly patented
design, and the most economical systems for fluorescence lifetime measurements,
the TimeMaster(TM) fluorescence Lifetime Spectrometers. These systems
revolutionized the fluorescence lifetime techniques by designing easy-to-use
systems which are consistent with the Company's modular and open architecture
strategy for products. Research and development efforts by the Company during
fiscal 1994 and 1995 provided a product line with a unique strobe technique, a
choice of two different lifetime techniques and three different base system
configurations as follows:
StrobeMaster(TM) provides a unique and patented strobe technique for measuring
fluorescence lifetimes which is economical to use. The strobe technique is
intensity dependent and provides accurate measurements at very high speeds.
These characteristics of the strobe technique are very important in the life
sciences area, where samples are not stable over long periods of time. The
StrobeMaster(TM) uses a NanoFlash(TM) illuminator source.
LaserStrobe(TM) is based on the strobe technique for measuring fluorescence
lifetimes and is as unique as the StrobeMaster(TM). With a nitrogen/dye laser
illumination source, the strobe technique provides for measurements of lifetimes
with a precision of below one nanosecond.
The unique strobe technique, through the introduction and sales of the
StrobeMaster(TM) and LaserStrobe(TM), has started to be recognized and accepted
for measuring fluorescence lifetimes as 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.
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(TM), RatioMaster(TM) and the TimeMaster(TM) 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 1998, the Company
spent $719,019 (1997-$878,425) or approximately 9% (1997-10%) 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 product 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 ("EC") 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 have been tested
and made to comply with the new standards. All new products will be tested and
will comply with EC 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, 1998, the Company backlog was $863,093, as compared with
$1,362,000 as of June 30, 1997.
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.
Human Resources
As of fiscal year ended June 30, 1998, the Company has 50 full-time employees,
22 of whom are employed in the United States, 22 of whom are employed by the
Canadian Subsidiary in London, Ontario, Canada, 4 of whom are employed in the
London, England sales office and 1 of whom is employed in the Germany
sales/service office and 1 in the Oslo, Norway sales office. The total employees
consist of 22 in manufacturing/operations, 14 in sales and marketing, 8 in
product development and 6 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. DESCRIPTION OF PROPERTY
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 was renewed for two additional years and expires in
1999. Additionally, the Company leases sales offices in, Denmark, England and
Germany. The London, England sales office is approximately 3,000 square feet and
has a lease term which expires October 2003 and the Wedel, Germany sales/service
office is approximately 4,000 square feet and has a lease term which expires
September 2001. The Norway sales office lease was terminated in July, 1998 and
the Company has rented space in a new office in Copenhagen, Denmark.
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, 1998.
<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 1998 Fiscal 1997
----------- -----------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st (Jul. 1-Sep. 30) 4 3 3 1/2 13/16
2nd (Oct. 1-Dec. 31) 5 2 4 3/4
3rd (Jan. 1-Mar. 31) 2 2 6 2
4th (Apr. 1-Jun. 30) 3 1/8 1 1/4 6 1/4 3 1/4
</TABLE>
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markup, markdown or commission, and may not necessarily represent actual
transactions.
As of June 30, 1998, the approximate number of holders of record of the common
stock of the Company was 156, which does not include those owners who are
registered with the Depository Trust Company.
The Company has never paid any cash dividends in the past and anticipates that
for the foreseeable future all earnings, if any, will be retained to finance
growth and to meet working capital requirements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Total revenue of $8,070,202 in 1998 decreased by $331,584 or 3.9% from
$8,401,786 in 1997. 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, and the
impact of orders received late in the final quarter which have a 45-60 day lead
time to produce and ship to customers.
Cost of products sold of $3,712,518 for fiscal 1998 increased by $619,704 or 20%
in comparison to cost of sales of $3,092,814 in 1997. On a percentage of net
sales basis, cost of sales increased from 36.8% to 46%. The increase in cost of
goods sold is primarily related to the one time product cost increases required
to meet European Community compliance issues.
Selling, general and administrative expenses of $3,915,563 in 1998 decreased in
dollar terms by $29,090 or .7% over $3,944,653 in 1997. This decrease resulted
from significant cost controls being put into place in the fourth quarter to
offset the decline in sales. On a percentage of sales basis, selling, general
and administrative expenses increased from 46.9% in 1997 to 48.5% in 1998. This
increase arose in the first nine months of the year and primarily related to
increased marketing and selling expenses for advertising and trade shows.
Research and development expenditures of $719,019 or 8.9% of net sales in 1998,
decreased from $878,425 or 10.5% of net sales in 1997. The decrease in these
expenses reflected the Company's completion of certifying the Company's products
for sales into the European Community in accordance with regulatory guidelines.
An additional $187,241 of software development expenses, which represents 2.3%
of net sales, was capitalized and represents a significant reduction in software
capitalization in the prior year. These expenses year-to-year are due to the
level of project activity for new products.
Interest expense decreased by $43,373 or 13.6% from $318,621 in 1997 to $275,248
in 1998. This decrease relates to both the waiver of interest and re-negotiation
of payment terms due to MLTV, a shareholder of the Company, and the reduction of
long-term debt.
Depreciation and amortization increased by $36,644 or 23% from $158,843 in 1997
to $195,477 in 1998. This increase relates to computer equipment acquired at the
end of 1997 and demonstration equipment.
There was no material change in the amortization of the goodwill which arose
from the acquisition of the Company's German subsidiary.
Amortization of other intangibles increased by $22,657, or 7.2% from $311,253 in
1997 to $333,910 in 1998. This amortization primarily relates to software
development costs incurred in prior years.
As a result of the foregoing, the Company reported a net loss for fiscal 1998 of
$1,233,941 in comparison to a net loss of $274,161 in 1997, an increase of
$959,780.
As a result of this net loss performance, the net loss per common share on a
weighted average number of common outstanding shares was $1.06 in comparison to
a net loss of $0.24 per share in 1997.
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.
Year 2000 Issue
Like other companies, financial and business organizations and individuals
around the world, the Company could be adversely affected if the computer
systems it uses and those used by other third parties on which it relies do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 issue". Management is
assessing its computer systems and the systems compliance issues of other third
parties on which it relies.
Based on the information available to management, the Company believes that the
products it sells to its customers are Year 2000 compliant. In addition, the
Company's suppliers are taking steps that they believe are reasonably designed
to address the Year 2000 issue with respect to the computer systems. At this
time, however, there can be no assurance that these steps will be sufficient,
and the failure of timely completion of all necessary procedures could have a
material adverse effect on the Company's operations. Management will continue to
monitor the status of and its exposure to this issue. For the year ended June
30, 1998, the Company incurred costs to upgrade its computer systems which
enabled it to be Year 2000 compliant. The Company does not expect to incur
significant additional Year 2000 costs.
Liquidity and Capital Resources
The working capital of the Company at June 30, 1998 was $1,536,497 as compared
to $2,072,411 at June 30, 1997, a decrease of $535,914 or 25.9%.
Current assets of $3,949,323 decreased $1,554,470 or 28.2% in comparison to the
prior year. This change primarily reflects (a) a decrease in cash of $1,109,696,
(b) a decrease in trade accounts receivable of $377,210 or 16.3%, and (c) an
increase in inventory and other current assets of $106,649.
Cash was used to fund operations and reduce borrowings and accounts payable. The
change in trade accounts receivable related to a lower sales volume than that
attributable to the final quarter of 1997. The accounts receivable balance of
$1.7 million represented 2.5 months of sales compared to 2.8 months of sales in
the prior year. The inventory balance of $1.7 million represents 5.6 months of
sales, compared with an inventory balance which represented 6.7 months of sales
in the prior year. This is attributable to a conscious effort by the Company to
reduce inventory levels to a more efficient operating level.
Current liabilities of $2,412,826 decreased $1,018,556 or 29.7% in comparison to
the prior year. This decrease was primarily due to: (a) reduction in notes
payable to banks of $228,154 or 17.3%, based on pay down of both the German
subsidiary bank line and a special line to Silicon Valley Bank; (b) reduction in
trade accounts payable of $364,356 or 34.3% based on payment activity; (c)
reduction in the current portion of long-term debt of $658,860 or 77.9%,
resulting principally from the re-negotiation of the payment terms of long-term
debt due to MLTV, a principal shareholder of the Company. This decrease was
offset by increases in other current liabilities of $232,814.
During March of 1998, the Company reached an understanding with MLTV that
interest would not accrue on the $630,000 principal amount of debt due by the
Company and that such balance would only become due upon the sale of the Company
or at such time as MLTV were to dispose of its interest in the Company.
As of December 15, 1997, the Company renewed its working capital line of credit
facility with Silicon Valley Bank of California for $2,000,000. This credit
facility has a one (1) year term (expiring December 31, 1998) and carries an
interest rate charge at the prime rate plus 1.5% (approximately 10%). 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 will retain ownership of intellectual property and is
restricted on the pledge of this property to any other party. The advance rate
is based on 75% against eligible domestic and Canadian receivables within 90
days from invoice date and 90% against insured or letter of credit backed
receivables. No clean-up period is required during the term of the loan. The
securities related to the Covington Capital debenture and the MLTV note are
subordinated to the bank debt. The balance outstanding at June 30, 1998 was
$1,020,696.
Bank indebtedness also includes the outstanding balance of $72,979 US (131,993
DM) at June 30, 1998 drawn on a credit facility with the Stadparkasse Bank of
Wedel, Germany. The total line of credit available is 400,000 DM. Interest is
charged on a quarterly basis at the German Federal Bank's discount rate plus two
points.
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 ($4,258 US) per month
for a period of forty-eight (48) months with the balance due at the end of the
term.
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, Canada plant. The
balance outstanding as of June 30, 1998 on the ODC fixed loan was $177,090
Canadian dollars ($120,651 US). The term of repayment is forty (40) months and
includes an interest rate of 6.75%. This term loan is classified as a long-term
debt with a current portion equal to twelve months of principal payments.
On March 7, 1997, PTI raised its first significant equity financing since 1987,
for $2,000,000, net $1,958,147 (for detail on specific terms, refer to Note H to
the Financial Statements). The importance of this financing is that it allowed
the Company to pursue its growth goals. The Company used the financing for new
product introduction and to expand its sales and marketing coverage.
Generally there is a six-month sales cycle, but the sales cycles can lengthen
due to economic conditions. During 1998, the sales cycle became too long, PTI
did not have the financial resources to sustain the sales and marketing plans
and had to cut back on its marketing and sales efforts.
If the Company has to repay some of the short term maturing debt, it will lose 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 two fiscal years.
ITEM 7. FINANCIAL STATEMENTS
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, appear on pages F1
through F26 of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. 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, 1998.
<TABLE>
<CAPTION>
MANAGEMENT
Name Age Position
---- --- --------
<S> <C> <C>
Charles G. Marianik 52 Chairman of the Board, President, Chief Executive
Officer and Director
Ronald Kovach 58 Executive Vice President, Secretary and Director
Howard D. Zumbrun 58 Vice President, Chief Financial Officer
William E. Aziz 42 Director
Louis Balogh 51 Director
M. Grant Brown 49 Director
Robert E. Curry 51 Director
Franklin J. Iris 68 Director
James F. Mrazek 57 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 E. Aziz was appointed as a member of the Board of Directors in December,
1997. This appointment satisfied a condition of the financing agreement with
Covington Capital Corporation. Mr. Aziz is a senior executive specializing in
corporate turnaround and restructuring activities. From 1991 to 1997, he served
as President and Chief Executive Officer of Interlink Freight Systems Inc. and
Agnew Group Inc. He is a graduate in honors business administration from the
Ivey School of Business at the University of Western Ontario and is a Chartered
Accountant.
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. The
Board currently consists of eight members.
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, 1998 with
all Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than ten-percent beneficial owners.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth, for fiscal years ending June 30, 1998, 1997, and
1996, 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 1998
exceeded $100,000, (the "Named Executive Officers") with respect to services
rendered by such persons to the Company and its subsidiaries. No individual who
would otherwise have been included in such table on the basis of salary and
bonus for the 1998 fiscal year resigned or terminated employment during that
fiscal year:
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards
------------------- ------
NAME AND Other Securities
PRINCIPAL Fiscal Annual Underlying All Other
POSITION Year Salary($) Compensation(1) Options Compensation(2)
- -------- ---- --------- --------------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Charles G. Marianik 1998 $196,927 $32,907 --- $37,389
Chairman, Chief 1997 $185,536 $28,666 24,000 $35,983
Executive Officer 1996 $180,927 $32,548 13,721 $35,983
and President
Ronald J. Kovach 1998 $128,593 $18,445 --- $ 6,202
Secretary and 1997 $105,863 $ 6,016 12,000 $ 5,819
Executive Vice 1996 $118,279 $ 8,961 5,843 $ 5,819
President-Technology
Howard D. Zumbrun(3) 1998 $88,378 $10,526 7,000 ---
Vice President and
Chief Financial
Officer
William D. Looney(3) 1997 $ 58,665 $ 3,128 ---- $ 3,369
Vice President, 1996 $112,365 $11,252 5,546 $ 5,776
Controller and
Treasurer
</TABLE>
(1) These amounts reflect personal benefits received by each Named
Executive Officer during the 1998 fiscal year. These personal benefits
include payments made on behalf of those individuals for (a) disability
insurance premiums, which include $1,718 for Mr. Marianik and $1,471
for Mr. Kovach; (b) medical expenses not otherwise covered by the group
plan, which include $3,570 for Mr. Zumbrun; (c) auto allowance, which
includes $2,538 for Mr. Marianik, $9,342 for Mr. Kovach and $5,613 for
Mr. Zumbrun, and (d) all income taxes attributed to insurance and
personal benefits and paid by the Company as a result of their receipt
of these personal benefits, which include approximately $28,651 for Mr.
Marianik, approximately $7,632 for Mr. Kovach and approximately $1,343
for Mr. Zumbrun.
(2) These amounts reflect supplemental term life insurance premiums for
each Named Executive Officer which includes for the 1998 fiscal year a
premium of $4,352 for Mr. Marianik and $1,086 for Mr. Kovach. For Mr.
Marianik, these amounts also include the premiums of $33,037 for each
fiscal year paid on a permanent-whole life insurance policy. For Mr.
Kovach, these amounts also include a premium of $5,116 for a
permanent-whole life policy.
(3) Mr. William D. Looney passed away in January 1997. Mr. Howard D.
Zumbrun became Vice President and Chief Financial Officer on September
15, 1997.
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants made
to each of the Named Executive Officers for the fiscal year ended June 30, 1998.
No stock appreciation rights were granted to these individuals during such year.
<TABLE>
<CAPTION>
Individual Grants(1)
--------------------
Number of
Securities
Underlying % of Total
Options Options Granted Exercise
Granted to Employees in Price Expiration
Name (#)(1) Fiscal Year ($/Sh)(2) Date
---- ------ ----------- --------- ----
<S> <C> <C> <C> <C>
Howard D. Zumbrun 7,000 100% $7.00 11/30/07
</TABLE>
- -------------------
(1) All options granted to Named Executive Officer are incentive stock
options under the federal tax laws and were granted on December 1,
1997. Pursuant to the option agreement evidencing these options, the
options were to become exercisable in three (3) successive equal annual
installments, with the first such installment to vest at 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.
<PAGE>
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,
1998. None of the Named Executive Officers exercised any stock options in 1998.
No stock appreciation rights were exercised during such year or were outstanding
at the end of that year.
<TABLE>
<CAPTION>
Value of Exercisable/
Number of Securities
Unexercisable In-the-
Underlying Unexercised Money Options at
Options at June 30, 1998 June 30, 1998 (1)
------------------------ -----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles G. Marianik 37,858 8,000 $-0- $-0-
Ronald J. Kovach 32,951 4,000 $-0- $-0-
Howard D. Zumbrun 2,333 4,667 $-0- $-0-
</TABLE>
- -----------------------
(1) Equal to the fair market value of securities underlying the option at
fiscal year end ($2.875 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, 1998 the Company paid an aggregate of $8,081 for director
traveling expenses. In addition, each non-employee director received an option
grant to purchase 3,333 shares of Common Stock on December 9, 1997 at an option
price of $7.00 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 27, 1997, the employment agreement between the Company and Mr. Marianik
was automatically extended for two years in accordance with the terms of the
contract. This employment agreement entitled Mr. Marianik to a base salary of
$215,000 in 1998. 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.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of September 1, 1998, 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.
<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 24.5%
Charles G. Marianik(2)
Princeton Corporate Plaza
1 Deerpark Drive, Suite F
Monmouth Junction, NJ 08852 320,097 19.8%
Covington Capital Corporation (8)
1 First Canadian Place
100 King Street West
Suite 2620, P.O. Box 165
Toronto, Ontario M5X 1C9 266,333 16.5%
Edison Venture Fund, L.P.
Princeton Pike Corporation Center
997 Lenox Drive #3
Lawrenceville, NJ 08648 112,333 6.9%
Michael Winderbaum
120 N. LaSalle, Ste. 2900
Chicago, IL 60602 111,285 6.9%
Ronald Kovach(3) 59,328 3.7%
Franklin J. Iris(4) 28,459 1.8%
Louis Balogh(5) 22,477 1.4%
James F. Mrazek(5) 23,111 1.4%
Howard D. Zumbrun(6) 3,570 .2%
All Directors and Executive
Officers as a Group (7 persons)(8) 1,120,200 69.3%
</TABLE>
<PAGE>
(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 37,858 shares which may be acquired within sixty days of September
1, 1998 pursuant to the exercise of stock options.
(3) Includes 32,951 shares which may be acquired within sixty days of September
1, 1998 pursuant to the exercise of stock options.
(4) Includes 20,999 shares which may be acquired within sixty days of September
1, 1998 pursuant to the exercise of stock options.
(5) Includes 19,444 shares which may be acquired within sixty days of September
1, 1998 pursuant to the exercise of stock options.
(6) Includes 2,333 shares which may be acquired within sixty days of September
1, 1998 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, 1998 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 1,167,356 outstanding shares plus
449,138 options that could be exercised within sixty days of September 1,
1998. On this basis, for purposes of calculations, the number of shares
used is 1,616,494.
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 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
On December 3, 1997, Mr. William E. Aziz, of Covington Capital Corporation, was
appointed to the Board of Directors of the Company.
On December 8, 1995, ML Technology Ventures, L.P. and Charles Marianik,
President of the Company, entered into a voting agreement providing that neither
party shall vote any of its shares in favor of a sale of the Company or merger
or consolidation without first consulting with and obtaining the written consent
of the other party.
<PAGE>
PART IV
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of the report:
1.and 2. The financial statements filed as part of this
report are listed separately in the Index to Financial
Statements located on page F1 of this report.
3.Exhibits - See Item 13(a). 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 13(a).
(b) No reports on Form 8-K were filed by the Company during the
last quarter of fiscal 1998.
(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(TM) 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) (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 27 Financial Data Schedule.
Exhibit 99 (a) 401(K) Plan, incorporated by reference from the Company's
Annual Report on Form 10-K for year ended June 30, 1989.
<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 23, 1998 By:/s/Charles G. Marianik
----------------------
Charles G. Marianik
Chairman of the Board,
Chief Executive Officer,
President and
Principal Executive Officer
Date: September 23, 1998 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 23, 1998
Charles G. Marianik Executive Officer, President and
Director, (Principal Executive Officer)
By: /s/Ronald J. Kovach
-------------------------------- Executive Vice President, September 23, 1998
Ronald J. Kovach Corporate Secretary and Director
By: /s/Howard D. Zumbrun
------------------------------- Vice President, September 23, 1998
Howard D. Zumbrun Chief Financial Officer
By:/s/William E. Aziz
-------------------------------- Director September 23, 1998
William E. Aziz
By:/s/Louis Balogh
-------------------------------- Director September 23, 1998
Louis Balogh
By:/s/M. Grant Brown
-------------------------------- Director September 23, 1998
M. Grant Brown
By:/s/Robert E. Curry
-------------------------------- Director September 23, 1998
Robert E. Curry
By:/s/Franklin J. Iris
-------------------------------- Director September 23, 1998
Franklin J. Iris
By:/s/James F. Mrazek
-------------------------------- Director September 23, 1998
James F. Mrazek
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Photon Technology International, Inc.
The following Consolidated Financial Statements of Photon Technology
International, Inc. are included in Item 7:
Report of Independent Auditors
Consolidated Balance Sheet--As at June 30, 1998
Consolidated Statements of Operations--For the Years Ended
June 30, 1998 and 1997
Consolidated Statements of Shareholders' Equity--For the Years
Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows--For the Years Ended
June 30, 1998 and 1997
Notes to Consolidated Financial Statements
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 sheet of Photon Technology
International, Inc. as of June 30, 1998 and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the two years in
the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 1998 and the results of its operations and its
cash flows for each of the two years in the period ended June 30, 1998, in
conformity with accounting principles generally accepted in the United States.
Ernst & Young
Chartered Accountants
London, Canada
September 4, 1998
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
As at June 30, 1998 (in U.S.$)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 258,007
Trade accounts receivable, less allowances of $44,085 1,705,040
Inventory
Finished goods $722,988
Work in process 296,594
Raw materials 720,543 1,740,125
--------
Prepaid expenses and other current assets 246,151
----------
TOTAL CURRENT ASSETS 3,949,323
PROPERTY AND EQUIPMENT
Furniture and fixtures 153,486
Machinery and equipment 2,403,269
---------
2,556,755
LESS: Accumulated depreciation 1,765,166 791,589
---------
DEFERRED INCOME TAX ASSET (Note F) 143,758
OTHER ASSETS (Note J) 1,658,423
----------
$6,543,093
==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET -- continued
As at June 30, 1998 (in U.S.$)
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness (Note C) $1,093,675
Accounts payable 696,779
Deferred income 29,519
Deposits 138,385
Accrued liabilities (Note K) 200,577
Current maturities of capital lease obligations -
(Note E) 67,189
Current maturities of long term debt (Note D) 186,702
-----------
TOTAL CURRENT LIABILITIES 2,412,826
LONG TERM DEBT (Note D) 1,553,369
CAPITAL LEASE OBLIGATIONS (Note E) 125,122
PREFERRED SHARES - Canadian subsidiary (Note H) 1,958,147
COMMITMENTS (Note E)
SHAREHOLDERS' EQUITY (Notes G, I, and L)
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 1,292,477
shares, including 125,121 shares
in treasury stock 6,305,315
Accumulated deficit (5,218,414)
Treasury stock, at cost (53,915)
Cumulative foreign currency translation adjustment (539,357)
---------
TOTAL SHAREHOLDERS' EQUITY 493,629
----------
$6,543,093
==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1998 and 1997 (in U.S.$)
1998 1997
----------- -----------
<S> <C> <C>
REVENUE 8,070,202 $ 8,401,786
COSTS AND EXPENSES
Cost of products sold 3,712,518 3,092,814
Selling, general, and administrative 3,915,563 3,944,653
Research and development 719,019 878,425
Interest 275,248 318,621
Depreciation and amortization 195,477 158,843
Goodwill amortization 135,061 135,061
Amortization of other intangibles 333,910 311,253
Foreign exchange loss 17,347 3,377
----------- -----------
9,304,143 8,842,947
----------- -----------
Loss before income tax benefits (1,233,941) (441,161)
Benefit from income taxes (Note F) (167,000)
----------- -----------
Net Loss ($1,233,941) ($ 274,161)
=========== ===========
Net Loss per common share $ (1.06) $ (0.24)
=========== ===========
Weighted average number of common shares
outstanding 1,164,930 1,160,676
=========== ===========
</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, 1998 and 1997 (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 July 1, 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 G) 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
3,948 shares issued under the
Company's Employee Stock
Purchase Plan (Note G) 7,929 2,518 10,447
Net Loss (1,233,941) (1,233,941)
Foreign currency
translation adjustment 2,415 2,415
---------- ----------- -------- --------- --------
Balance at June 30, 1998 $6,305,315 $(5,218,414) $(53,915) $(539,357) $493,629
========== ============ ========= ========== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1998 and 1997 (in US$)
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,233,941) $ (274,161)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 195,477 158,843
Goodwill amortization 135,061 135,061
Amortization - Other intangible assets 333,910 311,253
Deferred income tax benefit -- (167,000)
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 373,210 166,110
Decrease (increase) in inventory 84,260 (168,535)
Decrease (increase) in prepaid expenses and
other current assets 84,607 (81,986)
Decrease (increase) in accounts payable and accrued liabilities (334,227) 96,069
Increase (decrease) in deferred income 17,595 (37,831)
Increase in deposits 138,385 --
----------- -----------
Total adjustments 1,028,278 411,884
----------- -----------
Net cash provided (used) by operating activities (205,663) 137,723
INVESTING ACTIVITIES:
Purchase of property and equipment (69,020) (88,109)
Investments in patents -- (6,025)
Capitalized software (187,241) (280,570)
----------- -----------
Net cash used by investing activities (256,261) (374,704)
----------- -----------
<PAGE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1998 and 1997 (in US$)
1998 1997
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES:
Net proceeds from issuance of preference shares -- 1,962,137
Proceeds from issuance of common stock-
Employee Stock Purchase Plan 10,447 18,268
Financing costs incurred (3,990) (77,406)
Decrease in bank indebtedness (228,154) (200,568)
Repayment of long-term debt (334,532) (211,735)
Payment of capital lease obligations (66,539) (13,230)
----------- -----------
Net cash provided (used) by financing activities (622,768) 1,477,466
----------- -----------
Effect of exchange rate changes on cash (25,004) (151,823)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,109,696) 1,088,662
CASH AND CASH EQUIVALENTS - BEGINNING 1,367,703 279,041
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 258,007 $ 1,367,703
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID:
Interest $ 275,248 $ 294,779
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1998, the Company entered into a capital lease obligation for
computer equipment totaling $143,923.
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in US$)
JUNE 30, 1998
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 and its sales office branch in the United Kingdom.
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 operations.
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.
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.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 the
German subsidiary and the related value of net assets acquired or net
liabilities assumed, is reported net of amortization, and is being
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.
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 flows
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.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 Loss Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All loss per share amounts for all periods have been presented, and
where necessary, restated to conform to the Statement 128 requirements.
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$)
JUNE 30, 1998
NOTE B--GEOGRAPHIC INFORMATION
Geographical financial information for the years ended June 30, is as follows:
<TABLE>
<CAPTION>
(in thousands)
1998 1997
-------- --------
<S> <C> <C>
Net sales to unaffiliated customers:
North America $ 5,782 $ 5,880
Germany 1,246 1,238
United Kingdom 1,042 1,284
-------- --------
$ 8,070 $ 8,402
======== ========
Transfers between geographic areas:
North America 3,939 4,228
Germany 3 329
United Kingdom -- --
-------- --------
Revenue $ 3,942 $ 4,557
======== ========
Operating income (loss):
North America $ (408) $ 175
Germany (318) (256)
United Kingdom (232) (41)
-------- --------
Total Operating Loss $ (958) $ (122)
======== ========
Identifiable Assets:
North America $ 9,111 $ 10,572
Germany 900 1,116
United Kingdom 540 540
Elimination (4,008) (3,796)
-------- --------
Total Identifiable Assets $ 6,543 $ 8,432
======== ========
</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 (loss) consists of income (loss) before income tax
provision after adding back interest expense. 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.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE C--BANK INDEBTEDNESS
<TABLE>
<CAPTION>
(in US$)
1998
----
<S> <C>
Bank indebtedness as of June 30, 1998 consists of:
Working capital line of credit-Silicon Valley Bank $1,020,696
Line of credit-Stadparkasse Bank, denominated in German
Deutsche marks (1998-131,993 DM) 72,979
----------
$1,093,675
==========
</TABLE>
On June 26, 1996 the Company secured a working capital line of credit with
Silicon Valley Bank for $2,000,000. This credit facility has been extended to
December 31, 1998 and bears interest at prime (8.5% at June 30, 1998) 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, the common stock of 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 or domestic accounts receivable that are covered (supported) by either:
(a) credit insurance; or (b) letters of credit. The Company has received from
Silicon Valley Bank a waiver of covenant breaches at June 30, 1998.
Bank indebtedness includes the outstanding balance of $72,979 drawn on a credit
facility with the Stadparkasse Bank of Wedel, Germany. The total line of credit
available is 400,000 DM, which was established in conjunction with the formation
of the German Subsidiary. The collateral for the line represents a security
interest in all assets of the Germany Subsidiary. Interest is charged on a
quarterly basis at rates based on the German Federal Bank's discount rate (8.5%
at June 30, 1998).
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE D--LONG TERM DEBT
<TABLE>
<CAPTION>
(in US$)
1998
----------
<S> <C>
Details of long-term debt as of June 30, 1998 are as follows:
Subordinated promissory note payable to a
shareholder (MLTV) $630,761
Term loan payable to the Ontario Development
Corporation ("ODC"), at 6.75%, denominated in Canadian
dollars ($177,090 CDN) 120,651
Term loan denominated in German
marks (93,816 DM) 51,871
12% subordinated promissory note payable to Covington Capital Corporation,
denominated in Canadian
dollars ($1,375,000 CDN) 936,788
----------
Total 1,740,071
Less: current maturities 186,702
----------
Long-term debt, net of current maturities $1,553,369
==========
</TABLE>
On September 20, 1995, the Company entered into an agreement with MLTV. MLTV has
agreed to waive interest and required payments of principal until July 1, 1999.
This note is subordinated to the bank debt with Silicon Valley Bank (Note C) and
ranks equally in priority with the Covington Capital Corporation promissory
note.
The Company borrowed from ODC a $500,000 Canadian dollar fixed term loan at an
interest rate of 6.75% for a term of 4.5 years. Repayment began on July 15, 1996
for an amended period of forty months at a rate of $11,597 Canadian ($7,901 US)
per month, including principal and interest. The Company provided a security
interest in all chattel owned and acquired under this loan program. ODC waived a
floating charge on all assets in subordination to the Silicon Valley Bank debt
(Note C).
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE D--LONG TERM DEBT--Continued
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. Monthly principal payments of $6,250 Canadian will
extend through September 2000. This agreement included 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. In conjunction with the issuance of preference
shares of Photon Technology International (Canada), Inc. on March 7, 1997 (Note
H), 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 to
183,333 shares of common stock of the Company at $9.00 per share and the option
period 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.
The approximate aggregate amount of all long-term debt maturities for the years
ended June 30, 1998 is as follows:
1999 $ 186,702
2000 718,777
2001 834,592
----------
$1,740,071
==========
NOTE E--CAPITAL LEASE OBLIGATIONS AND COMMITMENTS
The Company has entered into capital leases for equipment expiring through
August 2002 with aggregate monthly payments of approximately $7,000, with
interest ranging from 9.2% to 10.8%.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE E--CAPITAL LEASES OBLIGATIONS AND COMMITMENTS--Continued
Future minimum annual rental commitments under capital leases and non-cancelable
operating leases at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1999 $ 86,721 $152,165
2000 81,909 73,371
2001 28,977 54,475
2002 21,696 42,336
2003 3,604 9,381
-------- --------
Total minimum lease payments 222,906 $331,728
========
Less interest 30,595
--------
Present value of net minimum
lease payments at June 30, 1998 $192,311
========
</TABLE>
Equipment under capital leases and accumulated amortization amounted to $274,985
and $79,194, respectively, as of June 30, 1998. Rental expense for operating
leases was $340,871 and $271,377 for 1998 and 1997, respectively.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE F--INCOME TAXES
At June 30, 1998 the Company has net operating loss carryforwards of
approximately $4,314,060 and $175,000 for U.S. federal and Canadian tax
reporting purposes, respectively, which expire in varying amounts through 2013
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, 1998, unused tax credits of approximately $117,000 and $61,000 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 benefit from income taxes for the years ended June 30, consists of the
following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current $ 0 $ 0
Deferred 0 (167,000)
--------- ---------
Tax benefit $ 0 $(167,000)
========= =========
</TABLE>
All tax benefits in 1997 relate to the Company's international operations. No
provision has been made for the Company's domestic operations in 1997 or 1998.
<PAGE>
Significant components of the Company's deferred tax assets and liabilities as
at June 30, 1998, are as follows:
<TABLE>
<CAPTION>
Deferred Tax Assets Current Non Current Total
- ------------------- ------- ----------- -----
<S> <C> <C> <C>
Accruals/Reserves $ 86,175 $ -- $ 86,175
Net Operating Loss Carryforward 1,913,682 1,913,682
Tax Credits 177,536 177,536
Other 8,135 8,135
---------- ---------- ----------
Gross Deferred Tax Asset $ 86,175 $2,099,353 $2,185,528
========== ========== ==========
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE F--INCOME TAXES--Continued
<TABLE>
<CAPTION>
Deferred Tax Liabilities
- ------------------------
<S> <C> <C> <C>
Capitalized Software -- (258,846) (258,846)
Goodwill related to the start-up of
the German subsidiary -- (98,725) (98,725)
Other -- (24,500) (24,500)
----------- ----------- -----------
Gross Deferred Tax Liability -- (382,071) (382,071)
----------- ----------- -----------
86,175 1,717,282 1,803,457
Valuation Allowance For Deferred Tax
Assets (86,175) (1,573,524) (1,659,699)
----------- ----------- -----------
Net Deferred Taxes $ -- $ 143,758 $ 143,758
=========== =========== ===========
</TABLE>
U.S. and foreign loss from operations before income tax provision for the years
ended June 30, 1998 and 1997 is as follows:
1998 1997
----------- -----------
U.S. $ (729,700) $ (66,239)
Foreign (504,241) (374,922)
----------- -----------
$(1,233,941) $ (441,161)
=========== ===========
<PAGE>
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
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Pre-tax loss $(1,233,941) $ (441,161)
=========== ===========
Provision for taxes at statutory rate (419,540) (149,995)
Canadian net operating loss carryforward (26,494) (7,153)
Goodwill related to start-up of German operations (73,819) (81,438)
Change in valuation allowance 485,560 (25,653)
Foreign tax rates in excess of U.S. Statutory rate (50,740) 753
Other 85,033 96,486
----------- -----------
Benefit from income taxes $ 0 $ (167,000)
=========== ===========
</TABLE>
The Company paid no corporate income taxes in 1998 or 1997. 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 $2,392 in
1998.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE F--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 G--EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan, effective April 1, 1996, to
provide eligible employees of the Company (including employees of 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 69,830.
In 1998, 3,948 shares were issued (5,958 shares were issued during 1997).
NOTE H--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$41,853, for a net amount
of US$1,958,147.
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 $0.50 per share.
In conjunction with the issuance of the preference shares, a put option
agreement was adopted between the Company and the holder of the preferred
shares. Under this agreement, the Company granted to the holder an irrevocable
and transferable right to require the Company to purchase from the holder, some
or all of the preference shares. The retraction price for each preference share
is the then current market price of the Company's common shares. The Company
then has five business days in which to notify the holder of its election of
whether it will satisfy the put price in cash or by the issuance of common stock
of the Company (subject to equivalence and adjustment, if necessary).
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE H--PREFERENCE SHARES--Canadian Subsidiary--Continued
Any holder of a preference share is entitled 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
purchase agreement. 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 I--STOCK OPTIONS AND WARRANTS
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, 1998 (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$)
JUNE 30, 1998
NOTE I--STOCK OPTIONS--Continued
The options granted under the discretionary option grant program vest in three
successive annual installments with the first such installment to vest at 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, except for options granted to a
greater than 10% shareholder which options have a maximum term of five years and
must have an exercise price of 110% of fair market value per share.
For the year ended June 30, 1998, the Company granted 30,332 stock options, of
which 7,000 options were issued to executive officers, and 23,332 options were
issued to directors and consultants. No options were exercised in fiscal 1998.
214,470 options or 72% of the authorized shares in the option pool have been
granted as of June 30, 1998, of which 177,805 are exercisable. Of the granted
options, 77,997 or 36% are under the automatic option grant program, and 116,475
or 54% are under the discretionary option grant program. The exercise price of
the common stock options range from $1.31 per share to $7.00 per share, and on a
weighted average basis approximates $4.07 per share. The granted and outstanding
options have expiration dates ranging from 1999 to 2007.
See Note D for descriptions of the options granted by the Company to C.I. -
C.P.A. Business Ventures Fund, Inc.
In addition, Silicon Valley Bank holds a warrant to purchase 5,000 shares of
common stock at $3.75 per share which expires November 26, 2001.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE J--OTHER ASSETS
Other assets consist of the following as of June 30, 1998:
<TABLE>
<S> <C>
Goodwill, net of accumulated
amortization of $555,240 $183,446
Capitalized software development costs,
net of accumulated amortization of $404,131 761,310
Patents, net of accumulated amortization of
$ 42,624 14,550
Purchase of technology rights and related joint venture
Interest, net of accumulated
amortization of $218,755 656,245
Deferred financing costs, net of accumulated
amortization of $127,966 42,872
----------
$1,658,423
==========
</TABLE>
The Company capitalized approximately $187,241 of software development costs
during fiscal 1998 ($280,000 in 1997). Amortization of capitalized software
development costs was $167,475 for 1998 and $87,000 for 1997.
Financing costs, primarily related to the Covington Capital and Silicon Valley
Bank loan agreements, have been capitalized and are amortized over the term of
the agreements (See Note D).
NOTE K--ACCRUED LIABILITIES
Accrued liabilities consist of the following as of June 30, 1998:
Employee compensation and other employee benefits $ 58,558
Accrued travel 19,293
Accrued taxes 24,040
Deposits 26,137
Miscellaneous 72,549
--------
$200,577
========
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE L--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 I--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 1998: risk-free interest rate of 5.40%
(1997-6.35%); dividend yields of 0.0% (1997-0.0%); volatility factors of the
expected market price of the Company's common stock of 2.071 (1997-2.423); and a
weighted-average expected life of the option of 5 years (1997-5 years).
The Company's pro forma information for the years ended June 30, 1998 and June
30, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net loss under U.S. GAAP $(1,233,941) $ (274,161)
Compensation expense per FASB 123 243,321 5,382
----------- -----------
Pro forma net loss $(1,477,262) $ (279,543)
=========== ===========
Pro forma net loss per common share $ (1.27) $ (0.24)
=========== ===========
</TABLE>
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE L--STOCK COMPENSATION--Continued
A summary of the Company's stock option activity, and related information as of
June 30, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Weighted Weighted
Number of Average Number of Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 197,471 $3.57 189,171 $3.63
Granted 30,332 6.92 45,999 3.42
Expired (13,333) 3.75 (37,699) 3.70
------- ----- ------- -----
Outstanding, end of year 214,470 $4.07 197,471 $3.57
======= ===== ======= =====
Exercisable at end of year 177,805 $3.86 151,472 $3.61
======= ===== ======= =====
Weighted-average fair value of
options granted during the period $6.13 $3.40
===== =====
</TABLE>
Exercise prices for options outstanding as of June 30, 1998 range from $1.31 to
$7.00. The weighted-average remaining contractual life of those options is 6.46
years.
NOTE M--COMPARATIVE AMOUNTS
Certain comparative amounts in the prior years have been reclassified to conform
with the presentation adopted in the current fiscal year.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE N--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, 1998 (in 000's):
<TABLE>
<CAPTION>
Book Fair
Value Value
----- -----
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $ 258 $ 258
Trade accounts receivable 1,705 1,705
Financial Liabilities:
Bank indebtedness 1,094 1,094
Accounts payable 696 696
Accrued liabilities 201 201
Long Term Debt: (Note D)
Subordinated promissory note - MLTV 631 561
Term loan payable - ODC 121 120
Term loan - German Marks 52 52
Subordinated promissory note-Covington Capital 937 970
Capital leases 192 190
</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.
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.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE O--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.
Year 2000 Issue (Unaudited)
Like other companies, financial and business organizations and individuals
around the world, the Company could be adversely affected if the computer
systems it uses and those used by other third parties on which it relies do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 issue". Management is
assessing its computer systems and the systems compliance issues of other third
parties on which it relies.
Based on the information available to management, the Company believes that the
products it sells to its customers are Year 2000 compliant. In addition, the
Company's suppliers are taking steps that they believe are reasonably designed
to address the Year 2000 issue with respect to the computer systems. At this
time, however, there can be no assurance that these steps will be sufficient,
and the failure of timely completion of all necessary procedures could have a
material adverse effect on the Company's operations. Management will continue to
monitor the status of and its exposure to this issue. For the year ended June
30, 1998, the Company incurred costs to upgrade its computer systems which
enabled it to be Year 2000 compliant. The Company does not expect to incur
significant additional Year 2000 costs.
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1998
NOTE P--RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." This
Statement establishes standards for the reporting and display of comprehensive
income and its components. SFAS 130 will be effective for the Company's fiscal
year 1999 and requires restatement of all previously reported information for
comparative purposes. This Statement will require additional disclosure but will
not have a material impact on the Company's financial position, results of
operations or cash flows. The FASB has also issued SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information" and SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities" which will be effective for
fiscal years 1999 and 2000, respectively. Management believes that these
Statements will not have a significant impact on the Company.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 258,007
<SECURITIES> 0
<RECEIVABLES> 1,749,125
<ALLOWANCES> (44,085)
<INVENTORY> 1,740,125
<CURRENT-ASSETS> 3,949,323
<PP&E> 2,556,755
<DEPRECIATION> (1,765,166)
<TOTAL-ASSETS> 6,543,093
<CURRENT-LIABILITIES> 2,412,286
<BONDS> 1,678,591
1,958,147
0
<COMMON> 6,305,315
<OTHER-SE> (5,811,686)
<TOTAL-LIABILITY-AND-EQUITY> 6,543,093
<SALES> 8,070,202
<TOTAL-REVENUES> 8,070,202
<CGS> 3,712,518
<TOTAL-COSTS> 3,712,518
<OTHER-EXPENSES> 5,316,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 275,248
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,233,941)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,233,941)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
