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, 1999
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.
(Name of small business issuer in its charter)
New Jersey 22-2494774
(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
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. $8,087,939
As of September 22, 1999, the registrant had 1,173,929 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 $446,093.
<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.
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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.
<PAGE>
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.
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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 1998 fiscal 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.
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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 1999 fiscal year, PTI had 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-vitro: 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, 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.
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<PAGE>
Product Group VI - Steady State Fluorescence - QuantaMaster
PTI has recently entered the largest single market in the fluorescence area.
Steady state fluorimeters are used in most basic fluorescence applications
wherever one has to detect small amount of substances, such as: environmental,
pharmaceutical, chemical, medical and process control.
PTI's modular architecture and price is unique in this market. PTI had not had
the necessary financial resources to properly promote this product. With the new
financing in 1997, (refer to Note I in Financial Statements) PTI 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
The Company's sales are primarily for research and development of analytical
measurement applications.
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<PAGE>
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.
<PAGE>
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
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<PAGE>
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 received US 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 1999, the Company
spent $603,303 (1998-$719,019) or approximately 7.5% (1998 - 8.9%) of total
revenues on research and development. This is above the average by other
companies in PTI's industry. PTI not only spends monies for developing new
products but is also coming up with new ways to decrease costs while maintaining
or even improving existing product performance.
Research and development was in four primary areas in the last three 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.
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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 received US patent protection for the RAM technology. Currently,
the Company is already successfully using one of the products in the RatioMaster
and ImageMaster systems lines.
Backlog
The Company's backlog consists of orders scheduled for delivery within three
months. As of June 30, 1999, the Company backlog was $1,347,329 as compared with
$863,093 as of June 30, 1998.
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.
<PAGE>
Human Resources
As of fiscal year ended June 30, 1999, the Company has 51 full-time employees,
20 of whom are employed in the United States, 23 of whom are employed by the
Canadian Subsidiary in London, Ontario, Canada, 4 of whom are employed in the
London, England sales office and 2 of whom are employed in the Munich, Germany
sales/service office and 2 in the Copenhagen, Denmark sales/service office. The
total employees consist of 22 in manufacturing/operations, 14 in sales and
marketing, 5 in product development and 10 in administration. None of the
Company's employees are covered by
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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 lease for the 9,000
square feet in London, Ontario expires in 1999, but the Company currently plans
to renew this lease for an additional two years. 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 (Hamburg area) administrative office is
approximately 4,000 square feet and has a lease term which expires September
2001, the Seefeld, Germany (Munich area) sales/service office is approximately
1,100 square feet and has a lease term which expires August 2001, and the
Copenhagen, Denmark sales/service office is approximately 700 square feet and
has a renewable quarterly occupancy.
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, 1999.
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 "PHTO".
<TABLE>
<CAPTION>
QUARTERLY COMMON STOCK PRICE RANGES
Fiscal 1999 Fiscal 1998
----------- -----------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st (Jul. 1-Sep. 30) 3 1/4 1 1/4 4 3
2nd (Oct. 1-Dec. 31) 2 1/4 13/16 5 2
3rd (Jan. 1-Mar. 31) 1 1/2 5/8 2 2
4th (Apr. 1-Jun. 30) 1 1/4 7/16 3 1/8 1 1/4
</TABLE>
<PAGE>
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markup, markdown or commission, and may not necessarily represent actual
transactions.
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As of June 30, 1999, the approximate number of holders of record of the common
stock of the Company was 147, 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 1999 COMPARED TO FISCAL YEAR 1998
Total revenues for the fiscal 1999 of $8,087,939 increased $17,737, or 0.2%,
from $8,070,202 in fiscal 1998. Net sales of $7,890,042 decreased $126,663, or
1.6%, from $8,016,705 in fiscal 1998 which reflects the impact of product orders
received late in the quarter which have a 45-60 day lead time to produce and
ship to customers. This performance was offset by an increase in other income.
Other income for fiscal year 1999 increased by $144,400, or 269.9%, primarily
due to recognition of customer deposits.
Cost of products sold for fiscal 1999 was $3,492,959, or 43.2% of total revenue,
which compares to $3,712,518, or 46.3% of total revenue for fiscal 1998. The
decrease of $219,559, or 5.9%, was due to both decreased net sales, and costs
related to plant production operation.
Selling (including marketing), general and administrative expenses of $3,125,070
for fiscal 1999 decreased $790,493, or 20.2%, from $3,915,563 for fiscal 1998.
These expenses as a percentage of total revenue decreased from 48.5% in fiscal
1998 to 38.6% in fiscal 1999. The decrease of $706,113 in selling and marketing
expenses in total and as a percentage of total revenue primarily reflects
decreased selling and marketing expenses for advertising and trade shows.
Research and development expenses of $603,303, or 7.5% of total revenue for
fiscal 1999 decreased $115,716, or 16.1%, from $719,019, or 8.9% of total
revenue for fiscal 1998. An additional $65,908 of software development expenses,
which represents 0.8% of total revenue, was capitalized for fiscal 1999 as
compared to $187,241, or 2.3% of total revenue for fiscal 1998. These expenses
are due to the level of project activity for new products.
Interest expense of $259,263 decreased $35,192, or 11.6%, from $294,455 in
fiscal 1998. This decrease is due to the declining balance of outstanding bank
indebtedness and long term debt throughout fiscal 1999.
Depreciation and amortization increased $88,062, or 13.6%, from $645,241 in
fiscal 1998 to $733,303 in fiscal 1999. This increase was primarily due to the
impact of higher amortization of software development costs capitalized in prior
fiscal years.
Foreign exchange losses in fiscal 1999 of $19,904 compares to losses of $17,347
in the prior fiscal year due to a mix of transactional activity.
Income taxes for the fiscal 1999 were $143,758 resulting from the reduction of
deferred tax assets due to the utilization of available net-operating losses in
Canada.
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The Company reported a net loss of $289,621 for fiscal 1999, compared to a net
loss of $1,233,941 for fiscal 1998. The reduction of costs of products, selling,
general and administrative expenses, and research and development expenses
discussed above were major impacts on income.
The resulting loss per share performance based on the number of common shares
outstanding for each fiscal year was $(0.25) in 1999 and $(1.06) in 1998.
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
The Company has been and is currently continuing to assess the potential impact
of the Year 2000 issue on the Company's operations. This assessment is
concentrated into three main areas; compliance of the Company's products and
software, evaluation of the Company's internal computers and information
systems, and assessments of third parties critical with regard to the Company's
operations.
All the Company's software stores the year as a four digit code, and
consequently is unaffected by the Year 2000 issue. The date and time stamps are
provided by the users' MS-DOS and Windows operating systems. These are not
expected to have problems until the year 2099. However, the Company cannot
assure any of its customers that problems will not be encountered with its
products if these organizations have not properly assessed the readiness of
their internal systems.
The Company has been assessing its computer systems and operations related
software used at all of its locations. To the extent that the Company is not
able to test the technology provide by third party hardware or software vendors,
the Company is in the process of obtaining assurances that their systems are
Year 2000 compliant. Currently, the Company believes all its computer systems
will be in compliance and has received obtained assurances from several of its
key software vendors that their products will be compliant.
The Company is also assessing the impact on its operations of the Year 2000
readiness of key vendors and suppliers, several product distributors, and
financial services organizations. When possible the Company has received
assurances from several key organizations that their systems will be compliant.
The failure of key companies in any one of these areas to adequately address and
remedy their Year 2000 readiness could have a material impact on the Company's
operating results and financial condition.
The resources available to the Company to address the compliance capability of
several of these key organizations are limited. Therefore the Company must rely
upon statements of assurances provided by these organizations which have far
greater resources than the Company and have invested significant resources to
address the compliance issues of their internal systems, and products and
services. Such areas of concern include, but are not limited to, public
utilities, local and long distance telephone
-12-
<PAGE>
services, telephone systems, banking services, commercial and public parcel
carriers, and commercial airline travel. At this time the Company does not
believe there will be any disruption of services in these areas.
In addition, it is unforeseen how the Year 2000 issue may impact the Company's
customers' purchasing patterns. Currently, the Company has not experienced any
negative impact that could potentially arise if customers shift their resources
to remedy their internal systems or delay purchasing the Company's products as
the calendar year progresses. Possible decreases in future revenues resulting
from these circumstances could have a material impact on the Company's operating
results and financial condition.
The Company believes that the cost of any Year 2000 modifications for both
internal use software and systems or the Company's products is not material.
(The Company estimates the expenditures relating to Year 2000 issues have not
exceeded $100,000) However, there can be no assurance that the various factors
discussed above relating to the Year 2000 compliance issues will not have a
material adverse effect on the Company's operating results and financial
position.
The Company currently has not developed nor implemented any Year 2000
contingency plans to date. However, the Company believes that it would be able
to maintain operations at level sufficient to conduct necessary business
functions.
Liquidity and Capital Resources
The working capital of the Company at June 30, 1999 was $1,843,225 compared to
$1,536,497 at June 30, 1998, an increase of $306,728, or 20.0%.
Current assets of $3,282,843 decreased $666,480, or 16.9%, from June 30, 1998.
This change primarily reflects decreases of $468,312 and $137,073 in accounts
receivable and inventory, respectively. The decreases were 27.5% and 7.9% of the
respective balances at June 30, 1998. The inventory balance represented 5.5
months of sales in inventory, which is comparable to the 5.6 months of sales in
inventory at the end of the preceding year. The trade accounts receivable
balance of $1.2 million represents 1.88 months of sales in comparison to 2.53
months of sales at June 30, 1998.
Current liabilities of $1,439,618 decreased $973,208, or 40.3%, in comparison to
the balance as of June 30, 1998. This decrease was due principally to reductions
in bank indebtedness, current portion of long term debt, trade accounts payable
and deferred revenue. These decreases were $555,864, $94,340, $212,177, and
$118,296 of the respective balances, or 50.8%, 37.2%, 29.4%, and 70.4%,
respectively.
As of December 14, 1998 the Company renewed its working capital line of credit
with Silicon Valley Bank of California for $2,000,000. This credit facility has
a one (1) year term (expiring December 13, 1999) and carries an interest rate at
the prime rate plus 1.5% (9.25% at June 30, 1999). Interest is due a payable
monthly, and the principal is due at maturity. The collateral for the line
represents a perfected first security interest in all the assets of the Company,
its wholly owned Canadian subsidiary and United Kingdom branch. The Company will
<PAGE>
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 ninety (90) days from invoice
date and 90% against insured or letter of credit domestic and foreign
receivables. The Company is not required to pay the outstanding balance in full
at any time during the term of the note. The balance outstanding at June 30,
1999 was $537,811. The securities related to the Covington Capital debenture and
the MLTV note are subordinated to the bank debt.
-13-
<PAGE>
Bank indebtedness normally includes the outstanding balance drawn on a credit
facility with the Stadparkasse Bank of Wedel, Germany. However, as of June 30,
1999 there was no outstanding balance on this credit facility. 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 (2) points. (The interest rate
charged by Stadparkasse Bank as of June 30, 1999 was 8.75%)
During March 1998, the Company reached an understanding with MLTV that interest
would not accrue on the $630,731 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.
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 Venture
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 ($4,231 US) per month
for a period of forty-eight (48) months with the balance due at the end of the
term. This financing was an important source of funds which provided for
investment to expand sales territory coverage through addition of personnel,
increase marketing support, and continue research and development efforts in
both hardware and software for new products and product cost reductions. The
balance as of June 30, 1999 was $1,300,000 Canadian dollars ($880,100 US).
In July 1994, documents were fully executed between the "ODC" and the Company
for a term loan facility in the amounts of $500,000 Canadian dollars. The loan
credit facility was established to allow production requests for equipment,
inventory and training expenditures associated with moving the production
operation from New Jersey plant to the London, Ontario plant. The balance
outstanding as of June 30, 1999 on the ODC fixed loan was $45,753 Canadian
dollars ($30,975 US) based on specific advance requests approved through this
date. The term of repayment is forty (40) months and includes an interest rate
of 6.75%.
On March 7, 1997, the Company raised its first significant equity financing
since 1987, for $2,000,000, net $1,958,147 (for detail on specific terms,
referred to Note I to the Financial Statements). The importance of this
financing is that it allows the Company to pursue its growth goals. The Company
had use this financing for new product introduction and to expand it sales and
marketing coverage.
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 current 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 new financing
if such circumstances present more attractive alternatives to the current
financing arrangements. The Company cannot be certain that it will be successful
in efforts to raise new funds.
Inflation
The Company believes that there has not been a significant impact from inflation
on the Company's operations during the past three fiscal years.
-14-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements, Notes to Consolidated Financial
Statements and the report of Ernst & Young LLP, 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.
-15-
<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 22, 1999.
MANAGEMENT
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Charles G. Marianik 53 Chairman of the Board, President, Chief Executive
Officer and Director
Ronald J. Kovach 58 Executive Vice President, Secretary and Director
M. Grant Brown 50 Director
Robert E. Curry 52 Director
Franklin J. Iris 69 Director
James F. Mrazek 58 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.
M. Grant Brown became a director of the Company in December 1995. Mr. Brown was
chosen by Covington Capital as their representative in fulfillment of a
condition of the financing agreement between Covington Capital Corporation and
the Company that a member of the Covington Capital group must be nominated by
the current Board of Directors. 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., Adeza
Corp., Instrumentation Metrics, Inc., Myrotech, Corp., Prometheus, Inc. and
Uresurge, 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.
-16-
<PAGE>
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 Chairman and C.E.O. of Cistron Biotechnology, Inc.
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 presently
holds the position of President and managing General Partner for the Four
Corners Venture Fund. 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. 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 six 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 five 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, 1999 with
all Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than five 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, 1999, 1998 and
1997, 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 1999
exceeded $100,000, (the "Named Executive Officers") with respect to services
rendered by such persons to the Company and its subsidiaries. The following
table also includes individuals who have resigned or terminated employment
during the fiscal year 1999 who would otherwise have been included in such table
on the basis of salary and bonus for the fiscal year:
-17-
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards
------------------- ------
NAME AND Other Securities
PRINCIPAL Fiscal Annual Underlying All Other
POSITION Year Salary($) Compensation(1) Options Compensation(2)
- -------- ---- --------- --------------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Charles G. Marianik 1999 $160,000 $33,608 28,333 $37,921
Chairman, Chief 1998 $196,927 $32,907 --- $37,389
Executive Officer 1997 $185,536 $28,666 24,000 $35,983
and President
Ronald J. Kovach 1999 $115,000 $14,802 7,500 $ 6,399
Secretary and 1998 $128,593 $18,445 --- $ 6,202
Executive Vice 1997 $105,863 $ 6,016 12,000 $ 5,819
President-Technology
Howard D. Zumbrun(3)(4) 1999 $50,000 $7,419 --- ---
Vice President and 1998 $88,378 $10,526 7,000 ---
Chief Financial Officer
William D. Looney(3) 1997 $ 58,665 $ 3,128 ---- $ 3,369
Vice President,
Controller and
Treasurer
</TABLE>
(1) These amounts reflect personal benefits received by each Named
Executive Officer during the 1999 fiscal year. These personal benefits
include payments made on behalf of those individuals for (a) disability
insurance premiums, which include $1,729 for Mr. Marianik and $1,292
for Mr. Kovach; (b) medical expenses not otherwise covered by the group
plan, which include $1,243 for Mr. Zumbrun; (c) auto allowance, which
includes $4,504 for Mr. Marianik, $7,200 for Mr. Kovach and $3,600 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 $27,374 for Mr.
Marianik, approximately $6,310 for Mr. Kovach and approximately $2,576
for Mr. Zumbrun.
(2) These amounts reflect supplemental term life insurance premiums for
each Named Executive Officer which includes for the 1999 fiscal year a
premium of $5,135 for Mr. Marianik and $1,737 for Mr. Kovach. For Mr.
Marianik, these amounts also include the premiums of $32,786 for each
fiscal year paid on a permanent-whole life insurance policy. For Mr.
Kovach, these amounts also include a premium of $4,662 for a
permanent-whole life policy.
(3) Mr. William D. Looney passed away in January 1997. Mr. Howard D.
Zumbrun became Vice President and Chief Financial Officer on September
15, 1997.
(4) Mr. Zumbrun resigned as Vice President and Chief Financial Officer, as
of December 31, 1998.
-18-
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants made
to each of the Named Executive Officers for the fiscal year ended June 30, 1999.
No stock appreciation rights were granted to these individuals during such year.
<TABLE>
<CAPTION>
Individual Grants(1)
--------------------
Number of
Securities
Underlying % of Total
Options Options Granted Exercise
Granted to Employees in Price Expiration
Name (#)(1) Fiscal Year ($/Sh)(2) Date
---- ------ ----------- --------- ----
<S> <C> <C> <C> <C>
Charles G. Marianik 28,333 80% $0.94 6/30/04
Ronald J. Kovach 7,500 20% $0.85 6/30/09
</TABLE>
- -------------------
(1) All options granted to Named Executive Officer are incentive stock
options under the federal tax laws and were granted on June 30, 1999.
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.
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,
1999. None of the Named Executive Officers exercised any stock options in 1999.
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, 1999 June 30, 1999 (1)
------------------------ -----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles G. Marianik 55,302 18,889 $-0- $-0-
Ronald J. Kovach 36,951 5,000 $-0- $-0-
</TABLE>
- -----------------------
(1) Equal to the fair market value of securities underlying the option at
fiscal year end ($0.44 per share) minus the exercise price payable for
those securities.
-19-
<PAGE>
Director Remuneration
Directors have not been paid a fee for serving on the Board or any committees of
the Board with the exception of Mr. Brown who receives a per meeting fee of $750
(Canadian Dollars) as part of the financing agreement with Covington Capital
Corporation. Directors are reimbursed for expenses related to attending Board or
committee meetings and annually are granted non-qualified stock options to
purchase the Company's Common Stock under the automatic option grant provision
of the Company's Stock Option Plan, as amended (the "Plan"). In the fiscal year
ended June 30, 1999 the Company paid an aggregate of $8,862 for director
traveling expenses. In addition, each non-employee director received an option
grant to purchase 3,333 shares of Common Stock on December 11, 1998 at an option
price of $1.13 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 July 6, 1999, 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
$210,000 in 1999. 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 allowance and a life
insurance policy, paid in full by the Company.
On July 6, 1999, the employment agreement between the Company and Mr. Kovach was
automatically extended for two years in accordance with the terms of the
contract. This employment agreement entitled Mr. Kovach to a base salary of
$135,000 in 1999. Under such agreement, Mr. Kovach is to be employed by the
Company in an executive capacity as Executive Vice 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. Kovach 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 allowance and a life insurance policy, paid in full by the Company.
<PAGE>
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.
-20-
<PAGE>
Pursuant to the terms of the option agreements the outstanding options will also
accelerate and become immediately exercisable for all of the shares at the time
subject to those options, should there occur certain changes in the ownership of
more than twenty percent (20%) of the Company's outstanding voting securities or
in the event there is a change in the majority of the Board members as a result
of any tender for the Company's outstanding voting securities, merger or other
business combination, or proxy contest for the election of Board members. On
December 8, 1995, MLTV purchased 333,333 shares of the Company's common stock
resulting in a change in ownership of more than 20% of the Company's outstanding
securities and the acceleration of the exercisability all of the then
outstanding options.
No Named Executive Officer of the Company served on the Board of Directors or
Compensation Committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of September 1, 1999, 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.
-21-
<PAGE>
<TABLE>
<CAPTION>
Name of Number of Percent of Class
Beneficial Owner(1) Shares Owned Outstanding (8)
- ------------------- ------------ ---------------
<S> <C> <C>
M.L. Technology Ventures, L.P. (6)
3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025 396,825 24.2%
Charles G. Marianik(2)
Princeton Corporate Plaza
1 Deerpark Drive, Suite F
Monmouth Junction, NJ 08852 337,541 20.4%
Covington Capital Corporation (7)
1 First Canadian Place
100 King Street West
Suite 2620, P.O. Box 165
Toronto, Ontario M5X 1C9 266,333 16.1%
Edison Venture Fund, L.P.
Princeton Pike Corporation Center
997 Lenox Drive #3
Lawrenceville, NJ 08648 112,333 6.8%
Michael Winderbaum
120 N. LaSalle, Ste. 2900
Chicago, IL 60602 111,285 6.7%
Ronald J. Kovach(3) 67,048 4.1%
Franklin J. Iris(4) 30,681 1.9%
James F. Mrazek(5) 25,333 1.5%
All Directors and Executive
Officers as a Group (5 persons)(6) 1,123,761 68.1%
</TABLE>
(1) For purposes of this table, a beneficial owner is one who, directly or
indirectly, has or shares with others (a) the power to vote or direct the
voting of the Common Stock or (b) investment power with respect to the
common stock which includes the power to dispose or direct the disposition
of the common stock.
(2) Includes 55,302 shares which may be acquired within sixty days of September
1, 1999 pursuant to the exercise of stock options.
(3) Includes 39,451 shares which may be acquired within sixty days of September
1, 1999 pursuant to the exercise of stock options.
-22-
<PAGE>
(4) Includes 24,332 shares which may be acquired within sixty days of September
1, 1999 pursuant to the exercise of stock options.
(5) Includes 21,666 shares which may be acquired within sixty days of September
1, 1999 pursuant to the exercise of stock options.
(6) 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.
(7) Includes 266,333 shares which may be acquired within sixty days of
September 1, 1999 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.
(8) In calculation of percentages, there were 1,173,929 outstanding shares plus
477,415 options that could be exercised within sixty days of September 1,
1999. On this basis, for purposes of calculations, the number of shares
used is 1,651,344.
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 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.
-23-
<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 1999.
(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.
<PAGE>
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.
-24-
<PAGE>
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.
- 25-
<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, 1999 By: /s/Charles G. Marianik
----------------------
Charles G. Marianik
Chairman of the Board,
Chief Executive Officer,
President and
Principal Executive Officer
Date: September 23, 1999 By /s/William J. Hiltner III
-------------------------
William J. Hiltner III
Corporate Controller
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, 1999
---------------------- Executive Officer, President and
Charles G. Marianik Director, (Principal Executive Officer)
By: /s/Ronald J. Kovach Executive Vice President, September 23, 1999
------------------- Corporate Secretary and Director
Ronald J. Kovach
By: /s/William J. Hiltner III Corporate Controller September 23, 1999
-------------------------
William J. Hiltner III
By: /s/M. Grant Brown Director September 23, 1999
-----------------
M. Grant Brown
By: /s/Robert E. Curry Director September 23, 1999
------------------
Robert E. Curry
By: /s/Franklin J. Iris Director September 23, 1999
-------------------
Franklin J. Iris
By: /s/James F. Mrazek Director September 23, 1999
------------------
James F. Mrazek
</TABLE>
- 26-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Photon Technology International, Inc.
The following Consolidated Financial Statements of Photon Technology
International, Inc. are included in Item 7:
Page
Report of Independent Auditors..................................... F2
Consolidated Balance Sheet--As at June 30, 1999..................... F3
Consolidated Statements of Operations and Comprehensive Loss
--For the Years Ended June 30, 1999 and 1998........................ F5
Consolidated Statements of Stockholders' Equity--For the Years
Ended June 30, 1999 and 1998....................................... F6
Consolidated Statements of Cash Flows--For the Years Ended
June 30, 1999 and 1998............................................. F7
Notes to Consolidated Financial Statements......................... F8
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders 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, 1999 and the related consolidated statements
of operations and comprehensive loss, stockholders' equity, and cash flows for
each of the years in the two year period ended June 30, 1999. 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, 1999 and the results of its operations and its
cash flows for each of the years in the two year period ended June 30, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/Ernst & Young LLP
--------------------
Ernst & Young LLP
Chartered Accountants
London, Canada
September 3, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
As at June 30, 1999 (in U.S.$)
1999
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................. $ 261,657
Trade accounts receivable, less allowances
of $45,042 ............................................ 1,236,728
Inventory
Finished goods ..................................... 495,471
Work in process .................................... 231,240
Raw materials ...................................... 876,341
----------
1,603,052
Prepaid expenses and other current assets ............. 181,406
----------
TOTAL CURRENT ASSETS ............................... 3,282,843
PROPERTY AND EQUIPMENT
Furniture and fixtures ................................ 224,561
Machinery and equipment ............................... 2,341,099
----------
2,565,660
LESS: Accumulated depreciation .............................. 1,951,183
----------
614,477
OTHER ASSETS (Note K) ....................................... 1,193,478
----------
$5,090,798
==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET -- continued
As at June 30, 1999 (in U.S.$)
1999
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C>
Bank indebtedness (Note C) ....................................... $ 537,811
Accounts payable ................................................. 508,642
Deferred income .................................................. 49,608
Accrued liabilities (Note L) ..................................... 184,003
Current maturities of long term debt and capital lease obligations
(Notes D and E) ............................................. 159,554
-----------
TOTAL CURRENT LIABILITIES ..................................... 1,439,618
LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(Notes D and E) ............................................... 1,503,965
PREFERRED SHARES - Canadian subsidiary (Note I) ........................ 1,958,147
COMMITMENTS (Note E)
STOCKHOLDERS' EQUITY (Notes G, J, and M)
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 118,548 shares
in treasury stock ........................................... 6,308,885
Accumulated deficit .............................................. (5,508,035)
Treasury stock, at cost .......................................... (51,082)
Accumulated Other Comprehensive Loss ............................. (560,700)
-----------
TOTAL STOCKHOLDERS' EQUITY .................................... 189,068
-----------
$ 5,090,798
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the Years Ended
June 30, 1999 and 1998 (in U.S.$)
1999 1998
--- ----
<S> <C> <C>
REVENUE ...................................... 8,087,939 8,070,202
COSTS AND EXPENSES
Cost of products sold .................. 3,492,959 3,712,518
Selling, general, and administrative ... 3,125,070 3,915,563
Research and development ............... 603,303 719,019
Interest ............................... 259,263 294,455
Depreciation ........................... 195,792 211,448
Amortization ........................... 537,511 433,793
Foreign exchange loss .................. 19,904 17,347
----------- -----------
8,233,802 9,304,143
----------- -----------
Loss before income tax expense ............... (145,863) (1,233,941)
Income taxes (Note F) ........................ 143,758 -0-
----------- -----------
Net Loss ..................................... ($ 289,621) ($1,233,941)
=========== ===========
Other Comprehensive Loss:
Foreign Currency Translation Adjustment (21,343) 2,415
Total Comprehensive Loss ..................... ($ 310,964) ($1,231,526)
=========== ===========
Net Loss per common share .................... $ (0.25) $ (1.06)
=========== ===========
Weighted average number of common shares
outstanding .................................. 1,169,952 1,164,930
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended June 30,
1999 and 1998 (in US$)
Accumulated
Treasury Other Total
Common Accumulated Stock, Comprehensive Stockholders'
Stock Deficit At Cost Loss Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 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)
Other Comprehensive Loss .... 2,415 2,415
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 .... 6,305,315 (5,218,414) (53,915) (539,357) 493,629
6,573 shares issued under the
Company's Employee Stock
Purchase Plan (Note G) ...... 3,570 2,833 6,403
Net Loss .................... (289,621) (289,621)
Other Comprehensive Loss .... (21,343) (21,343)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 .... $ 6,308,885 $(5,508,035) $ (51,082) $ (560,700) $ 189,068
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 1999 and 1998
(in US$)
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(289,621) $(1,233,941)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation 195,792 211,448
Amortization 537,511 453,000
Decrease in deferred tax assets 143,758 -0-
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 468,312 373,210
Decrease in inventory 137,073 84,260
Decrease in prepaid expenses and
other current assets 64,743 84,607
(Decrease) in accounts payable and accrued expenses (204,711) (334,227)
Increase in deferred income 20,089 17,595
Increase (decrease) in customer deposits (138,385) 138,385
------------ -----------
Total adjustments 1,224,182 1,028,278
----------- ----------
Net cash provided (used) by operating activities 934,561 (205,663)
INVESTING ACTIVITIES:
Purchase of property and equipment (37,813) (69,020)
Investments in patents ( 4,793) -0-
Capitalized software (65,910) (187,241)
------------- ---------
Net cash (used) by investing activities (108,516) (256,261)
------------ ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 1999 and 1998
(in US$)
1999 1998
---- ----
<S> <C> <C>
FINANCING ACTIVITIES:
Proceeds from issuance of common stock-
Employee Stock Purchase Plan 6,403 10,447
Financing costs incurred -0- (3,990)
Decrease in bank indebtedness (555,864) (228,154)
Repayment of long-term debt (198,235) (334,532)
Payment of capital lease obligations (70,631) (66,539)
------------ ----------
Net cash (used) by financing activities (818,327) (622,768)
------------ ---------
Effect of exchange rate changes on cash (4,068) (25,004)
------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,650 (1,109,696)
CASH AND CASH EQUIVALENTS - BEGINNING 258,007 1,367,703
---------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 261,657 $ 258,007
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID:
Interest $ 259,763 $311,573
========== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
During 1998, the Company entered into a capital lease
obligation for computer equipment totaling $143,923.
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in US$)
JUNE 30, 1999
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 inter-company 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 stockholders' equity as other
comprehensive losses. 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.
F-8
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
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.
F-9
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
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. Comprehensive Income (Loss)
In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS 130 requires disclosure of total non-stockholder changes in
equity in interim periods and additional disclosures of the components of
non-stockholder changes in equity on an annual basis. Total non-stockholder
changes in equity includes all changes in equity during a period except
those resulting from fiscal investments by and distributions to
stockholders.
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 acquired 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.
11. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
F-10
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE B--SEGMENTED INFORMATION
The company is organized and managed as a single business segment being
fluorescence and the Company is viewed as single operating segment by the chief
operating decision-maker for the purpose of resource allocation and assessing
performance.
Geographical financial information for the years ended June 30, is as follows:
<TABLE>
<CAPTION>
(in thousands)
1999 1998
------ ------
<S> <C> <C>
Net sales to unaffiliated customers:
North America ............................... $5,379 $5,782
Germany ..................................... 1,643 1,246
United Kingdom .............................. 1,066 1,042
------ ------
$8,088 $8,070
====== ======
Net Capital Assets:
North America ............................... $ 491 $ 536
Germany ..................................... 78 194
United Kingdom .............................. 45 61
------ ------
Total Net Capital Assets .................... $ 614 $ 791
====== ======
</TABLE>
Net sales to unaffiliated customers are based on the location of the selling
organization. Net capital 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.
F-11
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE C--BANK INDEBTEDNESS
(in US$)
<TABLE>
<CAPTION>
1999
----
<S> <C>
Bank indebtedness as of June 30, 1999 consists of:
Working capital line of credit-Silicon Valley Bank $537,811
========
</TABLE>
On June 26, 1996 the Company secured a working capital line of credit with
Silicon Valley Bank for $2,000,000. This credit facility has been extended to
December 13, 1999 and bears interest at prime plus 1.5%. (9.25% at June 30,
1999) Interest is due and payable monthly, and the principal is due at maturity.
The collateral for the line represents a perfected first security interest in
all assets of the Company, the common stock of its wholly-owned Canadian
subsidiary, and the United Kingdom branch office. The Company retains ownership
of intellectual property and is restricted on the pledge of this property to any
other party. The advances are based on 75% of eligible domestic and Canadian
accounts receivable due within ninety days of invoice date and 90% of eligible
foreign or domestic accounts receivable that are covered (supported) by either:
(a) credit insurance; or (b) letters of credit.
Bank indebtedness normally includes the outstanding balance drawn on a credit
facility with the Stadparkasse Bank of Wedel, Germany, however there is no
outstanding balance as of June 30, 1999. The total line of credit available is
400,000 DM, which was established in conjunction with the formation of the
German Subsidiary. The collateral for the line represents a security interest in
all assets of the Germany Subsidiary. Interest is charged on a quarterly basis
at rates based on the German Federal Bank's discount rate plus two (2) points.
(The interest rate charged by Stadparkasse Bank as of June 30, 1999 was 8.75% )
F-12
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE D--LONG TERM DEBT
<TABLE>
<CAPTION>
(in US$)
1999
----
<S> <C>
Details of long-term debt as of June 30, 1999 are as follows:
Subordinated promissory note payable to a
stockholder (MLTV) $ 630,761
Term loan payable to the Ontario Development
Corporation ("ODC"), at 6.75%, denominated in Canadian
dollars ($45,753 CDN) 30,975
12% subordinated promissory note payable to Covington
Capital Corporation, denominated in Canadian
dollars ($1,300,000 CDN) 880,100
----------
Total 1,541,836
Less: current maturities 81,750
----------
Long-term debt, net of current maturities $1,460,086
==========
</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 all of the
outstanding shares currently held by MLTV has been disposed of by MLTV. 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 ($7,851 US)
per month, including principal and interest. The Company provided a security
interest in all chattel owned and acquired under this loan program. ODC waived a
floating charge on all assets in subordination to the Silicon Valley Bank debt
(Note C).
F-13
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
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
I), the option agreement between C.I. - C.P.A. Business Ventures Fund, Inc., and
the Company was amended. The number of second option shares was increased 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, 1999 is as follows:
2000 $ 81,750
2001 1,460,086
----------
$1,541,836
==========
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 $7,200, with
interest ranging from 9.2% to 10.8%.
F-14
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE E--CAPITAL LEASES OBLIGATIONS AND COMMITMENTS--Continued
Future minimum annual rental commitments under capital leases and non-cancelable
operating leases at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
2000 86,540 265,323
2001 28,796 158,417
2002 16,739 75,828
2003 2,392 36,841
2004 -0- 25,476
-------- --------
Total minimum lease payments 134,467 $561,885
========
Less interest 12,784
--------
Present value of net minimum
lease payments at June 30, 1999 $121,683
========
</TABLE>
Equipment under capital leases and accumulated amortization amounted to $266,460
and $105,546, respectively, as of June 30, 1999. Rental expense for operating
leases was $267,516 and $340,871 for 1999 and 1998, respectively.
F-15
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE F--INCOME TAXES
At June 30, 1999 the Company has net operating loss carryforwards of
approximately $4,338,000 for U.S. federal tax reporting purposes, which expire
in varying amounts through 2014. In addition, the Company has approximately
$715,000 of net operating loss carryforwards for German tax reporting purposes
which do not have an expiration date and available scientific research
expenditures of approximately $260,000 in Canada that also do not have an
expiration date. The Company also has at June 30, 1999, unused tax credits of
approximately $117,000 for U.S. federal tax reporting purposes, which expire in
varying amounts through 2003, to offset future income taxes. The tax credits
relate to research and development expenditures. 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 income tax expense for the years ended June 30, consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current $ 0 $ 0
Deferred 143,758 0
-------- --------
Tax expense $143,758 $ 0
======== ========
</TABLE>
All tax expense in 1999 relate to the Company's Canadian subsidiary. No
provision has been made for the Company's domestic or German operations in 1998
or 1999.
<PAGE>
Significant components of the Company's deferred tax assets and liabilities as
at June 30, 1999, are as follows:
<TABLE>
<CAPTION>
Deferred Tax Assets Current Non Current Total
- ------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Accruals/Reserves $ 71,327 $ -- $ 71,327
Net Operating Loss Carryforward 1,832,462 1,832,462
Tax Credits 116,763 116,763
Available Research Expenditures 75,000 75,000
Other 14,624 14,624
---------- ---------- ----------
Gross Deferred Tax Asset $ 71,327 $2,038,849 $2,110,176
========== ========== ==========
</TABLE>
F-16
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE F--INCOME TAXES--Continued
<TABLE>
<CAPTION>
Deferred Tax Liabilities
- ------------------------
<S> <C> <C> <C>
Capitalized Software (188,767) (188,767)
Goodwill related to the start-up of
the German subsidiary (24,916) (24,916)
----------- ----------- -----------
Gross Deferred Tax Liability -- (213,683) (213,683)
----------- ----------- -----------
71,327 1,825,166 1,896,493
Valuation Allowance For Deferred Tax
Assets (71,327) (1,825,166) (1,896,493)
----------- ----------- -----------
Net Deferred Taxes $ -- $ -- $ --
=========== =========== ===========
</TABLE>
U.S. and foreign loss from operations before income tax provision for the years
ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
U.S. $(370,099) $ (729,700)
Foreign 224,236 (504,241)
--------- -----------
($145,863) $(1,233,941)
========== ============
</TABLE>
<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
----------------
1999 1998
---- ----
<S> <C> <C>
Pre-tax loss $ (145,863) $(1,233,941)
=========== ===========
Provision for taxes at statutory rate (49,593) (19,540)
Canadian net operating loss carryforward -- (26,494)
Goodwill related to start-up of German operations (74,736) (73,819)
Canadian Research Expenditures (13,926)
Change in valuation allowance 236,794 485,560
Foreign tax rates in excess of U.S. Statutory rate 8,279 (50,740)
Other 36,940 85,033
----------- -----------
Income tax expense $ 143,758 $ 0
=========== ===========
</TABLE>
The Company paid no corporate income taxes in 1999 or 1998. 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 $7,670 in
1999.
F-17
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
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 63,257.
In 1999, 6,573 shares were issued (3,948 shares were issued during 1998).
NOTE H--EMPLOYEE RETIREMENT BENEFITS
Effective July 1, 1999 the Company amended its salary reduction employee
benefits plan, a qualified plan adopted to conform to the United States Federal
tax code section 401(k). (The original plan was adopted effective March 1,
1989.) The Company will provide a matching contribution of 25% of all eligible
employees' pre-tax contributions, not to exceed 1.5% of each employee's eligible
compensation. The plan covers all full time employees in the United States who
elect to participate and whom meet the threshold of a minimum of 1000 hours of
service within the plan year. Most of the eligible employees have elected to
participate.
Each employee's pre-tax contributions are immediately vested upon participation
in the plan. The employees' vesting of the Company's matching contribution is
based upon length of service as follows:
Years of Service Vested %
---------------- --------
1 20%
2 40%
3 60%
4 80%
5 100%
F-18
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE H--EMPLOYEE RETIREMENT BENEFITS--Continued
Employees who are terminated prior to 100% vesting forfeit their non-vested
portion of the Company's matching contribution. All forfeited balances are
allocated to remaining eligible participating employees in the plan according to
their respective vested balances. Effective upon adoption of the amendment to
the plan, retroactive recognition of employment to date by all eligible
employees as July 1, 1999 was executed.
The Company estimates the annual fiscal contribution to be approximately
$11,000.
NOTE I--PREFERENCE SHARES--Canadian Subsidiary
On March 7, 1997, 296,296 preference shares of Photon Technology International
(Canada) Inc., (a wholly-owned subsidiary) were issued. The shares are
non-voting, non-cumulative, non-redeemable, retractable, non-participating, and
without nominal or par value. The aggregated purchase price of the preference
shares was US$ 2,000,000, net of financing costs of US$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 $0.50 per share.
In conjunction with the issuance of the preference shares, a put option
agreement was adopted between the Company and the holder of the preferred
shares. Under this agreement, the Company granted to the holder an irrevocable
and transferable right to require the Company to purchase from the holder, some
or all of the preference shares. The retraction price for each preference share
is the then current market price of the Company's common shares. The Company
then has five business days in which to notify the holder of its election of
whether it will satisfy the put price in cash or by the issuance of common stock
of the Company (subject to equivalence and adjustment, if necessary).
Any holder of a preference share is entitled to require Photon Technology
International (Canada), Inc. to redeem all, but no less than all, of such
holder's preference shares for the redemption price equal to the then current
market price of the Company's common shares, plus any declared and unpaid
dividends. The holder of the preference shares has agreed not to exercise its
redemption right unless the Company defaults on its obligations under the
purchase agreement. The share provisions also contain an adjustment provision in
relation to the redemption price on the basis that each preference share is and
is intended to be the equivalent of each common share of the Company, to the
effect that any change in the equivalence of the preference shares with the
common stock of the Company, as determined in good faith by the board of
directors of the Company, will result in such adjustment to the redemption price
as is required to re-establish such equivalence.
F-19
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE J--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, 1999. 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.
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% stockholder 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, 1999, the Company granted 42,499 stock options of
which 35,833 were issued to executive officers, and 6,666 options were issued to
directors under the automatic grant program. No options were exercised in fiscal
1999.
243,303 options or 81.1% of the authorized shares in the option pool have been
granted as of June 30, 1999, of which 206,082 are exercisable. Of the granted
options, 101,328, or 41.6%, are under the automatic option grant program, and
141,975 or 58.4% are under the discretionary
F-20
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE J--STOCK OPTIONS AND WARRANTS --Continued
option grant program. The exercise price of the common stock options range from
$0.85 per share to $7.00 per share, and on an weighted average basis
approximates $3.40 per share. The granted and outstanding options have
expiration dates ranging from 1999 to 2009.
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.
NOTE K--OTHER ASSETS
Other assets consist of the following as of June 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Goodwill, net of accumulated
amortization of $608,020 $ 48,414
Capitalized software development costs,
net of accumulated amortization of $676,153 555,197
Patents, net of accumulated amortization of
$51,253 11,434
Purchase of technology rights and related joint venture
Interest, net of accumulated
amortization of $306,259 568,741
Deferred financing costs, net of accumulated
amortization of $161,146 9,692
----------
$1,193,478
==========
</TABLE>
The Company capitalized approximately $65,908 of software development costs
during fiscal 1999 ($187,241 in 1998). Amortization of capitalized software
development costs was $272,022 for 1999 and $167,475 for 1998.
Financing costs, primarily related to the Covington Capital and Silicon Valley
Bank loan agreements, have been capitalized and are amortized over the term of
the agreements (See Note D).
F-21
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE L--ACCRUED LIABILITIES
Accrued liabilities consist of the following as of June 30, 1999:
Employee compensation and other employee benefits $ 81,373
Accrued travel 22,959
Accrued taxes 31,322
Accrued interest 2,997
Miscellaneous 45,352
--------
$184,003
========
NOTE M--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 or exceeds the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
For a summary description of the principal features of the Company's stock
option plan, see Note J--Stock Options.
Pro forma information regarding net income and earnings per share is required
under the Statement of Financial Accounting Standards (FASB) No. 123,
"Accounting for Stock Based Compensation," and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1999: risk-free interest rate of 5.67%
(1998-5.40%); dividend yields of 0.0% (1998-0.0%); volatility factors of the
expected market price of the Company's common stock of 1.812 (1998-2.071); and a
weighted-average expected life of the option of 5 years (1998-5 years).
The Company's pro forma information for the years ended June 30, 1999 and June
30, 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss under U.S. GAAP $ (289,621) $(1,233,941)
Compensation expense per FASB 123 (81,366) (243,321)
----------- -----------
Pro forma net loss $ (370,987) $(1,477,262)
=========== ===========
Pro forma net loss per common share $ (0.32) $ (1.27)
=========== ===========
</TABLE>
F-22
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE M--STOCK COMPENSATION--Continued
A summary of the Company's stock option activity, and related information as of
June 30, is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
Number of Average Number of Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 214,470 $4.07 197,471 $3.57
Granted 42,499 0.95 30,332 6.92
Expired (13,666) 6.21 (13,333) 3.75
-------- ---- -------- -----
Outstanding, end of year 243,303 $3.40 214,470 $4.07
======= ===== ======= =====
Exercisable at end of year 206,082 $3.71 177,805 $3.86
======= ===== ======= =====
Weighted-average fair value of
options granted during the period $0.52 $6.13
===== =====
</TABLE>
Exercise prices for options outstanding as of June 30, 1999 range from $0.85 to
$7.00. The weighted-average remaining contractual life of those options is 4.73
years.
NOTE N--COMPARATIVE AMOUNTS
Certain comparative amounts in the prior years have been reclassified to conform
with the presentation adopted in the current fiscal year.
F-23
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE O--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair market
values of the Company's financial instruments as of June 30, 1999 (in 000's):
<TABLE>
<CAPTION>
Book Fair
Value Value
----- -----
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $ 262 $ 262
Trade accounts receivable 1,237 1,237
Financial Liabilities:
Bank indebtedness 538 538
Accounts payable 509 509
Accrued liabilities 184 184
Long Term Debt: (Note D)
Subordinated promissory note - MLTV 631 625
Term loan payable - ODC 31 31
Subordinated promissory note-Covington Capital 880 899
Capital leases 122 121
</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.
F-24
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE P--SIGNIFICANT RISKS AND UNCERTAINTIES
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods ended June 30. 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.
NOTE Q--SUBSEQUENT EVENT
The Company's Board of Directors voted to approve, in principle, the sale of its
German subsidiary, Photomed GmbH, to a group of investors, which includes the
Company's Chairman and Chief Executive Officer, Charles G. Marianik. Photomed
GmbH will enter into an exclusive distributorship of the Company's products in
Germany, Scandinavia and several other European countries. In addition, Photomed
GmbH will retain its exclusive distributorship for Omega Optical/USA in Germany
and Austria.
The transaction is expected to be executed at the fair value of Photomed GmbH
($1.00 as of June 30, 1999) at the date of transfer of ownership. In addition,
the current "inter-company" liability due Photon Technology International, Inc.
(New Jersey corporation) from Photomed GmbH plus $150,000, which represents the
initial value of "ownership" of Photomed GmbH assigned by the Company, will be
converted into a non-interest bearing term note, payable over a period of seven
years. This inter-company balance as of June 30, 1999 was $688,207.
F-25
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 1999
NOTE Q--SUBSEQUENT EVENT--Continued
The Company does not expect the transaction to be completed prior to October 1,
1999.
NOTE R--RECENT ACCOUNTING PRONOUNCEMENTS
Since the fiscal year 1998 FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", SFAS 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
Mortgage Bank Enterprises", SFAS 135, "Rescission of FSAB Statement No. 75 and
Technical Corrections", and SFAS 136, "Transfer of Assets to a Not-For-Profit
Organization or Charitable Trust That Raises or Holds Contributions for Others".
Management believes that these Statements will not have an impact on the
Company.
In addition, the AICPA issued SOP 97-2, "Software Revenue Recognition", which
supersedes SOP 91-1. (This statement became effective for fiscal years beginning
after December 15, 1997) Management also believes that this pronouncement will
not have an impact on the company.
F-26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 261,657
<SECURITIES> 0
<RECEIVABLES> 1,281,770
<ALLOWANCES> (45,042)
<INVENTORY> 1,603,052
<CURRENT-ASSETS> 3,282,843
<PP&E> 2,565,660
<DEPRECIATION> 1,951,183
<TOTAL-ASSETS> 5,090,798
<CURRENT-LIABILITIES> 1,439,618
<BONDS> 1,503,965
1,958,147
0
<COMMON> 6,308,885
<OTHER-SE> 6,119,817
<TOTAL-LIABILITY-AND-EQUITY> 5,090,798
<SALES> 8,087,939
<TOTAL-REVENUES> 8,087,939
<CGS> 3,492,959
<TOTAL-COSTS> 3,492,959
<OTHER-EXPENSES> 4,481,580
<LOSS-PROVISION> (3,185)
<INTEREST-EXPENSE> 259,263
<INCOME-PRETAX> 145,863
<INCOME-TAX> 143,758
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (289,621)
<EPS-BASIC> (.25)
<EPS-DILUTED> 0
</TABLE>
