UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
Commission File No. 0-21816
PML, INC.
(Name of small business issuer in its charter)
Delaware 93-1116123
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
27120 SW 95TH Avenue
Wilsonville, Oregon 97070
(Address of principal executive offices, including zip code)
(503) 570-2500
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
---
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. Yes X No
---
Revenues for the most recent fiscal year: $13,319,120
The aggregate market value of voting Common Stock held by non affiliates (based
on the closing sales price on the NASD Electronic Bulletin Board) on August 28,
1997 was approximately $988,000.
Indicate by check mark whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes X No
---
As of August 28, 1997, there were 1,776,816 shares of Common Stock with $0.01
par value outstanding, and 211,551 Class B Common Shares with $0.01 par value
outstanding.
Documents incorporated by reference: N/A
<PAGE>
PML, INC.
FORM 10-KSB INDEX
Part I Page
------ ----
Item 1. Description of Business 2
Item 2. Description of Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 7. Financial Statements and Supplementary Data 10 &
F1-F18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 10
Part III
--------
Item 9. Directors, Executive Officers, Promoters and Control Personnel;
Compliance with Section 16(a) of the Exchange Act 11
Item 10. Executive Compensation 12
Item 11. Security Ownership of Certain Beneficial Owners and Management 13
Item 12. Certain Relationships and Related Transactions 14
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14
<PAGE>
PML, INC.
1997 FORM 10-KSB ANNUAL REPORT
PART I
Item 1. Description of Business
General
PML, Inc., (the company), formerly known as Meda, Inc., was formed on
September 3, 1991 by Monogenesis Corporation. It was inactive until it acquired
all of the issued and outstanding stock of PML Microbiologicals, Inc., formerly
known as Prepared Media Laboratory, Inc. (PML), on December 4, 1992 in return
for shares of its stock. The Company currently does all of its business through
PML, and references herein to "PML" and "the Company" are used interchangeably.
In early 1997, the name of the parent and operating companies were changed from
Meda, Inc. to PML, Inc. and from Prepared Media Laboratory , Inc. to PML
Microbiologicals, Inc., respectively.
PML, which has been in business since 1969, researches, develops,
manufactures, tests and distributes a wide array of biological products which
are used to test for and diagnose various conditions, illnesses and
contaminants. Its products include the following: prepared culture media;
monophasic and biphasic blood culture systems; enzyme-based rapid identification
kits, disks and strips; identification reagents in ampules and dropper bottles;
environmental systems for non-aerobic organisms; bacteriology and parasitology
stains; inoculating loops and transport swabs; parasitology transport and
specimen processing kits; and lyophilized organisms.
PML markets to both the clinical market (diagnosis of diseases in humans)
and to the industrial market (environmental and sterility testing). Typical
customers for PML's clinical products are hospitals, clinics, and wholesalers
that market to hospitals and clinics. PML's industrial customers include
pharmaceutical companies, biotech research facilities, and food and water
testing labs.
Products
PML's product line consists of diagnostic products and supporting
materials used by both clinical and industrial microbiologists. Its diagnostic
products include, among other items, prepared culture media in Petri dishes,
tubes and bottles for use in culturing and differentiating organisms from
specimens; various kits, disks and strips for rapid identification of organisms;
microdilution ("MIC") panels for determining the minimum inhibitory
concentration of antibiotics which may be used against the cultured organisms;
and various identification stains and reagents. Supporting materials include
inoculating loops for inoculating the specimen into culture media; transport
media for keeping specimens viable until they are delivered to the laboratory;
lyophilized control organisms, for quality control and training; gas generating
systems, for providing the proper gaseous environment for culturing organisms;
swabs for collecting specimens; and various fixatives and preservatives.
2
<PAGE>
The majority of PML's products have a defined shelf life ranging from as
little as a few weeks for media in Petri dishes to six months or more for
products in test tubes or bottles. Most products require refrigeration to
prevent premature deterioration. and some products are stored and shipped
frozen. Most products can be shipped by common carrier overnight without special
protective packaging except in extreme temperatures. Some products, such as
general laboratory reagents, contain hazardous chemicals and require special
storage, packaging, and shipping. See "Governmental Regulation."
Marketing
PML markets its products primarily in the United States and Canada through
its internal sales organization and through a network of distributors. PML's
customers include both clinical and industrial microbiology laboratories.
Hospital and private medical laboratories plus doctor's offices and clinics make
up most of the clinical market. The industrial market includes food and drug
packagers, food and water testing labs, and pharmaceutical and biotechnology
research firms. The veterinary market is also a growing segment.
Based upon management's research and derived from sources which management
believes to be reliable, the clinical microbiology market exceeds $1 billion
annually in the United States. The industrial market is estimated to be in
excess of $100 million and growing. The prepared culture media segment of the
clinical microbiology market is estimated at over $200 million. The balance of
this market consists of products such as viral identification kits, mainly
hepatitis and AIDS; bacteriology identification test kits; and automated
microbiology systems.
Although prepared culture media represents only a modest portion of the
total microbiology products market, these products are some of the most basic
and essential tools used by microbiologists. Despite technological advances,
conventional culture media is among the cheapest and most reliable methods for
identification of microorganisms. Product differentiation between various
suppliers of prepared culture media typically shows only minimal differences;
price and service are generally the key variables, and culture media tends to be
a very competitive market. PML maintains a strong presence in this product line
because of its overwhelming importance to microbiologists and the proven value
of PML's service philosophy in gaining and keeping customers. PML's main
marketing strategy is to acquire and/or develop newer technological products
that can be sold in conjunction with conventional culture media Marketing
selected products at the national, regional and international level is another
successful strategy.
In addition, PML intends to increase its focus on the industrial
microbiology market, which is growing at a faster pace than the clinical market.
In Fiscal 1997, the Company's sales in the industrial segment increased
substantially, and the Company is optimistic about further increases in Fiscal
1998.
Distribution of Products
To address service, shipping, and shelf life requirements, PML has
established a number of distribution centers in or near the following
metropolitan areas of the United States and Canada: Portland, Oregon;
Sacramento, California; Providence, Rhode Island; Vancouver, British Columbia;
and Toronto (Mississauga), Ontario. Each distribution center includes
temperature-controlled storage areas and a full inventory of routinely-ordered
products. Each distribution center receives the bulk of its inventory from the
nearest PML production plant on a weekly basis with specialty (products other
than routine prepared culture media commercially available from most suppliers)
and distributed products coming from the Wilsonville plant, a Portland, Oregon
suburb. PML typically ships a complete customer order within twenty-four to
forty-eight hours of receipt of the order. For larger customers, such as major
hospital laboratories, PML often delivers its products directly to the
customer's lab in its own delivery vehicles. Shipments to smaller or more remote
customers are made by common carrier, e.g. United Parcel Service or Federal
Express.
3
<PAGE>
Manufacturing
At present, the majority of PML's sales consist of products it
manufactures itself; primarily a prepared culture media in Petri dishes, tubes
and bottles. The manufacturing process is essentially a mixing, filling and
packaging operation. The culture medium itself is a blend of powdered nutrients
which typically include beef and soy byproducts; agar, a seaweed derivative used
as a gelling agent; and other nutritional or diagnostic substances such as
animal blood. For Petri dishes, the powdered nutrients are blended and
rehydrated, and the resulting liquid is sterilized in pressure vessels and
aseptically dispensed into presterilized plastic Petri dishes. As the medium
cools it gels into a semi-solid state and is then packaged for sale. Tubed and
bottled media are prepared in a similar manner except that these products are
usually sterilized after they are dispensed.
With the exception of small batches, PML produces most of its products on
custom-designed semi-automated production equipment. For example, empty Petri
dishes are loaded into a filling machine where automated dispensing pumps fill a
measured amount of culture medium into each dish. The dish moves onto a
refrigerated cooling conveyer where gelling occurs; then, it is stacked and
packaged. The finished products are stored in a quarantine area until quality
control testing is complete and the batch is approved for distribution.
PML maintains a quality control laboratory in each of its manufacturing
plants as part of its Total Quality Assurance program. The quality control lab
tests raw material samples prior to purchase, and tests representative samples
from each production batch for sterility, pH, color, and general appearance, as
well as the growth of the microorganisms that the product is designed to
culture.
In addition to culture media, PML produces a variety of ancillary products
such as stains, reagents, microdilution MIC panels, animal blood products, and a
variety of chemical solutions used by other production departments. The
manufacturing process for certain of PML's ancillary products such as stains,
reagents, and other chemical solutions generates a small amount (50 to 100
gallons per year) of hazardous materials which consist primarily of organic
solvents and heavy metal salts. PML hires licensed hazardous waste disposal
companies for the disposal of these materials at a nominal cost. See
"Governmental Regulation."
Suppliers
PML's largest suppliers provide Petri dishes, blood and plastic packaging
material which are available from a number of sources in the United States and
Canada. During the past year, the Company has reduced its purchases of
dehydrated media by increasing its in-house production to 60% of its total
consumption of this commodity. Several manufacturers and distributors of
glassware, chemicals and packaging materials exist in the United States and
Canada.
Competition
The market for prepared culture media continues to change. There is
continued national attention on the cost of health care and many hospitals and
clinical laboratories, PML's primary customers, are focusing on cutting costs.
As a result, the prepared culture media market has become increasingly price
competitive. Most hospitals are now members of buying groups known as Group
Purchasing Organizations (GPOs), which negotiate single supplier contracts for
their members. In the clinical products market, PML's principal competitor is
Becton Dickinson Microbiology Systems ("BDMS"), a subsidiary of Becton Dickinson
& Co. In addition to BDMS, there are generally smaller local or regional
competitors in most areas where PML markets. Key competitive factors in the
clinical microbiology market are price, quality, service, and breadth of
distribution. Although PML competes favorably in each of these areas, its
ability to compete in the future will depend, in part, on its ability to
continue to lower its culture media and distribution costs.
4
<PAGE>
In the industrial market, the key competitive factors are features,
quality, and service; price competition is not as prevalent as it is in the
clinical market. PML has only one other significant competitor in the industrial
market. PML competes favorably in the industrial market in all areas with this
competitor.
Research and Development
PML does a small amount of pure research and development ("R & D"). The
principal purposes of its current R & D activities are to improve its products
(e.g. testing additional ingredients and formulas or enhancing certain
performance characteristics), to evaluate products being considered for addition
to PML's product line, and to develop new products for addition to its line. R &
D functions are presently performed by multiple departments within PML and by
independent researchers and scientists that have been retained by PML.
Patents and Licenses
PML owns a number of patents and trademarks for products in the early
marketing stage. In addition, it has a license agreement with Definitive
Diagnostics, Inc. to manufacture and market its PHASE2(R) blood culture system.
This license agreement began June 1, 1992 and runs for 6 years with two 2-year
extension periods. See Note 11 of Notes to Consolidated Financial Statements.
Employees
On May 31, 1997 the Company had approximately 168 full time equivalent
employees, compared with approximately 163 at May 31, 1996. This increase was
due primarily to filling vacant positions in administrative staffing from the
previous year. The Company's employees are not covered by collective bargaining
agreements, and the Company considers its employee relations to be satisfactory.
Government Regulation
As a manufacturer of medical devices, PML is subject to certain
regulations of the U.S. Food and Drug Administration (FDA) and Canada's Health
Protection Branch (HPB). These regulations require that the FDA register and
inspect PML's products, facilities, and manufacturing processes. PML's
facilities, processes and products have received all of the required approvals,
and PML believes that it is in substantial compliance with all relevant FDA and
HPB requirements.
In addition, PML is subject to other federal, state and local regulatory
requirements relating to environmental concerns, waste management, hazardous
materials shipping, and health and safety matters. As with many similar
businesses, some risk of costs and liabilities related to these matters exists
in PML's business. Management believes that the Company's business is operated
in substantial compliance with applicable regulations -- the violation of which
could have a material adverse effect on the Company.
Liability Insurance
The Company maintains product liability insurance in the amount of $3
million. Product liability insurance is limited in availability and restrictive
in cost. Based on the essentially confirmatory nature of the majority of PML's
diagnostic products, PML's management believes that the Company is not subject
to significant product liability risk with its present product line. To date,
PML has never had to negotiate a product liability claim.
5
<PAGE>
Item 2. Description of Properties
PML currently operates from six leased locations in two countries. The
Company expects no difficulty in extending any of its leases as they come due.
The following chart summarizes the significant facilities which the Company
leases.
<TABLE>
<CAPTION>
Approximate Approximate
Square Footage Square Footage Lease
Location Manufacturing Admin & Distribution Expiration
-------- -------------- -------------------- ----------
<S> <C> <C> <C> <C>
1. Wilsonville, Oregon 9,000 34,000 June 2004
2. Mississauga, Ontario 16,000 3,000 November 2000
3. Mississauga, Ontario 4,000 - May 1998
4. Richmond, British Columbia 2,000 3,100 June 1998
5. Providence, Rhode Island - 12,000 April 1999
6. Sacramento, California - 2,000 January 1999
</TABLE>
Each of the manufacturing facilities has extensive leasehold improvements
and production equipment. In April 1997, the Company consolidated its Oregon
facilities into one new building in Wilsonville, Oregon. PML's Corporate
headquarters, a manufacturing unit and a distribution center are now located in
this facility. The move eliminates inefficiencies associated with the operation
of multiple facilities; and, it provides additional capacity for anticipated
growth in current product lines and in potential new business areas.
The Wilsonville production facility supplies conventional culture media to
the western United States region and provides specialty products to all other
locations. Equipment for the production of PML's PHASE2(R) blood culture system,
DUOTEK sterility testing system, MIC panels, and dehydrated media are also
located in Wilsonville.
The Richmond plant produces high volume culture media for western Canada
and also produces PML's line of parasitology products. The Mississauga plant
produces mostly high-volume culture media for eastern Canada and for the
northern United States regions, and much of PML's industrial contact plate
product line. A second Mississauga facility assembles parasitology kits on a
contract basis for various Canadian accounts.
Item 3. Legal Proceedings
Occasionally, the Company is a party to incidental suits or other legal
actions. The Company is not aware of any pending and or existing material
lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on November 21, 1996 and at that
meeting it elected four members to the Board of Directors; changed the name of
the Company from Meda, Inc., to PML, Inc.; increased the Common shares from
2,000,000 to 2,500,000; and ratified Price Waterhouse LLP as independent
auditors. The directors elected and the votes cast for all matters are as
follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstain
--------- ------------- -------
<S> <C> <C> <C>
Kenneth L. Minton 957,521 0 1,250
Arthur R. (Ron) Torland (CLASS B) 211,551 0 0
Craig S. Montgomery (CLASS B) 211,551 0 0
Douglas C. Johnson (CLASS B) 211,551 0 0
Change name from Meda, Inc to PML, Inc. 1,170,072 125 125
Increase common shares from
2,000,000 to 2,500,000 1,169,072 1,125 125
Ratification of auditors 1,235,515 125 1,125
</TABLE>
6
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock commenced trading on NASD's Electronic Bulletin
Board system in January of 1993 under the symbol "MDAN." Effective March of
1997, the symbol was changed to "PMLI." The following table sets forth the high
and low closing bid prices for the last two years as reported by The National
Quotation Bureau.
For the Quarterly High Low
Period Ended Bid Price Bid Price
----------------- --------- ---------
May, 1997 $0.59375 $0.59375
February, 1997 $0.59375 $0.59375
November, 1996 $0.62500 $0.62500
August, 1996 $0.53125 $0.37500
May, 1996 $0.68750 $0.37500
February, 1996 $0.37500 $0.31250
November, 1995 $0.37500 $0.37500
August, 1995 $0.31250 $0.31250
The Company has not paid any cash dividends on the Common Stock in the
past and anticipates that, for the foreseeable future, it will retain any
earnings available as dividends for use in its business. The Company's loan
agreement does not allow the Company to declare or pay cash dividends without
the written consent of the bank. The preferred shares have a provision which
calls for the accretion of dividends annually at a rate of prime plus 1.5%. In
April of 1996, the Company offered to all of its preferred shareholders the
option of converting all or a portion of their accreted dividends into common
stock. One preferred shareholder opted for the conversion of accreted dividends
totalling $37,346, which the Company subsequently converted into approximately
99,000 shares of common stock; the other shareholders declined. No conversions
were offered or accepted in fiscal year 1997. May 31, 1997 accreted dividends
totaled $146,561. See Note 8 of Notes to Consolidated Financial Statements.
Approximately 1,240 record holders of Common Stock existed as of May 31, 1997.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
- --------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward looking statements that involve a number of
risks and uncertainties. For example, the Company has stated its belief that
sales of industrial products should increase in the coming year, and that
reductions in the the cost of goods sold should result from improved procurement
practices. Future demand for the Company's products, including its industrial
products, is inherently subject to supply and demand conditions, and to the
unpredictable decisions of other market participants. There can be no assurance
that sales will increase generally or within any specified product line or that
the Company's margins will stabilize or improve. Other elements that could cause
results to differ materially include competitive pressures and factors listed
from time to time in the Company's reports to the Securities and Exchange
Commission, including, but not limited to, this report on Form 10-KSB.
7
<PAGE>
Results of Operations
- ---------------------
The Company continued its strong financial performance in fiscal 1997,
earning net income of $669,371 or $0.30 per share for the year, compared with a
net income of $206,001 or $0.09 per share the prior year. This improvement came
even though the Company experienced a small decline in net sales for the year of
3.8%.
The Company's performance was especially strong in the second half, as it
continued to benefit from its cost control efforts, earning $550,054 (including
a $220,000 deferred tax adjustment) in that period, compared with earnings of
$276,877 (including a $98,000 deferred tax adjustment) in the same period a year
ago.
The improvement in the Company's performance resulted from a number of
factors which are addressed in more detail in the following section. In general,
the Company cut costs by improving operations, particularly by improving
customer service and product quality, reducing waste, and reducing overtime
through operational improvements. The Company also continued the improvement of
its procurement process, initiated last year, which has resulted in significant
savings in the costs of materials and services.
Partially offsetting the favorable impact of the cost reduction program,
was the impact of a slight decrease in the value of the Canadian dollar relative
to the U.S. dollar. Approximately 41% of the Company's sales are Canadian and
are therefore affected by the level of the Canadian dollar. The average exchange
rate in 1997 decreased to .732 compared to .735 in 1996. This translates into a
decrease in sales dollars of about $22,000 in fiscal 1997 over 1996 due to the
effect of the exchange rate.
The remaining reduction in sales is due to continued pricing pressure from
competition and from cost containment measures in the health care industry such
as buying groups and reduced testing.
The following table presents the percentage relationship that certain
items in the Company's Consolidated Statement of Operations bear to sales for
the period indicated.
Percent of Sales
Year Ended May 31,
---------------------
1997 1996
------ ------
Net Sales 100.0% 100.0%
Cost of Goods Sold 59.8 64.3
------ ------
Gross Profit 40.2 35.7
Selling, general and administrative expenses 34.6 33.0
------ ------
Operating Income 5.6 2.7
Other expense 2.2 1.9
------ ------
Income before income taxes 3.4 0.8
Income tax benefit 1.6 0.7
------ ------
Net income 5.0% 1.5%
====== ======
8
<PAGE>
Year Ended May 31, 1997 compared With Year Ended May 31, 1996
- -------------------------------------------------------------
Sales in fiscal 1997 totalled $13.32 million, a decrease of $530 thousand
or 3.8% year-over-year. This decrease was primarily in the clinical sector and
was due to a number of factors including some loss of business to hospital
buying groups because of their increased use of group purchasing organizations
(GPOs). The Company made up for much of these lost sales with increased sales of
specialty products not included in GPO contracts. In addition, industrial
microbiology market sales have been increasing and nearly offset the clinical
decline in the fourth quarter when the sales decrease was just $30 thousand.
Gross profit improved to 40.2% of sales up from 35.7% the prior year. In
fiscal 1997, market and Company actions that improved gross profit included the
following: decreased sales of lower margin commodity-type products; increased
sales of higher margin specialty products; improved operating efficiencies
resulting in reduced scrap and outdates; lower material costs; a modest price
increase put into effect in January 1997; and a revaluation of U.S. and Canadian
finished goods of about $91 thousand. Management believes that there have been
no other changes in its sales or operations that would materially affect gross
profit.
Selling, general and administrative expenses increased to 34.6% of sales
in 1997 compared to 33.0% in 1996. The increase was due mainly to wage and
salary increases and higher depreciation from leasehold improvements and other
capital investments. Most other expense categories actually improved. Freight
expense improved dramatically for a second consecutive year due to the full year
impact of renegotiated contracts, dropping nearly 32% in total dollars, and
nearly 30% as a percentage of sales. Rent expense decreased from 2% of sales to
1.9% as the Company operated with fewer locations by completing its relocation
discussed earlier and by subleasing its entire administration building.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its operations over the years principally through
funds generated from operations and bank and stockholder loans. At May 31, 1997,
the Company had positive working capital of approximately $99,000 compared with
negative working capital of about $235,000 at May 31, 1996. Much of the
improvement in the current year was due to eliminating its deferred tax
valuation reserve which increased current assets by $220,000 partially offset by
an increase in its bank line of credit of about $140,000. The ratio of current
assets to current liabilities was 1.03 at May 31, 1997 compared to .93 at May
31, 1996. Quick liquidity (current assets less inventories to current
liabilities) was .62 at May 31, 1997 and .51 at May 31, 1996.
The twelve-month average collection period for trade receivables was 49.4
days at May 31, 1997 compared with 54 days at May 31, 1996.
Net cash provided by operating activities was $404,915 in fiscal 1997
compared with $830,819 provided by operations in fiscal 1996. The positive cash
this year was mainly from higher net income partially offset by the deferred tax
adjustment discussed in the earlier section. Net cash used in investing
activities was $637,316 in fiscal 1997 compared with $24,376 used by the Company
in investing activities in fiscal 1996. The Company spent $659,982 on the
purchase of plant, property and equipment during fiscal 1997, compared with
$52,747 in fiscal 1996. Financing activities provided cash of $296,924,
primarily from an increase in the bank line of credit and long term bank loans
from the Company's new lender, compared with $827,095 used during fiscal 1996 to
pay down the bank line and bank loans with the Company's previous lender.
9
<PAGE>
Due, in part, to a September 16, 1996 increase in the interest rate
charged by its former lender, the Company negotiated a larger and more favorable
four year financing agreement with another lender effective December 1, 1996.
The new financing agreement included interest at prime plus 2.5% which was
lowered to 2.0% on June 1, 1997 and will decrease each of the next two years if
certain financial ratios are met. In addition, the loan allows the Company to
borrow against both equipment and inventory as well as accounts receivable.
Proceeds from the new loan were used to pay off all outstanding debt from the
prior lender and will provide the funds for future expansion and capital
expenditures. The Company has already used part of these new funds to achieve
cost efficiencies by consolidating all its Oregon facilities and is currently
making much needed improvements in MIS systems. Management expects that both of
these investments will payback in about two years.
As part of the new financing agreement, the Company obtained a new bank
line of credit that has a current maturity date of November 30, 2000. The new
line of credit is secured substantially with all of the assets of the Company.
The available amount under the line of credit is based upon 80% to 85% of the
eligible accounts receivable and 30% to 40% of eligible inventory at the end of
each reporting period, not to exceed $2.5 million. The Company also borrowed
$400,000 on December 1, 1996, under a new four-year loan secured by eligible
operating equipment. The rate of interest charged on the line is prime plus 2.5%
and will decrease each year if the company meets certain financial ratios. This
loan will be repaid primarily out of the Company's receivable collections and
other cash provided by operating activities.
The Company may require additional capital to finance current operations,
make enhancements to or expansions of its manufacturing capacity, in accordance
with its business strategy, or for additional working capital, for inventory and
accounts receivable. The Company may also seek additional funds through public
or private debt or through bank borrowings. No assurances can be given that
future financings will be available with terms acceptable to the Company.
Without such future financing, the Company's ability to finance its growth will
be severely limited.
The Company's total debt structure at May 31, 1997 was as follows:
<TABLE>
<CAPTION>
Long-Term Current-Portion
------------ ---------------
<S> <C> <C>
Revolving credit at prime plus 2.50%, due November 30, 2000 $ 0 $ 1,248,928
Note payable at prime plus 2.50%, due November 30, 2000 258,322 100,008
Note payable at prime plus 1.25%, due November 1998 6,383 11,894
Note payable at 10%, due January 1998 0 10,000
Note payable at prime plus 1%, due December 1999 35,821 11,679
Note payable at 8%, due May 2000 51,543 23,923
Capital Lease obligations, due July 1999 40,246 40,143
Note payable at 6%, due May 2005 70,000 10,000
Note payable at 12%, due April 2000 82,269 15,529
Trade A/P converted to notes payable at 6%, due February 2001 511,127 82,614
------------ ------------
Total long debt $ 1,055,711 $ 1,554,718
Total Notes payable to related parties 0 247,550
------------ ------------
Total long and short term debt $ 1,055,711 $ 1,802,268
============ ============
</TABLE>
Item 7. Financial Statements and Supplementary Data
The information required by this item is included on pages F-1 to F-18 of
this report.
Item 8. Changes in and Disagreements with Accountants on Accounting Disclosure
PML's independent accountants, Price Waterhouse LLP, were engaged on May
21, 1996 and have been re-engaged for the current year. There have been no
disagreements with the accountants on any matter of accounting principles or
practices, financial statement disclosures, or auditing scope or procedures.
10
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Personnel;
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers of the Company
- -----------------------------------------------
The directors and executive officers of the Company are as follows:
Term as
Name Position Director Expires
---- -------- ----------------
A. Ron Torland Chairman of the Board 1997
Kenneth L. Minton President and
Chief Executive Office
Director 1997
James N. Weider Chief Financial Officer,
Vice President-Finance,
Secretary, Treasurer N/A
Douglas C. Johnson Director 1997
Craig S. Montgomery Director 1997
A. Ron Torland, age 50, has been employed by the Company or its
predecessor since 1970. He became Chairman of the Board in 1988, was Chief
Executive Officer from 1988 to 1996, and was President from 1982 to 1988. He was
Treasurer from 1972 to 1996 and a member of the Board of Directors since the
Company was incorporated in 1972. Mr. Torland holds a B.S. degree in business
administration and served in the U.S. Army from 1968 to 1970.
Kenneth L. Minton, age 47, was hired as the Company's President and Chief
Executive Officer in April, 1996, and was elected to the Board of Directors in
November, 1997. Prior to joining PML, he was President and Chief Operating
Officer of Hind, Inc., a manufacturer and distributor of high end sports apparel
from 1993 to 1996, and Vice President of Microwave Applications Group, an
electronics manufacturer, from 1985 to 1993. Prior to 1985, Mr. Minton had
extensive experience in operations, finance, sales and marketing in several
industries. Mr. Minton holds a B.S. degree in Business Administration.
James N. Weider, age 54, has been employed by the Company since August,
1995 as its CFO, Vice-President - Finance and Secretary. He also became
Treasurer in 1997. He has both a B.S. in business administration, with a major
in accounting, and an MBA from The Ohio State University, and has also passed
the CPA exam. Prior to coming to the Company, Mr. Weider was the Vice President
- - Finance at TNT Reddaway Truck Line from 1989 to 1995 and spent six years with
Tektronix and seventeen years with International Harvester.
Douglas C. Johnson, age 41, has been a director of the Company since
March, 1996. He holds a B.A. degree in Music from Fort Wright College in
Spokane, Washington, and a Masters Degree from the University of Southern
California in Los Angeles. He has been a professional opera singer for 13 years
and returned to the U.S. three years ago after nine years in Europe.
11
<PAGE>
Craig S. Montgomery, Ph.D., 43, has been a director of the Company since
March, 1996. He is a licensed clinical psychologist. From 1983 to 1991, he was
Program Director of New Day Center, Portland, Oregon, a residential and
outpatient facility for chemical dependency treatment. From 1991 to 1993, he was
Clinical Supervisor of both the New Day Center and the Dual Diagnosis program at
Portland Adventist Hospital and Caremark Behavioral Health Services. He is now
in private practice. Dr. Montgomery holds a Masters Degree from Pepperdine
University and a Ph.D. from the California School of Professional Psychology in
San Diego, California.
No director holds a directorship in any other Company reporting under the
Securities and Exchange Act of 1934.
Significant Employees
There are no significant employees other than those listed above.
Family Relationships
Mr. Torland and Dr. Montgomery are stepbrothers. Mr. Johnson is Dr.
Montgomery's and Mr. Torland's brother-in-law.
Involvement in Certain Legal Proceedings
None.
Item 10. Executive Compensation
The following table sets forth the compensation of all executive officers
of the Company for the fiscal year ending May 31, 1997 and 1996, who received or
earned total annual salary and bonuses during that period in excess of $100,000.
<TABLE>
<CAPTION>
Name of Individual Annual Compensation
and Position Year Salary Bonus Other Compensation
<S> <C> <C> <C> <C>
Kenneth L. Minton, CEO 1997 150,023 66,389 None
1996 17,310 None None
Woody Streb, VP Marketing 1997 92,447 25,000 None
1996 None None None
</TABLE>
No officer, director or employee was beneficiary of any long-term
compensation or other compensation in excess of the dollar values reflected in
item 402(b)(2)(iii)(c). No director received any compensation for his or her
services as a director.
12
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the ownership
of issued and outstanding shares of the Company as of the date hereof by each
director, executive officer, and person known to the Company to be the
beneficial owner of more than 5% of any class of the Company's voting securities
as of August 31, 1997:
Amount and
Name and Address Nature of Percent
Title of of Beneficial Beneficial of
Class Owner Ownership Class
- ------------------- ------------------------------- ---------- -------
Common Shares A. Ron Torland 110,381 6.2%
10595 SW Kiowa Street
Tualatin, OR 97062
Common Shares Arthur N. Torland 522,372 29.4%
10755 SW Lucas
Tualatin, OR 97062
Common Shares Julian G. Torland 267,900 15.1%
11100 SW North Dakota Street
Tigard, OR 97223
Common Shares Douglas C. & Joanne E. Johnson 146,832 8.3%
8728 SW Pamlico Court
Tualatin, OR 97062
Common Shares Craig S. Montgomery 47,243 2.6%
12600 SE Rachella Court
Boring, OR 97009
Class B
Common Shares A. Ron Torland 142,902 67.5%
10595 SW Kiowa Street
Tualatin, OR 97062
Class B
Common Shares Julian G. Torland 68,649 32.5%
11100 SW North Dakota Street
Tigard, OR 97223
Class A Convertible
Preferred Shares Arthur N. and Bessie M. Torland 2,750 55.6%
8520 SW Avery Street
Tualatin, OR 97062
Class A Convertible
Preferred Shares Julian G. Torland 700 14.1%
11100 SW North Dakota Street
Tigard, OR 97223
Class A Convertible
Preferred Shares Douglas C. & Joanne E. Johnson 1,500 30.3%
8728 SW Pamlico Court
Tualatin, OR 97062
13
<PAGE>
The directors and officers of the Company, as a group, own 304,456 common
shares, representing 17.1% of that class, and 142,902 shares of Class B common
shares, representing 67.5% of that class, and 1,500 shares of Class A
convertible preferred, representing 30.3% of that class.
There are no arrangements which may result in a change of control of the
Company.
Item 12. Certain Relationships and Related Transactions
The Company leases equipment and laboratories and did lease office
facilities from Arthur & Bessie Torland, Julian Torland, and Ron Torland, some
of whom hold more than ten percent of certain classes of voting securities of
the Company under four operating leases. Total rental expense incurred under
these four operating leases was approximately $150,000 and $90,000 in fiscal
1997 and 1996, respectively. (See Note 11 on Notes to Consolidated Financial
Statements.
The Company has a Technology License Agreement with Definitive
Diagnostics, Inc. ("DDI"). See Patents and Licenses. Under the agreement which
extends for six years, the Company will manufacture and market products
developed by DDI and pay a royalty based upon the number of units sold. Total
royalties of $28,855 were incurred in fiscal 1997 and $38,650 in fiscal 1996.
DDI is owned by Messrs. Arthur and Ron Torland, both shareholders owning more
than ten percent of a class of stock of the Company. Ron Torland is also a
director of the Company.
Joanne E. Johnson, wife of director Doug C. Johnson; Ron Torland, a
stockholder and director; Arthur & Bessie Torland, shareholders; and L. Bruce
Ham, brother-in-law of a director all have five year six percent notes issued in
fiscal 1996 with a balance of $82,788.
There are no other transactions, or series of similar transactions,
involving amounts in excess of $60,000.
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
Exhibit Description of Exhibit
3 Articles of Incorporation and Bylaws
4 Instruments defining the rights of holder (none)
9 Voting Trust Agreement (none)
10 Material contracts
a. Employment Agreement with Lester L. Leno
b. Consulting Agreement with Interim Management Co.
c. Employment Agreement with Kenneth L. Minton
d. 1994 Stock Option Plan for Non-employee Directors.
e. 1994 Stock Option Plan
14
<PAGE>
11 * Statement re: Computation of per share earnings
16 Letter on changes and certifying accountants
18 Letter on change in accounting principles
19 Previously unfiled documents (none)
21 Subsidiaries of Registrant
22 Published report regarding matters submitted to vote (none)
24 Power of Attorney (none)
28 Additional exhibits (none)
Each exhibit marked with a single asterisk is filed with this report on
form 10-KSB. Except as otherwise indicated, each exhibit not so marked is
incorporated by reference to the exhibit filed by the Company with its previous
filings to the SEC.
(b) Reports on Form 8-K.
A paper filing report on form 8-K was filed with the SEC on May 21, 1996.
This report related to a change in the Company's outside auditors. Subsequent to
the paper filing of Form 8-K, the Company was requested to file the same
information via the EDGAR system during the first quarter ended August 31, 1996.
15
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Tigard, State of Oregon, on August 28, 1997.
PML, INC.
By: /s/ Kenneth L. Minton
----------------------
Kenneth L. Minton, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on August 28, 1997, on behalf of the Company and in the
capacities indicated.
Signatures Title
- ---------- -----
/s/ Kenneth L. Minton President and Chief Executive Officer
- --------------------- (Principal Executive Officer), Director
Kenneth L. Minton
/s/ James N. Weider Vice President-Finance, Secretary and Treasurer, CFO
- --------------------- (Principal Financial and Accounting Officer)
James N. Weider
/s/A. Ron Torland Chairman of the Board
- ---------------------
A. Ron Torland
/s/Doug C. Johnson Director
- ---------------------
Doug C. Johnson
/s/Craig S. Montgomery Director
- ---------------------
Craig S. Montgomery
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of PML, Inc. (formerly Meda, Inc.)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of PML, Inc.
(formerly Meda, Inc.) and its subsidiary at May 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/Price Waterhouse LLP
- -----------------------
PRICE WATERHOUSE LLP
Portland, Oregon
July 7, 1997
F - 1
<PAGE>
PML, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, May 31,
Assets 1997 1996
------------------- -------------------
<S> <C> <C>
Current Assets:
Cash $ 74,410 $ 9,887
Trade accounts receivable, less allowance for doubtful
accounts of $81,609 in 1997 and $126,982 in 1996 1,773,446 1,651,918
Inventories:
Raw Materials 756,388 808,680
Work in Process 4,583 9,167
Finished Goods 699,093 604,902
Deferred income taxes 318,854 98,000
Prepaid expenses and other current assets 70,669 49,583
------------------- -------------------
Total Current Assets 3,697,443 3,232,137
Property, plant and equipment - net 1,717,951 1,358,854
Intangible assets - net 64,801 10,122
Other assets 83,554 66,623
------------------- -------------------
Total Assets $ 5,563,749 $ 4,667,736
=================== ===================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,054,462 $ 1,416,515
Accrued salaries and wages 375,249 151,546
Accounts payable - related parties 2,175 6,440
Other accrued liabilities 364,076 291,742
Notes payable - related parties 247,550 257,770
Bank line of credit 1,248,928 1,106,761
Current portion of borrowings - related parties 69,073 59,499
Current portion of borrowings 236,717 176,785
------------------- -------------------
Total Current Liabilities 3,598,230 3,467,058
------------------- -------------------
Borrowings - related parties less current portion 164,958 145,354
Borrowings, less current portion 890,753 814,887
------------------- -------------------
Total Borrowings, less current portion 1,055,711 960,241
------------------- -------------------
Stockholders' Equity
Preferred stock, $.01 par value; authorized 25,000 shares,
no shares issued or outstanding - -
Class A convertible preferred stock, stated and liquidation
value $100 per share; authorized 7,500 shares, issued and
outstanding 4,950 shares, including accreted dividends 641,561 592,974
Common stock, $.01 par value; authorized 2,500,000 shares,
issued and outstanding 1,776,816 shares 17,768 17,768
Class B common stock, $.01 par value; authorized 250,000 shares,
issued and outstanding 211,551 shares. 2,116 2,116
Class D common stock, $.01 par value, authorized 100 shares,
no shares issued or outstanding. - -
Additional Paid In Capital 144,701 144,701
Accumulated Equity (Deficit) 103,662 (517,122)
------------------- -------------------
Total Stockholders' Equity 909,808 240,437
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 5,563,749 $ 4,667,736
=================== ===================
</TABLE>
See notes to consolidated financial statements
F - 2
<PAGE>
PML, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
TWO YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1997 1996
------------------- --------------------
<S> <C> <C>
Net sales $ 13,319,120 $ 13,849,481
Cost of goods sold 7,959,121 8,901,494
------------------- --------------------
Gross profit 5,359,999 4,947,987
Selling, general, and
administrative expenses 4,605,214 4,577,871
------------------- --------------------
Operating income 754,785 370,116
------------------- --------------------
Other (income) expense:
Interest expense 282,016 294,172
Other 13,612 (33,795)
------------------- --------------------
Total other expense 295,628 260,377
------------------- --------------------
Income before income taxes 459,157 109,739
Income tax benefit 210,214 96,262
------------------- --------------------
Net Income $ 669,371 $ 206,001
=================== ====================
Net Income per common share $ 0.30 $ 0.09
=================== ====================
</TABLE>
See notes to consolidated financial statements
F - 3
<PAGE>
PML, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TWO YEARS ENDED MAY 31, 1997
<TABLE>
<CAPTION>
Retained
Class A Class B Additional Earnings
Convertible Common Common Paid-in (Accumulated
Preferred Stock Shares Shares Capital Deficit) Total
---------------- --------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995 $ 580,820 $ 14,497 $ 2,116 $ - $ (673,623) $ (76,190)
Common Stock returned and cancelled - (27) - 27 - -
Preferred Stock dividends accreted 49,500 - - - (49,500) -
Stock issued to employees - 1,870 - 68,255 - 70,125
1995 401K match - 432 - 40,069 - 40,501
Conversion of accreted dividends to Common Stock (37,346) 996 - 36,350 - -
Net income - - - - 206,001 206,001
---------------- --------- --------- ---------- ------------ ----------
Balance, May 31, 1996 592,974 17,768 2,116 144,701 (517,122) 240,437
Prefered Stock dividends accreted 48,587 - - - (48,587) -
Net Income - - - - 669,371 669,371
---------------- --------- --------- ---------- ------------ ----------
Balance, May 31, 1997 $ 641,561 $ 17,768 $ 2,116 $ 144,701 $ 103,662 $ 909,808
================ ========= ========= ========== ============ ==========
</TABLE>
See notes to consolidated financial statements
F - 4
<PAGE>
PML, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWO YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1997 1996
------------------- ---------------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 669,371 $ 206,001
------------------- ---------------------
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 279,275 313,972
(Gain) loss on sale of equipment 3,449 (14,206)
Deferred income taxes (220,854) (98,000)
Accounts receivable (121,528) 540,855
Inventories (37,315) 237,769
Other assets (97,202) 118,729
Accounts payable and accrued liabilities (70,281) (474,301)
------------------- ---------------------
Total adjustments (264,456) 624,818
------------------- ---------------------
Net cash provided by operating activities 404,915 830,819
------------------- ---------------------
Cash Flows from Investing Activities:
Proceeds from sale of assets 22,666 28,371
Purchase of property, plant and equipment (659,982) (52,747)
------------------- ---------------------
Net cash used in investing activities (637,316) (24,376)
------------------- ---------------------
Cash Flows from Financing Activities:
Proceeds from issuance of notes payable and bank credit line 5,991,969 333,610
Repayment of demand notes and bank credit line (5,808,792) (995,959)
Proceeds from issuance of long-term debt 501,120 23,000
Repayment of long-term debt (387,373) (187,746)
------------------- ---------------------
Net cash provided by (used in) financing activities 296,924 (827,095)
------------------- ---------------------
Increase (decrease) in cash 64,523 (20,652)
Cash at beginning of period 9,887 30,539
------------------- ---------------------
Cash at end of period $ 74,410 $ 9,887
=================== =====================
Supplemental Disclosures:
Interest paid $ 264,776 $ 271,929
Income tax paid 5,503 1,738
Non Cash Items:
Preferred stock dividends accreted 48,587 49,500
Accounts payable exchanged for long-term debt and notes payable 5,981 644,106
Accounts payable exchanged for capital stock issued to employees - 70,125
Accounts payable exchanged for capital stock issued to employee
401k plan - 40,501
Common shares reacquired - 27
</TABLE>
See notes to consolidated financial statements
F - 5
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED MAY 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
PML, Inc. ("PML" or the "Company") was incorporated as Meda, Inc. in
September 1991 and owns 100% of the common and preferred stock of PML
Microbiologicals, Inc. ("PML"), formerly Prepared Media Laboratory, Inc.
Effective December 4, 1992, Meda acquired PML and issued PML shareholders
1,164,526 Common Shares, 211,551 Class B Common Shares, and 4,950 Class A
convertible preferred shares of Meda. This business combination was
accounted for as a reverse acquisition of Meda by PML whereby PML is
deemed to be the acquirer for accounting purposes.
As a result of the reverse acquisition, effective December 4, 1992, PML
stockholders' equity was adjusted to reflect the exchange of stock in Meda
described above.
The Company produces and sells, throughout the United States and Canada,
to both the clinical market (diagnosis of diseases in humans) and the
industrial market (environmental and sterility testing). Typical customers
for the Company's clinical products are: hospitals; clinics; and
wholesalers that market to hospitals and clinics. The company's industrial
customers include: pharmaceutical companies; biotech research facilities;
and food and water testing labs.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of PML and its wholly-owned subsidiary,
PML Microbiologicals. All significant intercompany transactions and
balances have been eliminated.
Revenue Recognition - Sales revenue net of allowances is recognized at the
time the Company's product is shipped to customers.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property Plant and Equipment - Property, plant, and equipment are stated
at cost. Depreciation of property, plant, and equipment is provided using
primarily the straight-line method over the estimated useful lives of the
assets of 2 to 12 years. Amortization of leasehold improvements is
provided using the straight-line method over the estimated useful lives of
the assets or the initial term of the lease, whichever is shorter.
Intangible Assets - Intangible assets include a covenant not to compete,
customer lists, and costs in excess of fair value of assets acquired. The
covenant not to compete is being amortized on the straight-line method
over five years, the term of the agreement. The customer lists are being
amortized on the straight-line method over their expected useful lives of
five and ten years. Cost in excess of fair value of the assets acquired is
being amortized on the straight-line
F - 6
<PAGE>
method over five years. Accumulated amortization at May 31, 1997 and 1996,
was $240,499 and $235,993, respectively.
Long-Lived Assets - In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The statement provides that impairments of
long-lived assets be measured and valued based on the estimated future
cash flows. The Company adopted the statement in 1996; however, the
adoption did not have a significant impact on the Company's financial
position or results of operations.
Profit Sharing Plan - The Company has a profit sharing plan which
qualifies under Section 401(k) of the Internal Revenue Code. Under the
plan, eligible U.S. employees may contribute up to 15% of their
compensation with a Company match, at its option, up to 3% of the
employees' total compensation. The Company also has a profit sharing plan
which covers eligible Canadian employees. The Company is required to fund
out of profits a minimum contribution of $100 (CDN) per participant. The
Company recorded $4,971 of profit sharing expense in fiscal 1997 and
incurred a net profit share recovery in fiscal 1996 of ($1,887) due to a
partial reversal of a prior year accrual.
Foreign Currency - The financial statements and transactions of the
Company's Canadian division are maintained in Canadian dollars and
remeasured into the Company's functional currency (U.S. dollars) in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
52. Nonmonetary balance sheet items are remeasured at historical exchange
rates. Revenues and expenses are remeasured at the average exchange rate
for each fiscal year.
Net Income (Loss) Per Common Share - Net income per common share is
computed based upon the outstanding weighted average common and, to the
extent they are dilutive, common equivalent shares. The following is a
summary of the computation of net income per share for two years ended
May 31, 1997.
Years Ended May 31,
-------------------------------
1997 1996
Net income $ 669,371 $ 206,001
Preferred stock dividends accreted (48,587) (49,500)
------------ ------------
Net income on common stock $ 620,784 $ 156,501
============ ============
Weighted average number of common
shares outstanding 2,060,257 1,806,337
============ ============
Net income per common share $ 0.30 $ 0.09
============ ============
F - 7
<PAGE>
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." In accordance with this pronouncement, the
Company will adopt the new standard for periods ending after December 15,
1997. Management does not expect the adoption of this pronouncement to
have a significant effect on reported earning per share information.
Fair Value of Financial Assets and Liabilities - Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of the fair value of certain financial
assets and liabilities. The Company estimates the fair value of its
monetary assets and liabilities based upon the existing interest rates
related to such assets and liabilities compared to current market rates of
interest for monetary assets and liabilities of similar nature and degree
of risk. The Company estimates that the carrying value of all of its
monetary assets and liabilities approximates fair value as of May 31,
1997.
Accounting Estimates - The preparation of the Company's financial
statements 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 reported
periods. Actual results may differ from such estimates.
Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year presentation. These reclassifications had no
effect on previously reported results of operations.
3. INVENTORIES
Inventories consisted of the following:
May 31,
-------------------------------
1997 1996
Raw materials $ 756,388 $ 808,680
Work-in-process 4,583 9,167
Finished goods 699,093 604,902
------------- -------------
Total inventories $ 1,460,064 $ 1,422,749
============= =============
F - 8
<PAGE>
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
May 31,
-------------------------------
1997 1996
Prepaid expenses and deposits $ 70,623 $ 46,020
Other receivables 46 3,563
------------ ------------
Total prepaid expenses and other
current assets $ 70,669 $ 49,583
============ ============
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
<TABLE>
<CAPTION>
May 31,
-------------------------------
1997 1996
<S> <C> <C>
Manufacturing equipment $ 2,409,482 $ 2,360,256
Office furniture and equipment 1,049,809 724,378
Service vehicles 57,522 58,448
Leasehold improvements 660,581 439,526
------------ ------------
Subtotal 4,177,394 3,582,608
Less accumulated depreciation and amortization (2,459,443) (2,223,754)
------------ ------------
Property, plant, and equipment - net $ 1,717,951 $ 1,358,854
============ ============
</TABLE>
6. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consisted of unsecured demand notes at
prime rate plus 1% (9.5% at May 31, 1997 and 9.25% at May 31, 1996)
totaling $247,550 and $257,770 at May 31, 1997 and 1996, respectively.
F - 9
<PAGE>
7. BORROWINGS
<TABLE>
<CAPTION>
Borrowings consisted of the following:
May 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
First Interstate Bank of Oregon, N.A.:
$1,600,000 revolving credit line due March 15, 1997 at the
Bank's prime rate plus 3.00% (11.50% at May 31, 1997),
and collateralized by substantially all assets of the
Company. This loan was paid in full December 2, 1996. $ 0 $ 1,106,761
Note payable through March 1998 in monthly installments
of $7,191 including interest at 8%, collateralized by trade
accounts receivable, inventories, and equipment. This loan
was paid in full December 2, 1996. 0 139,796
Note payable through January 1998 in monthly installments
of $2,447 plus interest at the Bank's prime rate plus
1.25% (9.75% at May 31, 1997), collateralized by trade
accounts receivable, inventories, and equipment. This loan
was paid in full December 2, 1996. 0 28,359
Norwest Business Credit, Inc:
$2,500,000 revolving line of credit due November 30, 2000
at the Bank's prime rate plus 2.5% (11.00% at May 31, 1997),
and collateralized by trade accounts receivable and raw
materials. 1,248,928 0
Note payable through November 2000 in monthly installments
of $8,334 including interest of prime plus 2.50% (11.00% at
May 31, 1997) and collateralized by substantially all the
Company's equipment. 358,330 0
JP Wilsonville, LLC:
Unsecured note payable due in monthly installments of $2,202
including interest of 12% for 36 months and unpaid balance
due April 1, 2000. 97,798 0
Various Vendors:
Unsecured notes payable with 6% interest
due in installments through February 2001. 510,953 545,226
Various Vendors - Related parties:
Unsecured notes payable with 6% interest
due in installments through February 2001. 82,788 89,345
Ethel Wildt:
Unsecured note payable with interest at prime plus 1%
due November 1998 to related party. 18,277 23,000
Mary Brown:
Unsecured note due in installments of $2,425, including
interest at 8% through May 2000 related to repurchase 75,466 99,318
of common stock.
Les Leno:
Note payable through May 2005 in yearly principal
installments of $10,000, interest at 6% related to 80,000 90,000
termination settlement with former president.
Ronald Torland:
Unsecured demand note with interest at 10% due
January 1998 to a related party. 10,000 10,000
Ronald Torland:
Unsecured note payable with interest at prime plus 1%
due December 1999 to a related party. 47,500 47,500
------------ ------------
2,530,040 2,179,305
F - 10
<PAGE>
Less amounts due within one year 1,514,575 1,305,819
1,015,465 873,486
Total long-term portion - capital lease (see Note 9) 40,246 86,755
Total long-term obligations $ 1,055,711 $ 960,241
============ ============
</TABLE>
Aggregate maturities of borrowings for the years ending subsequent to May
31, 1997 are as follows:
1998 $ 1,514,575
1999 313,522
2000 426,195
2001 235,748
2002 10,000
Thereafter 30,000
-----------
Total $ 2,530,040
===========
The various debt agreements with Norwest Business Credit, Inc. contain
covenants which require the Company, among other things, to meet certain
objectives with respect to debt service coverage. In addition, the
agreements place certain limitations on dividend payments, capital
expenditures, lease rental payments and other outside borrowings. The
Company is either in compliance with all debt covenants or has been
granted waivers where applicable.
8. STOCKHOLDERS' EQUITY
Preferred Shares - In fiscal 1993, the Board of Directors adopted a
resolution authorizing 7,500 Class A Convertible Preferred Shares under
the following terms and conditions:
Stated Value - $100 per share.
Conversion Feature - Convertible by the holder into the number of Common
Shares valued at $2.80 per share.
Dividends - Wells Fargo Bank of Oregon, N.A. prime rate plus 1.5%
cumulative, annually, payable when and as declared by the Board of
Directors. Such dividends are accreted in periods when the declaration is
not made.
Redemption - Redeemed for cash, in whole or in part, at 100% of stated
value plus accrued and unpaid dividends to redemption date, on a date
determined by the Board of Directors.
Liquidation Preference - Upon any liquidation, dissolution, or winding up
of the Corporation, whether voluntary or involuntary, holders of Class A
Convertible Preferred Shares shall have preference and priority over
Common Shares, Class B Common Shares, Class D Common Shares, and any other
class of stock ranking junior to the Class A Convertible Preferred Shares
for payment out of the assets of the Company or proceeds
F - 11
<PAGE>
thereof available for distribution to stockholders of $100 per share plus
all accrued and unpaid dividends. The holders of Class A Convertible
Preferred Shares shall not be entitled to any other payments.
Holders of issued and outstanding Common Shares have preference over Class
B Common Shares upon voluntary or involuntary liquidation of the Company
only to the extent that holders of Common Shares shall be paid par value
of such shares prior to any distributions being made to holders of Class B
Common Shares. Holders of Class B Common Shares will then receive par
value for each share held and a sum equal to the distribution to be made
on each Common Share.
Pre-Emptive Rights - Under the terms of the amended Certificate of
Incorporation of PML, the holders of shares of any class of stock of PML
are not entitled to cumulative voting nor preferential or pre-emptive
right to subscribe for, purchase, or receive any shares of any class of
PML stock except that holders of Class B Common Shares shall have
pre-emptive rights with respect to the issuance of Class B Common Shares
only. In addition, PML is not allowed to sell or offer to sell any Class B
Common Shares without prior approval of the holders of a majority of the
issued and outstanding Class B Common Shares. Each Class B Common Share
may be converted to one Common Share at the discretion of the Class B
shareholder.
Stock Option Plans - Effective September 6, 1994, the Board of Directors
adopted the "1994 Stock Option Plan" and the "1994 Stock Option Plan for
Nonemployee Directors" (collectively, the "Plans"). The Plans authorize
650,000 shares be available for grant to eligible individuals and entities
as defined by the Plans. The term of each incentive stock option shall be
established by the Plan administrator, or ten years, whichever is shorter.
Options granted under the Plans generally become exercisable in four to
five equal installments beginning one year after the date of grant, and
expire ten years after the date of grant. During fiscal 1997 and 1996, the
Company granted 70,000 and 260,000 options, respectively, expiring ten
years hence at option prices of $0.3125 to $0.53 per share. To date none
of the options granted have been exercised.
A summary of the status of the options granted under the Plans at May 31,
1997 and 1996, together with changes during the period then ended, are
represented below. The numbers of options exercisable at May 31, 1997 and
1996 were 155,466 and 112,000, respectively.
Weighted Average
Options Exercise Price
Outstanding at May 31, 1995 400,000 1.44
Options granted at market price 260,000 0.40
Options exercised - -
Options canceled or expired (295,000) 1.38
Outstanding at May 31, 1996 365,000 0.68
Options granted at market price 70,000 0.49
Options exercised - -
Options canceled or expired (90,000) 0.99
Outstanding at May 31, 1997 345,000 0.62
F - 12
<PAGE>
The Company applies APB Opinion 25 and related interpretations in
accounting for the Plans. Accordingly, no significant compensation cost
has been recognized for options granted under the Plans, as options are
granted at or proximate to the fair market value at time of grant. Had
compensation cost associated with the Plans been determined based on the
fair market value at the grant date for options under the Plans,
consistent with the methodology of Statement of Financial Accounting
Standards (SFAS) No. 123, the Company's net income would have been reduced
to the pro forma amounts indicated below:
1997 1996
--------- ---------
(in thousands)
Net income, as reported 669,371 206,001
Net income, pro forma 643,265 187,522
Earnings per share, as reported 0.30 0.09
Earnings per share, pro forma 0.29 0.08
The effects of applying SFAS 123 to pro forma disclosures for 1997 and
1996 are not likely to be representative of the effects on reported income
for future years, because options vest over several years and additional
awards generally are made each year.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996: expected
volatility of 114% and 104%, respectively; expected dividend yield of 0%;
risk-free rate of return of 6.4%; and expected lives of seven years.
Total fair value of options granted at market price was computed to be
$32,317 and $78,259 for the years ended May 31, 1997 and 1996,
respectively.
The following table summarizes information about options outstanding at
May 31, 1997.
Weighted Average
Exercise Number Weighted Remaining
Price Range of Shares Average Price Contractual Life
------------- --------- ------------- ----------------
$0.5300 50,000 $0.5300 9.33
$0.3750 20,000 $0.3750 9.25
$0.3750 60,000 $0.3750 9.00
$0.3750 100,000 $0.3750 8.92
$0.3125 5,000 $0.3125 8.58
$0.375-$0.50 25,000 $0.4500 8.25
$0.5000 40,000 $0.5000 8.17
$1.5000 45,000 $1.5000 7.25
Stock Bonus - Subsequent to May 31, 1995, the Board of Directors
authorized a one-time bonus to each employee of PML on the payroll at May
1, 1995 in the form of 1,000 shares of PML common shares. At May 31, 1995,
the Company accrued compensation expense of $70,125, the estimated fair
value of the common stock, for this one-time bonus. There were no stock
bonuses accrued in the fiscal year ended May 31, 1996, but the fiscal 1995
accrual was issued in stock to employees. No stock bonuses were accrued or
paid in the fiscal year ended May 31, 1997.
F - 13
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain laboratories, facilities, and equipment under
noncancelable long-term lease arrangements which also require the Company
to pay executory costs such as property taxes, maintenance, and insurance.
The laboratories, facilities, and equipment leases are operating and
capital leases which expire in various years through 2004. Generally, such
operating leases include renewal options ranging from one to seven years.
Rental expense for operating leases was $578,101 and $566,000 in fiscal
1997 and 1996 respectively. Certain of the operating leases represent
related party transactions. See Note 11.
Future minimum lease payments on such capital leases and noncancelable
operating leases as of May 31, 1997 are as follows:
Years Ending Capital Operating
May 31, Leases Leases
1998 $ 48,060 $ 487,690
1999 36,201 382,785
2000 6,589 286,604
2001 - 269,027
2002 - 271,080
----------- -----------
Total 90,850 $ 1,697,186
=========== ===========
Less amount representing interest 10,461
-----------
Present value of capital lease obligations 80,389
Less current portion 40,143
-----------
Long-term portion $ 40,246
===========
F - 14
<PAGE>
10. INCOME TAXES
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of assets and liabilities.
Deferred tax assets result primarily from the recording of certain
expenses which currently are not deductible for tax purposes, tax credit
carryforwards, and Canadian net operating loss carryforwards. Deferred tax
liabilities result principally from the use, for tax purposes, of
accelerated depreciation.
A reconciliation between the statutory federal income tax (benefit)
expense and effective federal income tax (benefit) expense is as follows:
Years Ended May 31,
-------------------------
1997 1996
Federal statutory (benefit) expense at 34% $ 156,113 $ 39,053
Tax effect of:
Change in valuation allowance (414,636) (146,464)
Nondeductible permanent differences 16,547 5,117
State income taxes and other, net 31,761 6,037
Total $ (210,214) $ (96,262)
The components of the Company's income tax (benefit) expense are as
follows:
Years Ended May 31,
-------------------------
1997 1996
Current $ 10,640 $ 1,738
Deferred (220,854) (98,000)
Total $ (210,214) $ (96,262)
The domestic and foreign components of income (loss) before income taxes
were as follows:
Years Ended May 31,
-------------------------
1997 1996
Domestic $ 87,612 $ (46,264)
Foreign 371,545 156,003
Income before income
taxes $ 459,157 $ 109,739
F - 15
<PAGE>
At May 31, 1997 and 1996, the significant components of the Company's
deferred tax assets and liabilities are as follows:
1997 1996
Deferred tax assets:
Vacation accrual $ 70,988 $ 50,016
Allowance for doubtful accounts 31,502 49,040
Net operating loss carryforwards 303,485 487,070
Other 18,836 25,765
------------ -------------
Total deferred tax assets 424,811 611,891
Valuation allowance - (414,636)
------------ -------------
Deferred tax liabilities:
Excess tax depreciation (105,957) (99,255)
Prepaid insurance - -
------------ -------------
Total deferred tax liabilities (105,957) (99,255)
------------ -------------
Net deferred tax asset $ 318,854 $ 98,000
============ =============
The valuation allowance was recorded in 1996 to offset deferred tax assets
which could only be realized by earning taxable income in future years.
Management established the valuation allowances because it could not
determine if it was more likely than not that such income would be earned.
In 1997 management eliminated the allowance because it determined that it
was likely that the deferred tax asset would be used within two years.
The Company files US and Canadian tax returns on the results of its
operations conducted in each country. At May 31, 1997, the Company has
available approximately $786,231 of unused operating loss carryforwards,
to offset domestic taxable income, which expire 2010 and 2011.
11. RELATED-PARTY TRANSACTIONS
The Company has entered into a Technology License Agreement with
Definitive Diagnostics, Inc. ("DDI"). Certain stockholders and officers of
the Company are also stockholders and officers of DDI. Under the terms of
the agreement, which began on June 1, 1992, was modified on February 28,
1997, and extends over six years, the Company will manufacture and market
the products developed by DDI and pay a royalty of $.50 per unit through
May 31, 1997. Effective June 1, 1997, royalties will range from $.15 to
$.35 per unit until $500,000 have been paid, and then will be $.00 to $.15
per unit for the remaining life of the agreement. Total royalties of
$28,855 and $38,650 were incurred in fiscal 1997 and 1996, respectively.
F - 16
<PAGE>
The Company leases laboratories, office facilities and equipment from
stockholders under four operating leases. The monthly obligations under
the leases were $5,500 per month, expiring June 1998; $5,000 per month on
a month-to-month basis which was discontinued in June 1997, $1,000 per
month expiring May 31, 2000, and $1,100 a month on a month-to-month basis
which discontinued in April 1997.
One of the leases the Company entered into was a five-year equipment lease
agreement ("Agreement") with DDI commencing June 1, 1992. Under the
Agreement, the Company is required to pay rent in the amount of $1,000 per
month for four months, $2,500 per month for the following eight months,
$4,000 per month for the following 12 months, and $5,500 per month for the
remaining 36 months. Upon termination of the Agreement, the Company may
renew the lease at $5,500 per month for 12 months or purchase the
equipment at its fair market value. DDI forgave rent for December 1994
through May 1995. In addition, DDI agreed to reduce lease payments to
$1,500 per month for the period June 1995 through November 1995, after
which the original lease terms were reinstated. DDI is owned 51% by
shareholder A. Ron Torland and 49% by shareholder Arthur N. Torland.
The Company's leased Tualatin Manufacturing Plant is owned 50% by
shareholders Arthur N. Torland and Bessie M. Torland and 25% by
shareholder Julian G. Torland. The Company moved out of this facility into
its new Wilsonville facility in June 1997. The leased cold room at the
Company's Wilsonville Distribution Center is owned 50% by shareholders
Arthur N. Torland and Bessie M. Torland and 25% by shareholder Julian G.
Torland. The Company also pays rent to shareholders for a small facility
adjacent to its Tualatin Manufacturing Plant which is owned 50% by
shareholder Arthur N. Torland and 50% by shareholder Julian G. Torland.
The Company subleases this property to Clinical Microbiology Institute
("CMI"), an independent third party. Both this lease and sublease were
discontinued in April 1997. Total rental expense paid to stockholders for
all leases was approximately $150,000 and $90,000 in fiscal 1997 and 1996
respectively.
F - 17
<PAGE>
12. FOREIGN OPERATIONS
The following table indicates the relative amounts of net sales, operating
income, and identifiable assets of the Company by geographic area during
fiscal years 1997 and 1996.
1997 1996
Net sales:
United States $ 7,867,023 $ 8,288,888
Canada 5,452,097 5,560,593
------------- -------------
Total net sales $ 13,319,120 $ 13,849,481
Operating income:
United States $ 271,526 $ 106,542
Canada 483,259 263,574
Total operating income $ 754,785 $ 370,116
Identifiable assets:
United States $ 3,695,665 $ 2,849,835
Canada 1,868,084 1,817,901
Total identifiable assets $ 5,563,749 $ 4,667,736
Net currency transactions gains (losses) from Canada were ($10,214) and
$30,079 in 1997 and 1996, respectively.
Sales between geographic areas and export sales are not material.
The Company maintains separate accounts for both the United States and
Canada down to the Gross Profit level. However, some operating, selling,
general and administrative expenses are captured only on a Corporate
level. Therefore, the Company has had to make substantial use of estimates
and allocations in order to split its operating income on a geographic
basis. The numbers shown represent management's best efforts to allocate
total operating income.
13. QUARTERLY FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
The following is a summary of operating results by quarter for the fiscal
years ended May 31, 1997 and 1996:
1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
<S> <C> <C> <C> <C> <C>
Net sales $3,240,712 $3,386,393 $3,280,227 $3,411,788 $13,319,120
Gross profit 1,215,799 1,350,030 1,360,947 1,433,223 5,359,999
Net income 8,598 110,719 100,373 449,681 669,371
Net earnings per share 0.00 0.05 0.04 0.21 0.30
1996 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
Net sales $3,539,216 $3,533,709 $3,335,007 $3,441,549 $13,849,481
Gross profit 1,047,607 1,199,472 1,288,611 1,203,853 4,739,543
Net income (loss) (59,512) (11,364) 116,549 160,328 206,001
Net earnings (loss) per share (0.04) (0.01) 0.06 0.08 0.09
</TABLE>
F - 18
PML, INC.
Exhibit 11
<TABLE>
<CAPTION>
Years Ended May 31,
1997 1996
-------------- --------------
<S> <C> <C>
Net income $ 669,371 $ 206,001
Preferred stock dividends accreted (48,587) (49,500)
-------------- --------------
Net income after accretion of dividends $ 620,784 $ 156,501
============== ==============
Average number of common shares outstanding 1,776,816 1,594,826
Average number of Class B common stock outstanding 211,551 211,511
Average effect of common stock equivalents 71,890 -
-------------- --------------
Average number of total shares outstanding 2,060,257 1,806,337
============== ==============
Net income per common share $ 0.30 $ 0.09
============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 74,410
<SECURITIES> 0
<RECEIVABLES> 1,855,055
<ALLOWANCES> 81,609
<INVENTORY> 1,460,064
<CURRENT-ASSETS> 3,697,443
<PP&E> 4,177,394
<DEPRECIATION> 2,459,443
<TOTAL-ASSETS> 5,563,749
<CURRENT-LIABILITIES> 3,598,230
<BONDS> 1,055,711
0
641,561
<COMMON> 19,884
<OTHER-SE> 248,363
<TOTAL-LIABILITY-AND-EQUITY> 5,563,749
<SALES> 13,319,120
<TOTAL-REVENUES> 13,319,120
<CGS> 7,959,121
<TOTAL-COSTS> 7,959,121
<OTHER-EXPENSES> 4,615,489
<LOSS-PROVISION> 3,337
<INTEREST-EXPENSE> 282,016
<INCOME-PRETAX> 459,157
<INCOME-TAX> (210,214)
<INCOME-CONTINUING> 669,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 669,371
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
