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, 2000
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
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Commission File Number: 33-10943-NY
PHOTON TECHNOLOGY INTERNATIONAL, INC.
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(Name of small business issuer in its charter)
New Jersey 22-2494774
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1009 Lenox Drive, Suite 104, Lawrenceville, NJ 08648
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(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (609) 896-0310
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
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. $7,420,453
As of September 22, 2000, the registrant had 1,182,273 shares of its
Common Stock outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of that date is $3,399,035
<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 moved its head offices from Monmouth Junction, New Jersey to Lawrenceville,
New Jersey in July 2,000. PTI sells its products in North America through a
direct sales force, located in four different sales offices in the U.S. and
Canada.
<PAGE>
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 consolidated all in-house
manufacturing in Canada when it recently moved its head offices in New Jersey
and expanded the Canadian plant. The lower Canadian currency and labor costs
coupled with the availability of skilled labor, makes PTI's production more cost
effective.
Formerly European sales, service, distributors and product distribution were
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. On December 1st 1999,
PhotoMed was sold to Charles Marianik the President of PTI. The PhotoMed entity
will continue to distribute PTI's product in the same geographical area as its
primary business. In addition, PhotoMed has taken over service support for all
of Europe. The intent of the sale of PhotoMed is to gain access to European
financing in order to expand the sales and marketing of PTI's products in Europe
and to free up financial resources of PTI for marketing and sales in the rest of
the world.
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.
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 has many new products that it will be introducing over the next three years,
some of which are its own manufacture, some as a result of corporate parting
with other companies. PTI in light of the new product expansion, will continue
to upgrade and reorganize its product lines in order to be more effective in
marketing and sales. The two main divisions in the product groups are
components, Product Group I and systems, Product Groups II, III and IV.
<PAGE>
Product Group I - Optical Building Blocks
PTI's components make up this line. They are composed of:
- light sources, both conventional and nitrogen and dye lasers
- fiber optic illuminators
- light and sampling handling modules,
- various detectors using: photomultipliers, photodiodes and intensified
CCD cameras,
- microscope accessories that can be used with virtually any
manufacturers microscopes (PTI does not manufacture microscopes.)
PTI has introduced a new line of power supplies and starters for its light
sources that reduce RF interference, which has traditionally been a problem with
such products since they are used in places where computers and other sensitive
instrumentation are subject to interference from the RF. In addition the power
supplies and starters are lower in cost of manufacture.
PTI is currently test marketing a new light source line that will offer even
more efficient power output than its current light sources. Full product
introduction is anticipated in January of 2001. PTI has applied for patent.
As a result of a joint partnership with M.U.T., a German engineering Company,
PTI is introducing a new intelligent, portable spectrophotometer. This device
has the capability to detect many different types of substances or to analyze
light, such as color detection. In addition to the two current models PTI will
introduce a full line of accessories. Currently the product is being marketed
through the component group, but it is expected that over the next few years the
product will become an independent product line.
This product line has a very broad market, since these modules can be used
wherever light is used. In addition, the modules are being sold as single units,
as well as in several PTI systems. There are significant O.E.M. applications
that PTI is currently actively pursuing. This product line is PTI's oldest. The
products have been totally redesigned and kept up to the latest technology and
specifications.
Product Group II - Fluorescence Microscopy and Imaging
This is a new product line that was reorganized to combine all microscope based
fluorescence systems under one product line. Formerly the products were under
two separate product groups, the Ratio-Fluorescence Systems (excluding imaging)
- RatioMaster Line and the Fluorescence Imaging Systems ImageMaster Line.
The RatioMaster products were the first PTI systems, introduced in 1987. The
RatioMaster systems can detect various ions, or fluorescent-labeled compounds,
generally found in living organisms. The products have a wide range of
applications in the medical, life science and pharmaceutical areas. They are
currently used for research applications to diagnose diseases, monitor drug
effects, or to understand various functions of living organisms. The systems can
be used to study, in-vivo: tissues, cells, single cells or even events happening
at sub-cellular levels.
<PAGE>
Because the ImageMaster systems are used with PTI's RatioMaster systems and with
microscopes and therefore serve very similar markets PTI has decided to
incorporate them into the same product 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.
The patented RAM technology, developed with the MLTV funding, continues PTI's
technological leadership in this area. The RAM technology is used with both
RatioMaster and ImageMaster systems.
Added to this product line in the next fiscal year is the new fluorescence
microscopy systems (January 2001). These systems are used for routine
fluorescence applications in microscopy.
Product Group III - Spectrofluorometers - 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. The Company is
continuing to add options and accessories to complete the product line. Sales
have continued to increase at a steady state for this product line, but PTI is
looking at additional financing to fully exploit this product line.
Product Group IV - 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
<PAGE>
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 the increase in sales of
these systems during the early part of the current 2001 fiscal year.
New Product Application Developments
In addition to the development of new or improved products, PTI has started to
focus on new and emerging applications that have great future potential.
Although these applications may be long term, the lessons learned can be
incorporated into existing products keeping PTI's instrumentation state of the
art. Given PTI's limited financial resources, we have been judicious in pursuing
only a select few hot new opportunities.
New this year is the application of PTI's expertise in fluorescence microscopy
to forensics. PTI has developed and sold a specially developed forensic
microscopy system for a major U.S. crime lab for the identification of various
traces of substances that are found at a crime scene. PTI is currently examining
if this market niche is economically viable, since the Company has the expertise
to develop routine equipment for use in these types of applications.
PTI's fluorescence instrumentation this summer took a trip with the world famed
submersible Elvin, of Titanic fame. The submarine explored black smokers more
than a mile in depth on the ocean floor for signs of living organisms, where
PTI's instrumentation was used in studying these samples.
PTI will continue to explore the frontiers of science in fluorescence
applications. Currently PTI has been invited to explore fluorescence
applications in outer space.
Sales and Marketing
PTI has made excellent use of the World Wide Web and is currently experimenting
with using the WEB in direct sales, which while common for many products would
be new for our industry.
The Company's sales are primarily for research and development of analytical
measurement applications. The Company will continue to focus on opportunistic
areas in both life sciences and physical sciences areas because of the diversity
of the markets and different user demands.
Professionals in corporations, universities, government or private labs and
hospitals generally make buying decisions for the Company's products. 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
<PAGE>
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 10% and has local competition that is
successful only in this market area. The remainder of the world accounts for
less than 30%.
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.
PTI uses a direct sales force in North America, Canada, the UK and Ireland.
PhotoMed GmbH, a former subsidiary handles sales directly in Austria, Benelux,
Germany, Hungary, Scandinavia and the German part of Switzerland. The rest of
the world is handled through dealers from the U.S.
Competition
The market for the Company's products is highly competitive, and PTI expects
this competition to increase. Many of the Company's competitors have
significantly greater research and development, marketing and financial
resources than the Company, and therefore represent significant competition. As
with all new and emerging markets, there are no dominant players in the
fluorescent instrumentation marketplace (greater than 10% market share). There
are many small companies, many of which are smaller than PTI. The Company
believes that the primary competitive factors in the market for the Company's
products are product performance, price, breadth of product offerings and
technical support.
With respect to the OBB product line, the Company competes with catalogue
distributors that sell standard items and companies that manufacture a limited
range of competitive sub-components and components.
The Company's systems compete with fluorescence instruments offered by large
corporations such as Perkin Elmer, Hitachi, Jasco and Shimadzu. These
corporations have a much higher market profile and significantly greater
marketing and financial resources, with the capacity to offer products at a
lower price. In addition, many other small companies have attempted to enter the
fluorescence market, including IBH, SPEX, Edinburgh, ISS and Universal Imaging.
<PAGE>
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. US patent
protection was granted in 1997 for the RAM technology. In the current fiscal
year the Company has filed for two additional patents. 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 2000, the Company
spent $627,514 (1999-$603,303), or approximately 8.5% (1999 - 7.6%), of total
revenues on research and development, exclusive of capitalized software
development costs. In the aggregate the costs were $971,176, or 13.1%, and
$669,210, or 8.3%, for the fiscal years 2000 and 1999, respectively. 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 two primary areas in the last two years:
Cost Reduction
PTI has invested a substantial amount of monies in the reduction of the product
costs. The results have allowed the Company to reduce prices, while still
maintaining margins and improving product performance. PTI believes that cost
benefit analysis will increasingly be a factor in the purchasing decision
process. Investing in this type of research will help PTI become more
competitive.
The cost of good sold reduction measures are particularly favorable to PTI at
the current time in the European Economic Community, where the EU has collapsed
against the dollar making U.S. manufactured goods more than 30% more expensive
over the last 18 months. Since most of PTI's competitors are U.S. companies or
Japanese companies, PTI can reduce its prices and still make a reasonable
margin.
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
significant cost component of research and product development.
Given the scarcity of software personnel, PTI has been particularly successful
in recruiting foreign talent to meet the Company's growing software skill needs.
As of the current fiscal year more than 80% of programming is now done abroad.
<PAGE>
PTI is working on a special project that should make at least the control of its
instrumentation hardware immune to changes in computers or software operating
systems. This should reduce future software R&D costs.
Backlog
The Company's backlog consists of orders scheduled for delivery within three
months. As of June 30, 2000, the Company backlog was $1,488,991 as compared with
$1,347,329 as of June 30, 1999.
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 and assembly operations are
incorporated within 9,000 square feet facility in London, Ontario, Canada.
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.
Human Resources
As of fiscal year ended June 30, 2000, the Company has 47 full-time employees,
17 of who are employed in the United States, 28 of who are employed by the
Canadian Subsidiary in London, Ontario, Canada, 2 of who are employed in the
London, England sales office. The total employees consist of 23 in
manufacturing/operations, 10 in sales and marketing, 5 in product development
and 9 in administration. None of the Company's employees are covered by
collective bargaining agreements. The Company's success will depend in part on
its continued ability to attract and retain high quality employees. The Company
considers its relations with employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
In July 2000, the Company relocated its headquarters to a 4,000 square feet
office suite in Lawrenceville, New Jersey primarily for administrative and sales
and marketing functions. The lease term is for five years and expires in 2005.
The 9,000 square foot London, Ontario facility incorporates primarily production
responsibilities, but also includes administrative, sales, and research and
development functions. The lease term is for two years and expires in 2001. The
<PAGE>
new United Kingdom sales office in West Sussex, England is approximately 1,500
square feet and has a renewable quarterly occupancy.
ITEM 3. LEGAL PROCEEDINGS
There is no material pending legal proceeding 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, 2000.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock commenced trading in the over-the-counter market
under the NASDAQ symbol "PHON" on February 9, 1987. In August 1992, the
Company's common stock was delisted from The NASDAQ Small Cap Market and is now
traded on the OTC Bulletin Board under the symbol "PHTO".
QUARTERLY COMMON STOCK PRICE RANGES
Fiscal 2000 Fiscal 1999
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Quarter High Low High Low
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1st (Jul. 1-Sep. 30) 1 3/8 3 1/4 2 1/4
2nd (Oct. 1-Dec. 31) 1 1/4 2 1/4 13/16
3rd (Jan. 1-Mar. 31) 14 3/4 1/4 1 1/2 5/8
4th (Apr. 1-Jun. 30) 4 1/2 3/4 1 1/4 7/16
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markup, markdown or commission, and may not necessarily represent actual
transactions.
As of June 30, 2000, the approximate number of holders of record of the common
stock of the Company was 156, which does not include those owners who are
registered with the Depository Trust Company.
The Company has never paid any cash dividends in the past and anticipates that
for the foreseeable future all earnings, if any, will be retained to finance
growth and to meet working capital requirements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Total revenues for the fiscal year 2000 of $7,420,453 decreased $667,486, or
8.3%, from $8,087,939 in fiscal 1999. Net sales of $7,295,910 decreased
$594,133, or 7.5%, from $7,890,043 in fiscal 1999. These decreases reflect the
impact of the PhotoMed sale offset by a higher sales order backlog. This
performance was offset by an increase in other income. Other revenue for fiscal
year 2000 decreased by $73,353, or 37.1%.
Net sales from the North American sales offices of $5,529,370 increased
$127,282, or 2.4%, from $5,402,088 in fiscal 1999. Net sales from the UK sales
office increased $5,421, or 0.5%, to $1,035,013 in fiscal 2000. Net sales for
the former PhotoMed subsidiary were $731,527 and $1,458,363 for fiscal years
2000 and 1999, respectively.
Cost of products sold for fiscal 2000 were $3,592,239, or 48.4% of total
revenue, which compares to $3,492,959, or 43.2% of total revenue for fiscal
1999. The increase of $99,280, or 2.8%, was due to an increase of the reserve
for future loss of inventory value against fiscal 1999 reserve.
Selling (including marketing), general and administrative expenses of $2,724,766
for fiscal 2000 decreased $400,304, or 12.8%, from $3,125,070 for fiscal 1999.
<PAGE>
These expenses as a percentage of total revenue decreased from 38.6% in fiscal
1999 to 36.7% in fiscal 2000. The decrease resulted from $182,947 and $217,357
decreases in selling and marketing and general and administrative expenses,
respectively. Selling and marketing expenses for PhotoMed were $197,377 and
$415,971 for fiscal years 2000 and 1999, respectively.
Research and development expenses of $627,514, or 8.5% of total revenue for
fiscal 2000 increased $24,212, or 4.0%, from $603,303, or 7.5% of total revenue
for fiscal 1999. An additional $343,662 of software development expenses, which
represents 4.6% of total revenue, were capitalized for fiscal 2000 as compared
to $65,908, or 0.8% of total revenue for fiscal 1999. These expenses are due to
the level of project activity for new products and software development.
Interest expense of $211,173 decreased $48,090, or 18.5%, from $259,263 in
fiscal 1999. This decrease primarily relates to the decreased level of average
bank indebtedness and long-term debt throughout fiscal 2000 in comparison to the
prior fiscal year.
Depreciation and amortization decreased $256,434, or 35.0%, from $733,303 in
fiscal 1999 to $476,869 in fiscal 2000. This decrease was primarily due to no
amortization in the current fiscal year relating to specific goodwill of
PhotoMed, which was fully amortized in fiscal 1999, as well as the general
impact of the PhotoMed sale. Depreciation and amortization for PhotoMed for
fiscal 1999 was $187,998.
Foreign exchange net gains in fiscal 2000 of $10,183 compares to losses of
$19,904 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 non-operating losses in
Canada. There was no provision for income taxes in fiscal 2000.
The Company reported net income of $3,864 for fiscal 2000, compared to a net
loss of $289,621 for fiscal 1999. The gain on the sale of the PhotoMed
subsidiary, the proceeds from the tax loss sale, and increases in the cost of
products sold discussed above were the major impacts on income.
The resulting per share performance based on the weighted average number of
shares outstanding was net income of $0.01 per share for fiscal 2000 in
comparison to net loss of $(0.25) in fiscal 1999.
Factors That May Affect Future Results
The Company believes that results of operations in any period could be impacted
by factors such as delays in the shipments or lack of market acceptance of new
products, a slower growth rate in the Company's target markets, order deferrals
in anticipation of new product releases, increased competition, adverse changes
in general economic conditions in any of the countries in which the Company does
business, or reduction or delay of private sector and government spending on
research activities.
Liquidity and Capital Resources
The working capital of the Company at June 30, 2000 was $1,538,668 compared to
$1,843,225 at June 30, 1999, a decrease of $304,577, or 16.5%.
Current assets of $2,878,285 decreased $404,558, or 12.3%, from June 30, 1999.
This change primarily reflects decreases of $145,560 and $221,422 in cash and
inventory, respectively. The decreases were 55.6% and 13.8% of the respective
balances at June 30, 1999. The inventory balance represented 4.6 months of sales
in inventory, which is comparable to the 5.5 months of sales in inventory at the
<PAGE>
end of the preceding year. The trade accounts receivable balance of $1,197,849
represents 1.97 months of sales in comparison to 1.88 months of sales at June
30, 1999.
Current liabilities of $1,339,617 decreased $100,001, or 6.9%, in comparison to
the balance as of June 30, 1999. This decrease was due principally to a decrease
in bank indebtedness and current portion of long-term debt of $122,525, or
22.8%, and $83,295, or 52.2%, of the respective balances as of June 30, 1999.
This decrease was offset by an increase of $77,118, or 155.0%, in deferred
revenue in comparison to fiscal 1999.
As of December 14, 1999 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, 2000) and carries an interest rate at
the prime rate plus 1.5% (11.0% at June 30, 2000). 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 the assets of the Company,
its wholly owned Canadian subsidiary and United Kingdom branch. The Company will
retain ownership of intellectual property and is restricted on the pledge of
this property to any other party. The advance rate is based on 75% against
eligible domestic and Canadian receivables within 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,
2000 was $415,286. The securities related to the Covington Capital debenture and
the MLTV note payable are subordinated to the bank debt.
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. The lender has
agreed not to require any principal repayments prior to June 30, 2001. This note
is subordinated to the bank debt with Silicon Valley Bank and ranks equally in
priority with the Covington Capital Corporation promissory note
On October 31, 1995, the Company completed a $1,100,000 ($1,500,000 Canadian)
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. 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. (This expires October 31, 2000.) 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.
Covington Capital Corporation has agreed not to demand repayment as long as
principal repayments are not made on the MLTV debt facility. The Company's plan
is to continue to adhere to the current debt repayment schedule by remitting to
lender monthly principal payments of $4,219 ($6,250 Canadian), plus interest,
beyond the October 2000 payoff date.
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 allowed the Company to pursue its growth goals. The Company
had used the proceeds for new product introduction and to expand its 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.
<PAGE>
The Company will continue to manage within its financial resources and attempt
to balance its working capital needs with cash flow generated from operations
and available current financing. The Company will continue to seek additional
financing to fully exploit its sales and marketing potential. The Company cannot
be certain that it will be successful in efforts to raise additional funds.
Inflation
The Company believes that there has not been a significant impact from inflation
on the Company's operations during the past two fiscal years.
ITEM 7. FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements, Notes to Consolidated Financial
Statements and the report of Ernst & Young LLP, independent auditors, with
respect thereto, referred to in the Index to Financial Statements, appear on
pages F1 through F29 of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning executive officers and
directors of the Company, including their ages and positions with the Company as
of September 22, 2000.
MANAGEMENT
Name Age Position
---- --- -------
Charles G. Marianik 54 Chairman of the Board, President,
Chief Executive Officer and Director
Ronald Kovach 59 Executive Vice President, Secretary
and Director
M. Grant Brown 51 Director
Robert E. Curry 53 Director
Franklin J. Iris 70 Director
James F. Mrazek 59 Director
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.
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
<PAGE>
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, 2000 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, 2000, 1999 and
1998, 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 2000
exceeded $100,000, (the "Named Executive Officers") with respect to services
rendered by such persons to the Company and its subsidiaries. The following
table also includes individuals who have resigned or terminated employment
during the fiscal year 2000 who would otherwise have been included in such table
on the basis of salary and bonus for the fiscal year:
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
------------------- ------
NAME AND Other Securities
PRINCIPAL Fiscal Annual Underlying All Other
POSITION Year Salary($) Compensation(1) Options Compensation(2)
-------- ---- --------- --------------- -------- ---------------
<S> <C> <C> <C> <C>
Charles G. Marianik 2000 $134,340 $33,461 --- $30,496
Chairman, Chief 1999 $160,000 $33,608 28,333 $37,921
Executive Officer 1998 $196,927 $32,907 --- $37,389
and President
Ronald J. Kovach 2000 $133,680 $15,235 --- $ 6,986
Secretary and 1999 $115,000 $14,802 7,500 $ 6,399
Executive Vice 1998 $128,593 $18,445 --- $ 6,202
President-Technology
Howard D. Zumbrun(3) 2000 --- --- --- ---
Vice President and 1999 $50,000 $7,419 --- ---
Chief Financial 1998 $88,378 $10,526 7,000 ---
Officer
</TABLE>
(1) These amounts reflect personal benefits received by each Named
Executive Officer during the 2000 fiscal year. These personal benefits
include payments made on behalf of those individuals for (a) disability
insurance premiums, which include $1,712 for Mr. Marianik and $1,409
for Mr. Kovach; (b) medical expenses not otherwise covered by the group
plan; (c) auto allowance, which includes $7,200 for Mr. Marianik,
$7,200 for Mr. Kovach, 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 $24,548
for Mr. Marianik, approximately $6,625 for Mr. Kovach.
(2) These amounts reflect supplemental term life insurance premiums for
each Named Executive Officer, which includes for the 2000 fiscal year a
premium of $2,263 for Mr. Kovach. For Mr. Marianik, these amounts also
include the premiums of $30,496 for each fiscal year paid on a
permanent-whole life insurance policy. For Mr. Kovach, these amounts
also include a premium of $4,723 for a permanent-whole life policy.
(3) Mr. Zumbrun resigned as Vice President and Chief Financial Officer,
effective December 31, 1998.
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants made
to each of the Named Executive Officers for the fiscal year ended June 30, 2000.
No stock appreciation rights were granted to these individuals during such year.
Individual Grants(1)
-------------------
Number of
Securities
Underlying % of Total
Options Options Granted Exercise
Granted to Employees in Price Expiration
Name (#)(1) Fiscal Year ($/Sh)(2) Date
---- ---------- ------------ ---------- ----------
None
-------------------
(1) All options granted to Named Executive Officer are incentive stock
options under the federal tax laws and were granted on June 30, 2000.
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,
2000. None of the Named Executive Officers exercised any stock options in 2000.
No stock appreciation rights were exercised during such year or were outstanding
at the end of that year.
Value of Exercisable/
Number of Securities
Unexercisable In-the-
Underlying Unexercised Money Options at
Options at June 30, 2000 June 30, 2000 (1)
------------------------ -----------------------
Exercisable Unexercisable Exercisable Unexercisable
Charles G. Marianik 56,609 9,445 $20,021 $10,012
Ronald J. Kovach 41,951 2,500 $5,750 $2,875
--------------------
(1) Equal to the fair market value of securities underlying the option at
fiscal year end ($2.00) per share) minus the exercise price payable for
those securities.
<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 will receive 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, 2000 the Company paid an aggregate of $4,835 for
director traveling expenses. In addition, each non-employee director received an
option grant to purchase 3,333 shares of Common Stock on December 10, 1999 at an
option price of $0.50 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 2000. 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 2000. 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
Pursuant to the express provisions of the Stock Option Plan, the outstanding
options under the Plan held by the Chief Executive Officer and the Company's
other Named Executive Officer will immediately accelerate in full and become
exercisable for all of the shares at the time subject to that option in the
event the Company is acquired by merger, consolidation or asset sale, unless the
option is to be assumed by the successor corporation or otherwise replaced with
a comparable option to purchase the shares of such successor corporation.
Pursuant to the terms of the option agreements the outstanding options will also
accelerate and become immediately exercisable for all of the shares at the time
subject to those options, should there occur certain changes in the ownership of
more than twenty percent (20%) of the Company's outstanding voting securities or
<PAGE>
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.
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, 2000, 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.
Name of Number of Percent of Class
Beneficial Owner(1) Shares Owned Outstanding (8)
------------------- ------------ ---------------
Charles G. Marianik(2)
Princeton Corporate Plaza
1009 Lenox Drive, Suite 104
Lawrenceville, NJ 08648 408,681 27.7%
M.L. Technology Ventures, L.P. (6)
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025 396,825 26.9%
Michael Winderbaum
120 N. LaSalle, Ste. 2900
Chicago, IL 60602 119,600 8.1%
Ronald Kovach(3) 97,889 6.6%
Covington Capital Corporation (7)
1 First Canadian Place
100 King Street West
Suite 2620, P.O. Box 165
Toronto, Ontario M5X 1C9 83,333 5.6%
James F. Mrazek(5) 28,666 1.9%
Franklin J. Iris(4) 28,014 1.9%
All Directors and Executive
Officers as a Group (5 persons)(6) 1,043,408 72.2%
<PAGE>
(1) For purposes of this table, a beneficial owner is one who, directly or
indirectly, has or shares with others (a) the power to vote or direct the
voting of the Common Stock or (b) investment power with respect to the
common stock which includes the power to dispose or direct the disposition
of the common stock.
(2) Includes 56,609 shares that may be acquired within sixty days of September
1, 2000 pursuant to the exercise of stock options.
(3) Includes 41,951 shares that may be acquired within sixty days of September
1, 2000 pursuant to the exercise of stock options.
(4) Includes 21,665 shares that may be acquired within sixty days of September
1, 2000 pursuant to the exercise of stock options.
(5) Includes 24,999 shares that may be acquired within sixty days of September
1, 2000 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 83,333 shares that may be acquired within sixty days of September
1, 2000 pursuant to the exercise of stock options. Mr. Grant Brown
represents the Covington Capital Corporation on the Board of Directors.
These shares were therefore included as part of the Directors and Executive
Officers Group.
(8) In calculation of percentages, there were 1,182,273 outstanding shares plus
292,888 options that could be exercised within sixty days of September 1,
2000. On this basis, for purposes of calculations, the number of shares
used is 1,475,161.
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.
<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.
Exhibit 4 (d) Form of Non-Qualified Option, incorporated by
reference from the Company's Annual Report on Form 10-K for
year ended June 30, 1989.
Exhibit 4 (e) Purchase Agreement and Put Agreement, effective March 7, 1997,
by and among C.I. Covington Fund Inc., Photon Technology
International (Canada) Inc. and Photon Technology
International, Inc., Incorporated by reference from the
Company's report on Form 8-K.
Exhibit 10 (a)(1) Employment Agreement between Charles G. Marianik
and the Company dated June 30, 1990, incorporated by
reference from the Company's Annual Report on Form 10-K for
year ended June 30, 1990.
<PAGE>
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 10(z)(3) Stock Purchase Agreement dated December 1, 1999 by and
between Photon Technology International, Inc. and Charles G.
Marianik.
Exhibit 21 Subsidiaries, incorporated by reference from the Company's
Annual Report on Form 10-K for year ended June 30, 1988.
Exhibit 27 Financial Data Schedule.
Exhibit 99 (a) 401(K) Plan, incorporated by reference from the Company's
Annual Report on Form 10-K for year ended June 30, 1989.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOTON TECHNOLOGY INTERNATIONAL, INC.
Date: September 22, 2000 By:______________________
Charles G. Marianik
Chairman of the Board,
Chief Executive Officer,
President and
Principal Executive Officer
Date: September 22, 2000 By:_______________________
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: Chairman of the Board and Chief September 22, 2000
---------------------------
Charles G. Marianik Executive Officer, President and
Director, (Principal Executive Officer)
By:_____________________ Executive Vice President, September 22, 2000
Ronald J. Kovach Corporate Secretary and Director
By:_____________________ Corporate Controller September 22, 2000
William J. Hiltner III
By: Director September 22, 2000
------------------------
M. Grant Brown
By: Director September 22, 2000
------------------------
Robert E. Curry
By: Director September 22, 2000
--------------------------
Franklin J. Iris
By: Director September 22, 2000
------------------------
James F. Mrazek
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Photon Technology International, Inc.
The following Consolidated Financial Statements of Photon Technology
International, Inc. are included in Item 7:
Page
Report of Independent Auditors..........................................F2
Consolidated Balance Sheet--As at June 30, 2000.........................F3
Consolidated Statements of Operations and Comprehensive Income (Loss)
--For the Years Ended June 30, 2000 and 1999.............................F5
Consolidated Statements of Stockholders' Equity--For the Years
Ended June 30, 2000 and 1999............................................F6
Consolidated Statements of Cash Flows--For the Years Ended
June 30, 2000 and 1999..................................................F7
Notes to Consolidated Financial Statements..............................F8
-F1-
<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, 2000 and the related consolidated statements
of operations and comprehensive income (loss), stockholders' equity, and cash
flows for each of the years in the two year period ended June 30, 2000. 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, 2000 and the results of its operations and its
cash flows for each of the years in the two year period ended June 30, 2000, in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Chartered Accountants
London, Canada
September 1, 2000
-F2-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET As at June 30, 2000 (in U.S.$)
2000
----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 116,097
Trade accounts receivable, less
allowances of $19,816 1,197,849
Inventory
Raw materials 989,629
Work in process 308,782
Finished goods 83,219
---------
1,381,630
Prepaid expenses and other current assets 182,709
---------
TOTAL CURRENT ASSETS 2,878,285
PROPERTY AND EQUIPMENT
Furniture and fixtures 153,914
Machinery and equipment 2,232,866
---------
2,386,780
LESS: Accumulated depreciation 2,001,364
---------
385,416
OTHER ASSETS
Note Receivable (Note M) 840,456
Intangible Assets (Note K) 1,214,623
---------
$5,318,780
==========
See Notes to Consolidated Financial Statements.
-F3-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET -- continued As at June 30, 2000 (in U.S.$)
2000
----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness (Note C) $ 415,286
Accounts payable 513,477
Deferred revenue 126,726
Accrued liabilities (Note L) 207,869
Current maturities of long term debt
and capital lease obligations (Notes D and E) 76,259
----------
TOTAL CURRENT LIABILITIES 1,339,617
LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(Notes D and E) 1,425,255
PREFERRED SHARES - Canadian subsidiary (Note I) 1,958,147
COMMITMENTS (Note E)
STOCKHOLDERS' EQUITY (Notes G, J, and N)
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 1,295,810
shares, including 113,537 shares
in treasury stock 6,311,465
Accumulated (deficit) ( 5,504,169)
Treasury stock, at cost ( 48,922)
Accumulated other comprehensive (loss) ( 162,613)
------------
TOTAL STOCKHOLDERS' EQUITY 595,761
-----------
$5,318,780
===========
See Notes to Consolidated Financial Statements.
-F4-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
For the Years Ended June 30, 2000 and 1999 (in U.S.$)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUE
Net Sales 7,295,910 7,890,043
Other Revenue 124,543 197,896
----------- -----------
7,420,453 8,087,939
----------- -----------
COSTS AND EXPENSES
Cost of products sold 3,592,239 3,492,959
Selling, general, and administrative 2,724,766 3,125,070
Research and development 627,514 603,303
Interest 211,173 259,263
Depreciation 188,636 195,792
Amortization 288,233 537,511
Foreign exchange (gain) loss (10,183) 19,904
----------- -----------
7,622,378 8,233,802
----------- -----------
Loss from Operations (201,925) (145,863)
Other Income
Gain from sale of subsidiary (Note M) 108,709 -0-
Sale of state tax losses (Note F) 97,080 -0-
----------- -----------
205,789 -0-
----------- -----------
Income (loss) before income tax expense 3,864 (145,863)
Income taxes (Note F) -0- 143,758
----------- -----------
Net Income (Loss) $ 3,864 ($ 289,621)
=========== ===========
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment 398,087 (21,343)
----------- -----------
Total Comprehensive Income (Loss) $ 401,951 ($ 310,964)
=========== ===========
Basic Net Income (Loss) per common share $ 0.01 $ (0.25)
=========== ===========
Diluted Net Income (Loss) per common share $ 0.01 $ (0.25)
=========== ===========
Weighted average number of common shares
outstanding 1,178,345 1,169,952
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-F5-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2000 and 1999 (in US$)
Accumulated
Treasury Other Total
Common Accumulated Stock, Comprehensive Stockholders'
Stock (Deficit) At Cost Income (Loss) Equity
----- --------- ------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1998 $6,305,315 $(5,218,412) $(53,914) $(539,357) $493,632
6,573 shares issued under
the Company's Employee
Stock Purchase Plan (Note G) 3,570 2,833 6,403
Net Income (Loss) (289,621) (289,621)
Cumulative foreign currency
translation adjustment (21,343) (21,343)
---------- ----------- -------- --------- --------
Balance at June 30, 1999 6,308,885 (5,508,033) (51,081) (560,700) 189,071
5,011 shares issued under the
Company's Employee Stock
Purchase Plan (Note G) 1,081 2,159 3,240
Exercise of Stock Options 1,499 1,499
Net Income (Loss) 3,864 3,864
Cumulative foreign currency
translation adjustment 398,087 398,087
---------- ----------- -------- --------- --------
Balance at June 30, 2000 $6,311,465 $(5,504,169) $(48,922) $(162,613) $595,761
========== ============ ========= ========== ========
</TABLE>
See Notes to Consolidated Financial Statements
-F6-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 2000 and 1999
(in US$)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,864 $ (289,621)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 188,636 195,792
Amortization 288,229 537,511
Decrease in deferred tax assets 0 143,758
Gain from sale of subsidiary (Note M) (108,709) 0
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (225,060) 468,312
Decrease in inventory 150,309 137,073
(Increase) decrease in prepaid expenses and
other current assets (34,463) 64,743
Increase (decrease) in accounts payable and accrued liabilities 50,370 (204,711)
Increase in deferred revenue 77,117 20,089
(Decrease) in customer deposits 0 (138,385)
----------- -----------
Total adjustments 386,429 1,224,182
----------- -----------
Net cash provided (used) by operating activities 390,293 934,561
INVESTING ACTIVITIES:
Purchase of property and equipment (35,628) (37,813)
Investments in patents (1,605) (4,793)
Capitalized software (343,662) (65,910)
----------- -----------
Net cash provided (used) by investing activities (380,895) (108,516)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock-
Employee Stock Purchase Plan 3,240 6,403
Proceeds from exercise of stock options 1,499 0
Increase (decrease) in bank indebtedness 27,667 (555,864)
Repayment of long-term debt (81,750) (198,235)
Payment of capital lease obligations (80,252) (70,631)
----------- -----------
Net cash provided (used) by financing activities (129,596) (818,327)
----------- -----------
Effect of exchange rate changes on cash (25,362) (4,068)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (145,560) 3,650
CASH AND CASH EQUIVALENTS - BEGINNING 261,657 258,007
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 116,097 $ 261,657
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID:
Interest $ 209,697 $ 259,763
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION
The Company sold the PhotoMed GmbH subsidiary for a sum of $150,001, which
included cash of $1 and a note receivable of $150,000.
Included in the PhotoMed note receivable balance of $840,456 are $690,456 of
trade accounts receivables and other accumulated transactions outstanding from
PhotoMed GmbH as of December 1, 1999.
See Notes to Consolidated Financial Statements
-F7-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in US$)
JUNE 30, 2000
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, until the point of its sale (see Note M.), 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 accumulated
other comprehensive income (loss). 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 maturity at acquisition of three months or less, and are
stated at cost plus accrued interest, which approximates market.
-F8-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
4. Inventory
Inventory is stated at the lower of cost or net realizable value for work
in process and finished goods and at the lower of cost or replacement cost
for raw materials. The cost of inventory is determined using the first in,
first out method.
5. Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
which range from three to ten years. At the time of disposal of assets,
both the cost and accumulated depreciation related to the particular assets
are removed from the appropriate accounts and any gains or losses are
included in income. Major renewals and betterment of assets are
capitalized.
6. Intangible 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.
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.
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.
-F9-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
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. Leases
Leases are classified as capital or operating leases. Leases, which
transfer substantially the entire 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.
10. 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.
.
-F10-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
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:
(in thousands)
2000 1999
---- ----
Net sales to unaffiliated customers:
North America $ 5,529 $ 5,402
Germany 732 1,458
United Kingdom 1,035 1,030
-------- --------
$ 7,296 $ 7,890
======== ========
Net Capital Assets
North America $ 378 $ 491
Germany -0- 78
United Kingdom 7 45
------ ------
Total Net Capital Assets $ 385 $ 614
====== ======
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.
-F11-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE C--BANK INDEBTEDNESS
(in US$)
2000
----
Bank indebtedness as of June 30, 2000 consists of:
Working capital line of credit-Silicon Valley Bank $415,286
========
On June 26, 1996 the Company secured a working capital line of credit with
Silicon Valley Bank for $2,000,000. This credit facility has been extended to
December 13, 2000 and bears interest at prime plus 1.5%. (11.0% at June 30,
2000) Interest is due and payable monthly, and the principal is due at maturity.
The collateral for the line represents a perfected first security interest in
all assets of the Company, the common stock of its wholly-owned Canadian
subsidiary, and the United Kingdom branch office. The Company retains ownership
of intellectual property and is restricted on the pledge of this property to any
other party. The advances are based on 75% of eligible domestic and Canadian
accounts receivable due within ninety days of invoice date and 90% of eligible
foreign or domestic accounts receivable that are covered (supported) by either:
(a) credit insurance; or (b) letters of credit.
NOTE D--LONG TERM DEBT
(in US$)
2000
----
Details of long-term debt as of June 30, 2000 are as follows:
Subordinated promissory note payable to a
Stockholder (MLTV) $630,761
12% subordinated promissory note payable to Covington
Capital Corporation, denominated in Canadian
dollars ($1,225,000 CDN) 826,998
-----------
Total 1,457,759
Less: current maturities 50,632
----------
Long-term debt, net of current maturities $ 1,407,127
===========
-F12-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE D--LONG TERM DEBT--Continued
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 have been disposed of by MLTV. The
lender has agreed not to require any principal repayments prior to June 30,
2001. 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.
On October 31, 1995, the Company completed a $1,100,000 ($1,500,000 Canadian)
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. 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. (This expires October 31, 2000.) 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.
Covington Capital Corporation has agreed not to demand repayment as long as
principal repayments are not made on the MLTV debt facility. The Company's plan
is to continue to adhere to the current debt repayment schedule by remitting to
the lender monthly principal payments of $4,219 ($6,250 Canadian), plus
interest, beyond the October 2000 payoff date.
The approximate aggregate amount of all long-term debt maturities for the years
ended June 30, 2000 is as follows:
2001 $ 50,632
2002 1,407,127
-----------
$ 1,457,759
===========
-F13-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE E--CAPITAL LEASES OBLIGATIONS AND COMMITMENTS
The Company has entered into capital leases for equipment expiring through
August 2002 with aggregate monthly payments of approximately $2,393 ($3,544
Canadian), with interest rates of 9.2% and 10.41%.
Future minimum annual rental commitments under capital leases and non-cancelable
operating leases at June 30, 2000 are as follows:
Capital Operating
Leases Leases
------ ------
2001 28,715 206,572
2002 16,692 143,633
2003 2,381 116,798
2004 -0- 115,809
2005 -0- 101,206
Thereafter -0- 8,448
---------- ----------
Total minimum lease payments 47,788 $692,466
========
Less interest 4,033
---------
Present value of net minimum
lease payments at June 30, 2000 $ 43,755
=========
Equipment under capital leases and accumulated amortization amounted to $266,460
and $146,452, respectively, as of June 30, 2000. Rental expense for operating
leases was $255,490 and $267,516 for 2000 and 1999, respectively.
-F14-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE F--INCOME TAXES
At June 30, 2000 the Company has net operating loss carryforwards of
approximately $4,173,000 for U.S. federal tax reporting purposes and
approximately $150,000 for Canadian federal tax reporting purposes, which expire
in varying amounts through 2014 and 2007, respectively. In addition, the company
has available scientific research expenditures of approximately $230,000 for
Canadian federal tax reporting purposes that do not have an expiration date. The
Company also has as of June 30, 2000, 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:
2000 1999
---- ----
Current $ -0- $ -0-
Deferred -0- 143,758
----------- -----------
Tax expense $ -0- $ 143,758
=========== ===========
No provision has been made for the Company's domestic or Canadian operations in
2000 or 1999.
Significant components of the Company's deferred tax assets and liabilities as
at June 30, 2000, are as follows:
Deferred Tax Assets Current Non Current Total
------------------- ------- ----------- -----
Accruals/Reserves $ 56,064 $ -0- $ 56,064
Net Operating Loss Carryforward -0- 1,418,982 1,418,982
Tax Credits -0- 116,763 116,763
Available Research Expenditures -0- 79,800 79,800
Other 63,018 41,400 104,418
----------- ----------- -----------
Gross Deferred Tax Asset $ 119,082 $ 1,656,945 $ 1,776,027
=========== =========== ===========
-F15-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE F--INCOME TAXES--Continued
<TABLE>
<CAPTION>
Deferred Tax Liabilities Current Non Current Total
------------------------ ------- ----------- -----
<S> <C> <C> <C>
Amortization of Capitalized Software -0- (245,810) (245,810)
Depreciation of Property & Equipment -0- (54,461) (54,461)
------------ ---------- ----------
Gross Deferred Tax Liability -0- (300,271) (300,271)
----------- --------- ---------
119,082 1,356,674 1,475,756
Valuation Allowance For Deferred Tax
Assets (119,082) (1,356,674) (1,475,756)
--------- ----------- -----------
Net Deferred Taxes $ -0- $ -0- $ -0-
============ ============= ============
</TABLE>
U.S. and foreign loss from operations before income tax provision for the years
ended June 30, 2000 and 1999 is as follows:
2000 1999
---- ----
U.S. $ 71,421 $(370,099)
Foreign (67,557) 224,236
---------- ---------
$ 3,864 $(145,863)
=========== =========
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
----------------
2000 1999
---- ----
<S> <C> <C>
Pre-tax income (loss) $ 3,864 $(145,863)
========== ==========
Provision for taxes at statutory rate 1,314 (49,593)
Goodwill related to start-up of German operations (6,968) (74,736)
Canadian Research Expenditures -0- (13,296)
Change in valuation allowance 420,717 236,794
Decrease in tax asset due to sale of subsidiary (338,282) -0-
Foreign tax rates in excess of U.S. Statutory rate (4,250) 8,279
Other (72,531) 36,310
---------- -----------
Income tax expense $ -0- $ 143,758
============== ===========
</TABLE>
The Company paid no corporate income taxes in 2000 or 1999. 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 $12,150 in
2000 ($7,670 in 1999).
-F16-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE F--INCOME TAXES--Continued
In April 2000, the Company completed the sale of its State of New Jersey
corporate tax loss carry-forwards and investment tax credits under the State's
Technology Tax Transfer Program for $103,277. This sale encompasses both net
corporate tax loss carry-forwards and investment tax credits generated through
the fiscal year ended June 30, 1998. Net proceeds from the sale, after deducting
broker fees, were $97,080.
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
subsidiary) with the opportunity to acquire a proprietary interest in the
Company. The number of authorized shares reserved for issuance is 58,246. In
2000, 5,011 shares were issued. (6,573 shares were issued during 1999).
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 who meet the threshold of a minimum of 1,000 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%
-F17-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
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 service rendered by all eligible employees
as July 1, 1999 was executed.
The Company's contribution for year ended June 30, 2000 was $10,211.
NOTE I--PREFERENCE SHARES--Canadian Subsidiary
On March 7, 1997, 296,296 preference shares of Photon Technology International
(Canada) Inc., (a wholly-owned subsidiary) were issued. The shares are
non-voting, non-cumulative, non-redeemable, retractable, non-participating, and
without nominal or par value. The aggregated purchase price of the preference
shares was US$ 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 $0.50 per share.
In conjunction with the issuance of the preference shares, a put option
agreement was adopted between the Company and the holder of the preferred
shares. Under this agreement, the Company granted to the holder an irrevocable
and transferable right to require the Company to purchase from the holder, some
or all of the preference shares. The retraction price for each preference share
is the then current market price of the Company's common shares. The Company
then has five business days in which to notify the holder of its election of
whether it will satisfy the put price in cash or by the issuance of common stock
of the Company (subject to equivalence and adjustment, if necessary).
-F18-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE I--PREFERENCE SHARES--Canadian Subsidiary--Continued
Any holder of a preference share is entitled to require Photon Technology
International (Canada), Inc. to redeem all, but no less than all, of such
holder's preference shares for the redemption price equal to the then current
market price of the Company's common shares, plus any declared and unpaid
dividends. The holder of the preference shares has agreed not to exercise its
redemption right unless the Company defaults on its obligations under the put
agreement. The share provisions also contain an adjustment provision in relation
to the redemption price on the basis that each preference share is and is
intended to be the equivalent of each common share of the Company, to the effect
that any change in the equivalence of the preference shares with the common
stock of the Company, as determined in good faith by the board of directors of
the Company, will result in such adjustment to the redemption price as is
required to re-establish such equivalence.
NOTE 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, 2000. 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.
-F19-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE J--STOCK OPTIONS--Continued
The options granted under the discretionary option grant program vest in three
successive annual installments with the first such installment to vest at the
grant date, unless otherwise provided in the option agreement. Options granted
under the automatic option grant program will vest (and the Company's repurchase
rights of the option shares will lapse) in three successive equal annual
installments over the optionee's period of Board service, with the first such
installment to vest upon the completion of one year of Board service measured
from the automatic grant date.
All options granted have a maximum term of ten years from grant date, and each
option has an exercise price equal to 100% of the fair market value per share of
the Company's common stock on the grant date, except for options granted to a
greater than 10% 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, 2000, the Company granted 6,666 stock options to
directors under the automatic grant programs. In addition, 10,000 stock options
were issued to a key employee of which 3,333 were exercised.
233,166 options or 78.8% of the authorized shares in the option pool have been
granted as of June 30, 2000, of which 201,222 are exercisable. Of the granted
options, 94,661, or 40.0%, are under the automatic option grant program, and
138,505 or 60.0% are under the discretionary option grant program. The exercise
price of the common stock options range from $0.38 per share to $7.00 per share,
and on a weighted average basis approximates $3.17 per share. The granted and
outstanding options have expiration dates ranging from 2000 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 $3.75 per share which expire November 26, 2001.
-F20-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE K--INTANGIBLE ASSETS
Intangible assets consist of the following as of June 30, 2000:
Capitalized software development costs,
net of accumulated amortization of $851,840 723,172
Patents, net of accumulated amortization of
$54,079 10,214
Purchase of technology rights, net of accumulated
amortization of $393,763 481,237
-----------
$1,214,623
===========
The Company capitalized $343,662 of software development costs during fiscal
2000 ($65,908 in 1999). Amortization of capitalized software development costs
was $175,688 for 2000 and $272,022 for 1999.
NOTE L--ACCRUED LIABILITIES
Accrued liabilities consist of the following as of June 30, 2000:
Employee compensation and other employee benefits $ 121,820
Accrued travel 20,934
Accrued taxes 3,711
Accrued interest 2,312
Miscellaneous 59,092
----------
$ 207,869
==========
-F21-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE M - SALE OF SUBSIDIARY
On December 1, 1999, the Company sold its one hundred percent ownership of its
German subsidiary, PhotoMed GmbH, to the Company's Chairman and Chief Executive
Officer, Charles G. Marianik, who owns 28% of the Company's outstanding stock.
PhotoMed GmbH entered into an exclusive distributorship of the Company's
products in Germany, Scandinavia and several other European countries for period
of seven years. In addition, PhotoMed GmbH will retain its exclusive
distributorship for Omega/USA in Germany and Austria.
The sale price was $150,001, which represents the $150,000 initial equity
investment made by the Company into the former PhotoMed subsidiary, and $1 cash.
The $150,000 is included in a $840,456 note receivable balance due to the
Company. The remaining $690,456 balance of this note receivable represents the
trade accounts receivable and other transactions due to the Company from the
former PhotoMed subsidiary as of the disposal date. (These amounts were
previously eliminated on the consolidated reporting basis.) The note receivable
is payable within seven (7) years and is non-interest bearing if the entire
balance is repaid within one year.
The operations of PhotoMed GmbH for the five months ended November 30, 1999 and
the year ended June 30, 1999 are included with the results of operations of the
Company as a whole in the Consolidated Statements of Operations and
Comprehensive Income (Loss). The results of operations of PhotoMed for the five
months ended November 30, 1999 were net revenues of $809,201, less costs and
expenses of $770,497, for income from operations of $38,704.
The results of operations of PhotoMed for the year ended June 30, 1999 were net
revenues of $1,643,187, less costs and expenses of $1,597,550 for income from
operations of $45,637.
Included with the current fiscal year's Consolidated Statement of Operations is
a gain of $108,709 from the sale of the PhotoMed GmbH subsidiary.
The results of PhotoMed operations, excluding the gain on sale of the
subsidiary, on per share performance based on the weighted average number of
common shares outstanding was income of $0.03 per share ($0.03 diluted per
share) for the year ended June 30, 2000. This is in comparison to income of
$0.04 per share ($0.04 diluted per share) for the year ended June 30, 1999. The
gain on the sale of the subsidiary on the weighted average number of common
shares outstanding was $0.09 per share for the year ended June 30, 2000.
-F22-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE N--STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related Interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
For a summary description of the principal features of the Company's stock
option plan, see Note J--Stock Options.
Pro forma information regarding net income and earnings per share is required
under the Statement of Financial Accounting Standards (SFAS) 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 2000: risk-free interest rate of 6.28%
(1999-5.67%); dividend yields of 0.0% (1999-0.0%); volatility factors of the
expected market price of the Company's common stock of 1.969 (1999-1.812); and a
weighted-average expected life of the option of 5 years (1999-5 years).
The Company's pro forma information for the years ended June 30, 2000 and June
30, 1999 is as follows:
2000 1999
---- ----
Net income (loss) under U.S. GAAP $ 3,864 $(289,621)
Compensation expense per SFAS 123 (25,494) (81,366)
---------- -----------
Pro forma net (loss) $(21,630) $(370,987)
========= ==========
Pro forma net (loss) per common share $(0.02) $(0.32)
======= =======
-F23-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE N--STOCK COMPENSATION--Continued
A summary of the Company's stock option activity, and related information as of
June 30, is as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Weighted Weighted
Number of Average Number of Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 243,303 $3.40 214,470 $4.07
Granted 16,666 0.42 42,499 0.95
Exercised (3,333) 0.38 -0- -0-
Expired (23,470) 4.07 (13,666) 6.21
-------- ---- -------- ----
Outstanding, end of year 233,166 $3.17 243,303 $3.40
======= ===== ======= =====
Exercisable at end of year 201,222 $3.49 206,082 $3.71
======= ===== ======= =====
Weighted-average fair value of
options granted during the period $0.42 $0.52
===== =====
</TABLE>
Exercise prices for options outstanding as of June 30, 2000 range from $0.38 to
$7.00. The weighted-average remaining contractual life of those options is 4.56
years.
Weighted
Number Average Weighted
Outstanding at Remaining Average
Range of Exercise Prices June 30, 2000 Contractual Life Exercise Price
------------------------ -------------- ----------------- --------------
Less than $1.00 49,166 6.22 $0.79
$1.00 to $4.00 164,001 3.73 $3.43
Greater than $4.00 19,999 4.56 $6.87
-----------
233,166
===========
-F24-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE N--STOCK COMPENSATION--Continued
Weighted
Number Average
Exercisable at Exercise Price at
Range of Exercise Prices June 30, 2000 June 30, 2000
------------------------ -------------- --------------
Less than $1.00 23,888 $0.92
$1.00 to $4.00 159,557 $3.49
Greater than $4.00 17,777 $6.86
--------------
201,222
==============
-F25-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE O--RELATED PARTY TRANSACTIONS
The following is the summary of transactions between the Company and PhotoMed
GmbH for the fiscal years ended June 30, 2000. (The Company sold its one hundred
percent ownership of PhotoMed, effective December 1, 1999 (See Note M.))
Transactions between the Company and PhotoMed through November 30, 1999 were
eliminated on the consolidated reporting basis.
2000
----
Net Sales to PhotoMed (Post-November 30, 1999) $120,300
========
Allocation of Expenses to PhotoMed $110,683
========
Net Purchases from PhotoMed $2,500
======
Services Provided by PhotoMed $7,581
======
As stipulated by the purchase agreement, sales by the Company to PhotoMed
continue to be transacted at the same transfer pricing levels that existed when
PhotoMed was a subsidiary of the Company. These sales price levels are lower
than the pricing levels currently transacted with the Company's other
territorial distributors. This pricing arrangement is in effect for the
seven-year term of the distribution agreement. (See Note M.)
Allocation of Expenses represents costs incurred by the Company for the direct
benefit of PhotoMed as both entities share elements of common management and
identifiable shared resources. The expenses included allocation of salaries,
taxes and benefits, direct expenses and allocation of certain operational costs.
Services Provided by PhotoMed represent the monthly charges per the agreement
between the Company and PhotoMed by which PhotoMed service personnel will assume
direct responsibility for service and support for the Company's customers and
distributors originating from its United Kingdom sales office. The monthly
amount is 4,000 DM plus any direct products costs, which are transacted
separately as Net Purchases from PhotoMed.
Included in the accounts receivable balance is $103,483 outstanding from
PhotoMed GmbH at June 30, 2000.
-F26-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE O--RELATED PARTY TRANSACTIONS--Continued
In addition, there is a note receivable due to the Company from PhotoMed in the
amount of $840,456 as of June 30, 2000. This represents the sum of $690,456 of
accounts receivable and other transactions due to the Company as of the disposal
date and the $150,001 sale price of the PhotoMed subsidiary. (The accounts
receivable balances were previously eliminated on the consolidated reporting
basis.) The note receivable is payable within seven (7) years and is
non-interest bearing, if the entire balance is repaid within one year. Interest
will accrue thereafter on any outstanding balance that has not been repaid as of
December 1, 2000 at a rate equal to the Company's effective borrowing rate.
-F27-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE P--COMPARATIVE AMOUNTS
Certain comparative amounts in the prior years have been reclassified to conform
with the presentation adopted in the current fiscal year.
NOTE Q--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, 2000 (in 000's):
Book Fair
Value Value
----- -----
Financial Assets:
Cash and cash equivalents $ 116 $ 116
Trade accounts receivable 1,198 1,198
Note Receivable 840 840
Financial Liabilities:
Bank indebtedness 415 415
Accounts payable 513 513
Accrued liabilities 208 208
Long Term Debt: (Note D)
Subordinated promissory note - MLTV 631 556
Subordinated promissory note-Covington Capital 827 837
Capital leases 44 43
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.
-F28-
<PAGE>
PHOTON TECHNOLOGY INTERNATIONAL, INC.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued (in US$)
JUNE 30, 2000
NOTE R--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, Western Europe 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 S--RECENT ACCOUNTING PRONOUNCEMENTS
Since the 1998 fiscal year, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities, and SFAS 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of the FASB Statement No. 133". As a
result, the SFAS 133 will now be applicable to all fiscal quarters of fiscal
years beginning after June 15, 2000 (instead of June 15, 1999). Management is
investigating the impact of the new standards on the company, but anticipates
that the impact, if any, will not be material.
In addition, in recent years, the AICPA issued SOP 98-1, "Accounting for Costs
of Computer Software Developed or Obtained for Internal Use" and SOP 98-9, a
modification of SOP 97-2. Management believes that this pronouncement will not
have an impact on the company.
The SEC issued SAB 101, 101A and 101B "Interpretive Guidance on Revenue
Recognition". Management also believes that this pronouncement will not have an
impact on the company.
-F29-
